Europe Aims to Cut China Risks, Not China Ties

The European Union’s executive body released an economic-security strategy Tuesday that included a call for member states to consider new controls for European investment in other countries that might pose security risks. Although the document didn’t name specific countries, officials have said it is aimed largely at reducing the risks in its economic relationships with China and Russia.

Europe has long taken an open and liberal approach to free trade and investment. But China’s growing economic power is raising concern across the continent that it might be exposing itself to risks from a geopolitical rival. Now the bloc is looking for ways to curb those risks without abandoning a trade relationship worth roughly $2.6 billion a day.

The strategy, laid out in a paper that the EU published Tuesday, spells out some of the main economic risks officials believe Europe now faces, including supply chain disruptions and the use of European technology or knowledge for another country’s military or intelligence purposes.

To address those risks, the EU strategy calls on member states to consider tools that, if implemented, could mark a significant shift in the bloc’s approach to trade and investment. Those include the possibility of new controls on specific types of investments in other countries and more coordination of export controls for goods that can have both civil and military uses.

“We need to ensure that European companies’ capital, their knowledge and expertise, their research, is not abused by countries of concern for military applications," European Commission President Ursula von der Leyen said.

Whether member states, who would have to agree to such measures, are willing to back them, remains uncertain.

Some diplomats have expressed concern that the commission is aligning itself too closely with the U.S. when it comes to trade relations with China. Von der Leyen, whose team has worked closely with the White House over Russia, released a joint statement with President Biden in March that floated the possibility of investment controls to protect European and U.S. companies.

Chinese officials have already warned Europe not to take further steps that could undercut economic ties.

The strategy outlined by the bloc Tuesday doesn’t immediately change the EU’s trade or security policies. It is intended to be a starting point for discussions among European countries ahead of a leaders’ summit later this month. Decisions may not come until next year.

More than a year after Russia’s war with Ukraine began, Europe is joining the U.S. in making critical decisions about its relationship with China. European officials have expressed concern about Beijing’s ties to Moscow and its push to exert global influence by funding infrastructure projects in developing countries and pursuing key positions in multilateral bodies. They have also marked out the bloc’s dependencies in specific economic and technological sectors on Chinese trade, supply chains and raw materials.

Secretary of State Antony Blinken

Secretary of State Antony Blinken, who met this week with Chinese leader Xi Jinping and other officials, credited von der Leyen with articulating the phrase “de-risk, not decouple," which he said reflects the approach many countries are now taking to China.

The Brussels paper kicks off what is likely to be a contentious and prolonged discussion for European governments on how far they should actually go in imposing restrictions on commerce with China—and on how much power they are willing to cede to the EU to make decisions that can have a deep impact on their economies. Powers over national-security issues are usually closely guarded by EU capitals.

In countries such as the Netherlands, home to the European semiconductor-equipment company ASML Holding, and Germany, where foreign direct investment in China, its biggest trade partner, continues to rise, there is considerable caution about EU-wide rules on outbound investment managed by EU officials. That has forced the commission to take a cautious approach. It has told member states that before it pushes for any mechanism, there will be thorough assessments of the challenges European companies face and a review of current instruments to see whether they can reduce risks.

The effort to tighten export-control coordination comes as the war in Ukraine has highlighted the difficulty of effectively banning critical exports to a major power.

The EU worked with the U.S. and other allies to impose a range of export controls on Russia, including dual use military and civilian goods, because of the war over Ukraine but Moscow has been able to continue importing Western goods from third countries. The EU is now looking to develop a new sanctions regime that could extend some export bans to countries helping Russia circumvent sanctions, a proposal that has caused unease in some capitals.

During recent visits to Europe by senior Chinese officials, Beijing has warned Europe not to follow what it perceives as the U.S.’s more confrontational policies. Those visits continued this week with China’s new Premier Li Qiang holding government consultations in Berlin and traveling on to France.

Germany’s government, like many of its European peers, has been walking a tightrope between its alliance with the U.S. and the need to preserve trade links with China. “We have no interest in decoupling," German Chancellor Olaf Scholz said during Li’s visit on Tuesday, in reference to the debate about splitting Western economies from China.

“We are very glad that people are saying that decoupling is neither feasible nor desirable," Fu Cong, China’s ambassador to the EU, told reporters in Brussels recently.

But he said China is concerned about how far the EU might go in its push to reduce economic risks. Europe shouldn’t “overstretch the concept of security to the extent that they become an obstacle to open and free trade," he said.

The EU has already developed new trade tools that apply globally but are widely viewed as aimed at China, and scrutiny of foreign investment has increased. China’s foreign investment in Europe fell 22% in 2022 from the previous year, reaching 7.9 billion euros, the equivalent of $8.6 billion, the lowest level since 2013, according to the consulting firm Rhodium Group.

An anticoercion mechanism agreed on by the EU Parliament and member states seeks to make it easier to retaliate against countries that try to use trade or investment restrictions as a pressure tactic. And new foreign subsidy rules will allow the bloc to bar Chinese and other companies from making certain acquisitions or winning large public contracts if they previously received government support that the EU deems distortive.