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As EU heads of state and government gather in Brussels on Thursday and Friday (29-30 June), relations with China will be an important part of the discussion, but it is unclear whether the apparent convergence on the ‘de-risking, not decoupling’ trope will lead to change on the ground.
Ahead of the EU Summit, many member state diplomats were quite positively surprised at how far the views of different member states had converged regarding economic relations with China.
While early drafts of the summit conclusions just mentioned China in a single sentence, namely that “The European Council held a strategic discussion on China,” the most recent draft conclusions leaked to journalists dedicate an entire page to the topic.
Crucially, diplomats point to the fact that the EU leaders seem to converge on the approach that Commission President Ursula von der Leyen had laid out in her March speech, saying that China remained an important trading partner and that the EU wanted to “de-risk, not decouple” from China.
Does de-risking mean anything?
The EU “will continue to reduce critical dependencies and vulnerabilities, including for its supply chains, and will de-risk and diversify where necessary and appropriate,” the draft conclusions read.
And in the next sentence: “The European Union does not intend to decouple or to turn inwards.”
Maybe these formulations are the big progress that diplomats want to see, but we will only know for sure when change is visible on the ground. And for now, trade between the EU and China is proliferating, and the current account balance is more unbalanced than ever.
One cannot but suspect that the “de-risk, not decouple” slogan is a clever way of acting as if there were agreement when there actually is none. While for some, the slogan means de-risking, for others, it mainly means “not decoupling.”
However, if de-risking is to mean anything at all, it will mean decoupling in certain areas and for certain companies.
For example, you cannot de-risk the European communications infrastructure without at least partially decoupling from Chinese providers.
Too big to fail
And companies certainly won’t do it by themselves. While they will hedge for some of the risks related to their business in China, for example, reputational risks or some supply chain risks, they cannot be relied upon to account for the macroeconomic or security risks in case China were to use the EU’s economic dependence to threaten significant harm one day.
A recent paper by the German Council on Foreign Policy argues that some large companies could even expect the government to bail them out in an emergency because letting them fail during a crisis would wreak even more economic havoc.
In this view, large corporations with a lot of business in China should be understood similarly to banks that are “too big to fail”, and that can reap private profits while letting the public carry the risk.
It is thus high time that the EU and member state governments started implementing specific measures to de-risk and, where necessary, to decouple from China.
At least on a very personal level, EU leaders have understood that de-risking can also mean decoupling. According to member state diplomats, the discussion on China will be held without any phones in the room, fearing somebody might listen in.
Decoupled from their phones and thus de-risked from Chinese eavesdropping, EU leaders will hopefully take this as a cue to take their first steps towards de-risking on the ground.
“China was killing us,” US President Donald Trump said back in 2019, criticising the large current account deficit that the US had with China.
This Trumpist outburst was the first thing that came to my mind when I saw the numbers below, showing the explosive growth of the EU’s electric car imports from China over the past two years compared to the comparatively non-existing EU exports of electric cars to China.
It’s not surprising that the EU would have a large trade deficit with China, but at least cars were supposed to be the European thing! Regarding the apparent car of the future, this is not a given it seems.
However, this is also not a case of Chinese cars flooding the EU market, at least not for now.
Comparing the monthly EU electric car import numbers across countries of origin, as the chart below does, we can see that the EU imports from China picked up when the imports from the US died down in mid-2021.
Part of the story is that Tesla has started delivering to Europe from its China-based factories. Moreover, many European brands also import electric vehicles for the European market from their Chinese factories.
While the US protects its market by only giving out subsidies for electric vehicles if produced in the US, the EU – ever the good pupil of multilateral trade doctrine – sprays around the subsidies to everybody.
It could change for the worse in the future, however. Chinese car brands are increasing their market share in Europe, and due to their large domestic market, they have been able to develop reliable and less pricey electric cars that will sooner or later catch the interest of European consumers.
In cars at large, the EU generated a trade surplus of €96 billion in 2022, with export values more than two and a half times higher than imports. As the graph below shows, the EU also has a trade surplus in electric cars, but it is less dominant than cars in general and much more volatile.
All is not lost for the European auto industry, but rough times are ahead, especially if Europe is to follow higher multilateral trade standards than everybody else.
You can find all previous editions of the Economy Brief Chart of the week here.
EU Commission unveils digital euro regulation and a regulation to strengthen cash: On 28 June, the EU Commission unveiled its regulation proposal, setting the regulatory guidelines for the ECB to develop and implement a retail digital euro that should be accessible to everybody offline and online. In parallel, the Commission also proposed a regulation that should ensure the legal tender and the availability of physical cash.
EU Commission unveils rules for financial data access and use. On 28 June, the European Commission presented new rules to regulate the access and use of customer data in financial services to ensure customers’ control over financial data and allow consumers to access tailored data-driven products and services. The regulation sets the rights and obligations for accessing and reusing data in financial services, including balance of accounts, various types of investments, pension rights, and non-life insurance.
EU Commission updates payment rules to fight fraud, improve consumer rights. On 28 June, the European Commission presented two proposals for rules on payment services, which update the previous payment directive (PSD2) adopted in 2015. The revised package seeks to combat fraud, increase transparency for consumers, improve the availability of cash, and level the playing field between banks and fintech.
Basel III Trilogue: EU Council and Parliament reach agreement on bank capital requirements. On 27 June, the Parliament and the EU Council negotiators agreed on a common text for the bank capital requirements directive and regulation. They agreed on an output floor that should limit the variability of internal risk models when determining the necessary capital to back up a bank’s balance sheet. Moreover, there are new measures on environmental and crypto risks for members of the board, as well as for third-country banks that want to be active in the EU market.
EU-India FTA: chapters on government procurement and SMEs negotiated. After the fifth round of negotiations for a free trade agreement between the EU and India, the chapters on SMEs and government procurement are closed. Nevertheless, EURACTIV understands that the positions on the most crucial part of the negotiations, namely the market access commitments, are still far apart. The politically given timeline of concluding the agreement by the end of 2023 looks increasingly unrealistic.
GSP trilogues stuck over inclusion of migration issues. As the EU’s regulation on the generalised scheme of preference (GSP) is running out by the end of the year, the European Parliament and member states have still not agreed to the Commission’s GSP legislative proposal for 2024-2033. While member states represented in the EU Council would like to make access to GSP conditional on countries readmitting their own nationals if they migrated to the EU illegally, Parliament negotiators want to keep the issue separate. As a Commission spokesperson told EURACTIV, the Commission has started work to prolong the current GSP rules and avoid the cliff-edge scenario, in which developing countries would lose preferential market access that GSP grants. However, the Council and the Parliament must also approve such a prolongation.
Philippine trade minister wants FTA with EU before 2028. As the Philippines is nearing the status of an upper-middle income country, which would see it lose preferential treatment in EU trade policy, it is trying to seal trade relations with the EU using a free trade agreement, its secretary of trade and industry Alfredo Pascual said in an interview with EURACTIV and Borderless.
EU Parliament committee calls for criminalisation of prostitution clients. On 27 June, the European Parliament Committee on women’s rights adopted a report calling on member states to decriminalise women in prostitution while criminalising their clients. This regulatory approach is currently used by France, Ireland and Sweden and aims at reducing demand while also ensuring sex workers can access social services. The report has been criticised by some EU lawmakers and sex workers’ associations, as it defines prostitution as a form of gender-based violence.
Europe’s inflation outlook depends on how corporate profits absorb wage gains: The IMF made waves on Twitter this week by tweeting out a graph that showed how much of the price increase over the past two years could be attributed to rising corporate profits instead of rising wages. If you want to see more than just the tweet, better read the IMF’s explanation of the data as well.
Corporate profits don’t cause inflation. While many left-leaning economists and politicians celebrated the IMF’s tweet, Frances Coppola wrote up why rising corporate profits are not causing inflation per se but are symptoms of excess aggregate demand.
Additional reporting by Silvia Ellena.
