What’s Next for European Businesses in China?

August 2, 2023

Conflicting signals on EU-China relations at a time of increased exchange underline the importance of remaining ahead of geopolitical risk, while providing important opportunities for European multinational corporations to consolidate their market position.

Re-opening to High-level Exchanges Reveals Growing Complexities

The first half of 2023 saw a flurry of high-level diplomatic visits between China and Europe. Beijing has embarked on a campaign of European engagement, following a prolonged lack of in-person exchanges due to COVID-19 restrictions and in an attempt to improve European ties at a time of deteriorating relations with the United States. This activity follows heightened tensions with Europe itself over questions of pandemic diplomacy, economic coercion and trade restrictions, and deep concerns in Europe over China’s positioning on the war in Ukraine. The EU increasingly sees these as matters affecting the Single Market and Europe-wide democracy, justifying increased involvement at the EU level.

Such was the context for visits by China’s top diplomat Wang Yi and then-Foreign Minister Qin Gang to Europe, respectively in February and May 2023, and by French President Emmanuel Macron, European Commission President Ursula von der Leyen and German Foreign Minister Annalena Baerbock to China in April. But the resumption of exchanges has also laid bare the complexities at hand. Von der Leyen preceded her visit by calling for “de-risking” in her first dedicated speech on China. And while observers noted the higher profile of Macron’s itinerary compared to that of the Commission President and the unprecedentedly positive coverage he saw in Chinese state media, in Europe, controversy around Macron’s remarks on Taiwan soon dominated the narrative. This also colored Baerbock’s own subsequent visit, which some observers characterized as “damage control.”

Europe De-risks—but Not at an Even Pace

In their engagements with Europe, China’s diplomats have emphasized their desire for Europe to pursue “strategic autonomy”—a thinly-veiled reference for continued cooperation with China and independence from the United States—and sought to encourage European investment. However, as China’s new Premier Li Qiang made his first overseas trip since taking office to Germany and France on June 18-23, landmark adjustments were being finalized to key elements of European China policy. Germany’s long-awaited China Strategy, finally published on July 13, includes significant inputs from the more China-sceptic elements of Germany’s coalition government. Meanwhile, the EU’s Economic Security Strategy, published on June 20, lays out the de-risking agenda in concrete terms, including plans to propose outbound investment controls and to seek a greater role for the EU in export controls.

Not everyone is de-risking at the same pace. The Netherlands stepped up export controls on advanced chip manufacturing equipment on June 30, with Beijing responding shortly after with its own restrictions on semiconductor raw materials, while the EU’s Internal Market Commissioner Thierry Breton called for better coordination at European level. But EU proposals for outbound investment controls have seen a mixed reaction from member states, including Germany where Chancellor Olaf Scholz has suggested that de-risking investments should be a matter for companies. Meanwhile, the European Commission has expressed deep concern that too few member states have applied restrictions on “high-risk” (notably Chinese) telecoms equipment providers. And conclusions on China from the much-anticipated end-of-June summit of European heads of state and government were noted for falling short of any significant rebalancing of the EU’s now years-old partner-competitor-systemic rival triptych.

Nonetheless, while specific approaches and definitions will remain a matter of debate, the notion that de-risking is needed is fast becoming the consensus. The EU’s leadership has emerged as a strong driver of this trend, as it seeks ever more oversight and coordinating roles over economic and technological security issues. This is likely to continue and indeed to be further emphasized when a new European Commission takes office at the end of 2024, following the European elections. With little prospect for reviving bilateral deals with China such as the abortive Comprehensive Agreement on Investment, European trade and foreign policy officials will continue to prioritize the EU’s own autonomous instruments for rebalancing perceived injustices and strengthening Europe’s security.

Looking Ahead—Implications for Multinationals

Beijing is unlikely to overlook punitive sanctions against its companies and economic interests, regardless of how much it would like a positive relationship with Europe. Top diplomats have reacted strongly to the EU’s de-risking proposals and sanctions on Chinese companies alleged to be supporting Russia’s war in Ukraine. In May, Qin Gang warned that China would “react in necessary ways,” and Head of the Ministry of Foreign Affairs’ European Affairs Department Wang Lutong called such moves a “stab in the back.” More recently, Wang Yi has called on the EU to “clarify” its position on the relationship. Even with both sides making a conscious effort for productive dialogue, underlying differences will continue to undermine the overall relationship.

Nevertheless, European businesses will continue investing in China, likely under lower pressure than their American counterparts. And so will Chinese businesses in Europe—even as M&A volumes have collapsed, greenfield investment from China’s leading industrial players is increasing, most importantly from EVs and their subsidiary industries. The hard realities of China’s importance to global supply chains mean there will be no mass market exit. The question is therefore how European businesses in China can mitigate the increased risk from geopolitical developments while their home countries work out a clear strategy for handling differences with China.

There is no single, one-size-fits-all answer. The approach companies must take depends on their individual industry as well as the relationship of their domestic market with Beijing. Matters are complicated by interacting EU and member state approaches to trade and technology relations, as well as by the growing divergences in the expectations European and Chinese policymakers have for multinationals in terms of supporting their respective economic security. However, a continued desire on both sides to maintain a workable relationship means opportunities remain for European companies to establish a stronger foundation for success in China. To make the most of them, companies will need to invest in well-informed, interconnected and long-term government relations and geopolitical risk management strategies, both in Europe and in China.

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