Why we cover this topic on Innovation Origins:
Our global economy is amid a disruptive shift catalyzed by Covid-19, the Ukraine War, inflation, sanctions, and the imminent rise of China as the world’s largest economy. All eyes are currently on China’s 20th Party Congress in October regarding how Beijing will wield power to push forward its goal of shared prosperity. The Congress also decides whether China’s current leadership will continue to hold on power. What role will China play in the global economy? To what extent does politics influence and mingle with economic plans? As previously mentioned in this blog, many anticipate Congress providing more clarity on whether China would “re-open” to the world. This blog continues to address the challenges ahead of EU-China bilateral relations.
“China is too large, too powerful, and too sophisticated for Europe to consider emulating the U.S.’s formula for reducing economic dependence on it.”
Frank Umbach, head of research at EUCERS/CASSIS, University of Bonn, GIS, 2020.
It is not unexpected that many hold pessimistic views on EU-China bilateral relations. The last few years demonstrate an increased decoupling trend. Heated discussions within Europe over the degree of such decoupling have been carried out at governmental and academic levels.
Before COVID-19
Meanwhile, China has continuously addressed its centrality in regional and global scenes. Chinese leadership demonstrates assertiveness through its public diplomacy and has been evolving its global governance strategy. Examples are shown from the accelerating expansion of the BRICS grouping and the trilateral free trade agreement among China, Japan, and South Korea earlier in 2022.
Looking back, the decoupling between China and Europe started before the global supply chain was disrupted by Covid-19. Covid only intensified the separation. Realizing the importance of the EU’s strategic independence for economic and security reasons, European policymakers have since been aiming to take a more cautious approach. For instance, ASML’s case from a previous blog demonstrates the influence of geopolitics in the high-tech industry.
In early September, researchers across Europe gathered at the CHERN Joint Working Group Conference in Paris and discussed how much decoupling between China and Europe is already happening and should be happening in a more realistic and strategic sense. Since decoupling at its core is economically inefficient but may be necessary in terms of Europe’s strategic independence in the long term, researchers argue that “with the right tools and clear objectives”, the EU would have to come up with a holistic view to let decoupling happen “where it needs to happen” and avoid it from “happening too fast and too broad”, considering the key aspects including economic fairness, national security, economic resilience, and global supply chain. As a speaker mentions, “When you are on top of the world, the liberal market works to your advantage. When you are less competitive, you can close the market a bit.”
Challenges
There are several challenges worth pointing out here.
First, decoupling takes place between China and Europe at different levels, in different regions and industries. Though theoretically possible, it is improbable to formulate complete undivided perspectives just within the EU itself.
Secondly, double decoupling takes place regarding politics and business. From the political aspect, China and Europe seem to have demonstrated an increased separation. However, carrying much less decoupling sentiment, most business activities tell us a slightly different story. European companies that have China-related businesses show more pragmatism in their China operations.
Lastly, looking ahead to the global economy, Chinese startups are emerging incredibly fast in various fields due to domestic demands. A scenario of sanctions and export controls from a “united west” would impose a limited effect on Chinese businesses regarding products and markets. In turn, European companies may need even more than at present to collaborate with Chinese firms and adapt to Chinese demands in industries ranging from robotics, automotive, AI, solar energy, etc.
Implications for Brainport-China businesses
What does all this place the Brainport-China businesses? The Netherlands is an important entry point for Chinese businesses. What happens with Brainport companies vis a vis China may also occur among other EU businesses. In other words, Brainport-China businesses are significant references in understanding the future EU-China bilateral relations, especially concerning high-tech sectors. Recent research shows that the Netherlands is on the top of the list of countries that hold negative views of China regarding its politics but holds fewer negative views on bilateral relations. That means there are still strong drives from the Netherlands to continue developing its trading and cultural relations with its China partners.
“We are too much intertwined with each other. It is impossible to separate peacefully.”
Gordon Dumoulin, 5iZ China
Two questions
Currently residing in Beijing, Gordon Dumoulin anticipates that the geopolitical pressure against China is strongly growing and will probably not end soon. It would be helpful to look at some basics of bilateral relations. During my interview with Gordon, we discussed the two questions as to why we need to do business with China and why we want to do business with China.
First, decades ago, many European corporations moved their low-wage industries to China, i.e., raw materials production, which undeniably enabled China to develop economically. However, in turn, the growing need of European corporations for raw materials led to their dependency on China’s raw material supplies and, in some cases, equipment supplies. Can these corporations shift production to Vietnam, India, or other countries? Theoretically, yes, but the reality is not that simple. They may have intermediate processing capacity but do not possess heavy essential raw material production capacity like in China. At least not yet. China still plays a fundamental role in the global supply chain.
Secondly, European corporations are known for their innovations in design and intermediate processing but not so much in raw materials. Nor have they developed extensively on the capacity of basic production. On the other hand, China has been working consistently on innovation and sustainability in raw material production for the cause of both sustainability and efficiency. Chinese businesses are committed to evolving in significant fields of global health, internet governance, climate change, and development finance. The country’s growing middle class has also played a significant role in forming a more innovative marketplace. It is no longer just a supply market but also a massive selling and consuming market. As mentioned earlier, along with consistent policy intervention, China is taking global leadership in various sectors regarding green transition. Extraordinary examples are demonstrated in electric mobility and solar energy. Thus, looking into the future, there are many more talking points for collaboration between the EU and China on innovation and sustainable finance.
The continuing dialogue between global powers
“If you cannot beat China, join it,” argues Professor Umbach. Increasing inter-dependent trading relations helps to reduce the risks of geopolitical conflicts and tensions. Perhaps one may need to shift the perspectives from decoupling to competition, which does not necessarily exclude prudent measures for fair play. In turbulent times, continuing dialogue between global powers is vital to seek constructive talking points in EU-China bilateral relations. After all, no one desires a lose-lose relationship, and neither is it a zero-sum game.
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