“Four-fifths of lithium-ion batteries used in Europe today come from China. The situation is similar in the case of rare earth metals,” says Paulina Uznańska, a senior analyst with the China Team at the Center for Eastern Studies.
The European Union is diligently working on a strategy to become independent from China, but as is revealed in this exclusive Trans.INFO interview, it is encountering resistance from its Member States.
Dorota Ziemkowska-Owsiany: How would you characterise the trade relations between the European Union and China in one word?
Paulina Uznańska, senior analyst of the China Team at the Center for Eastern Studies:
Imbalance.
This is because trade relations between these entities are strongly skewed in favour of China, resulting in a surplus of EUR 400 billion in its trade with the European Union.
This disparity doesn’t stem from Europe’s desire to buy Chinese goods without offering anything in return. Rather, it’s due to unequal access to the market – the EU market is open to products from China, while European companies cannot count on the same openness in the Chinese market.
China’s economic policy, currently aimed at strengthening economic security, poses a long-term threat to the competitiveness of European enterprises, and is leading to their displacement from third-country markets where they compete with China.
This is not a new problem. In fact, it has been brewing for a decade. However, the discussion about Europe’s strong dependency on China is particularly relevant today.
The COVID-19 pandemic has made many decision-makers In Europe aware of how dependence on critical goods from authoritarian regimes can lead to significant disruptions in supply chains. This became even clearer after the outbreak of the war in Ukraine, within the context of Russia. Currently, there is a discussion in Europe not only about how to change this state of affairs, but also about whether it can be done at all.
China’s clear presence in the European market can be seen, for example, in the data on China’s share in EU exports. In 2022, it exceeded 20%.
I believe the problem lies not only in the percentage of EU imports from China, but primarily what we import. If these were easily replaceable goods, we would obviously be dealing with an unfavorable economic relationship, but not one so critical from the perspective of economic security.
The crux of the problem is that we import goods from China that are necessary for the EU to achieve, for example, the green transformation, and there is no easy way to withdraw from this dependence.
Four-fifths of lithium-ion batteries used in Europe today come from China. The situation is similar in the case of rare earth metals. Of course, some of them could be imported from outside China, but their refining is so expensive and involves such high environmental costs that the decision related to it is not so easy to make.
Moreover, this is not just a problem for Europe in general, but for individual countries as well. Let’s take the example of Poland, which is the third-largest importer of graphite from China after the United States and South Korea. Poland uses it, for example, to produce electric car components. The danger of this dependence is demonstrated by the fact that on December 1 last year, China introduced licenses for the export of graphite.
Indeed, what you mention is clearly visible in OECD data. They show that over 70% of imports to European Union countries from China were intermediate goods (in 2015-2020). Experts from the Polish Economic Institute argue that this clearly indicates the nature of supplies from this country. Moreover, sectors such as clothing, but also “computer, electrical, electronic products and components are highly dependent on imports from China”. However, I would like to return for a moment to China’s share in EU exports. Before the pandemic, it was about 18%. During it, it reached 22%, but in 2022, it dropped again to 20.5%. I’m wondering where this pandemic peak came from?
I think it was then that we realised the extent of this relationship. It was simply not possible to import specific products from other places in the world, and demand for certain goods skyrocketed. For example, for face masks, the production of which has been carried out in East Asia for years.
Moreover, the pharmaceutical sector, in general, and especially the production of basic drugs such as paracetamol and its intermediates, was largely concentrated in China or India, mainly due to cost optimisation.
Returning to your question – the problem was also visible in the case of semiconductors, which we largely obtain from Taiwan. It’s responsible for 60% of the global production of semiconductors, and over 90% of the most advanced ones with a size below 10 nanometers.
Meanwhile, we all remember what happened when, as a result of COVID, there were restrictions on the work of microchip factories. The resulting disruption to global supply chains saw demand for semiconductors increase rapidly. Supply simply could not keep up and the international automotive sector had to drastically reduce production.
It seems that the European Union authorities have finally realised the gravity of this problem. The December summit between the European Union and China was devoted to this topic. Ursula von der Leyen then called for, as she put it, the restoration of balance in trade relations with China. At the beginning of our conversation, you mentioned one of the aspects of this imbalance – the lack of access of European enterprises to the Chinese market. Where does this stem from?
We must remember that this is not only a problem of European companies but of all foreign ones. The Chinese market is asymmetrically open, shaped by legal regulations that the Chinese formulate in such a way that operating on their market is possible only in certain, clearly limited sectors, or only in cooperation with a Chinese partner. There are internal regulations that make it very difficult for external entities to access financing. At the same time, things are much easier for Chinese companies.
Today, many sectors have already been partially opened, but we are still dealing with the consequences of that state of affairs. Not all European Union countries feel the same way, as not all of them are equally dependent on China. Germany is the most high profile case, due to the fact that its companies are most present in China. This is strongly reflected in the economic data – the annual income of German companies operating on the Chinese market is approximately 6% of German GDP.
This is most visible in two sectors – automotive and chemical. Let’s focus on the first one. For years, German companies have performed very well on the Chinese market because they created joint ventures with local companies, from which they benefited, also based on the high demand of local customers for German premium automotive brands. On the other hand, these companies transferred their technological know-how to China, which, largely based on German technologies, had built a very strong production chain for electric cars.
As a result, to compete in the global electric car market today, you must rely to some extent on Chinese technologies. China already occupies such an important place on the global electromobility map that it cannot be ignored.
There is a certain irony in this that cooperation with China, which has brought enormous benefits to German companies for years, has also led to a situation where these companies are being forced out of the Chinese market by local producers. The latter are already starting to expand strongly into Europe, and if the EU does not react in time, it will be an unstoppable wave, especially since it is difficult to compete with them on price.
However, the matter is very complex because German business, despite what is happening, and even though the Chinese economy is showing some downward trends, wants to stay in this country. Recent data from the German Chamber of Commerce in China shows that over 90% of German companies want to stay in the Chinese market, and more than half even intend to increase their investments there.
Is this down to a matter of habit, or a desire to maintain a competitive advantage thanks to the significantly lower production costs in China?
The truth is that it is very difficult to find an alternative to the Chinese market. An anecdote quoted by one of the main German car manufacturers says that weekly sales of premium brands in China, for example in India, would be achieved after a year. There is no other market in the world that has such a scale and such internal demand for this type of goods.
For this reason, companies that are already present there, instead of withdrawing, prefer to focus on the “local for local” strategy, i.e., building a separate supply chain for China. With such a strategy, if over time it turns out that the company is gradually being forced out of the Chinese market, the entire company does not lose so much by running separate operations, for example in Europe and the United States.
When communicating with foreign entities, the Chinese often promise greater market access. At first, they even partially implement them. Ultimately, however, they put pressure on these companies, and in turn, on their governments, to shape their policy towards China in such a way that its effects do not impact business. And again – this is clearly visible in the case of Germany, where there is an evident distinction between national interest and the interests of German business.
Importantly, the scale of dependence of European businesses on China is already so great that this country can now use not only a carrot strategy, but also a stick strategy, introducing, for example, export licenses for gallium or germanium and causing Europe to take a step back and delay certain political decisions related to derisking.
What you are talking about can also be seen in relations with the United States, for example. When they began to introduce certain mechanisms to loosen their dependence on China, in August last year the latter responded by restricting American companies’ access to gallium, which of course is essential for the production of microchips among other things. This only shows that we are dealing with a universal strategy of making any foreign partners dependent on us.
Absolutely, and very effective.
On the other hand, China pursues a policy of subsidising exports and the development of local companies. The ten-year Made in China 2025 Plan has been in operation since 2015, aiming to develop its industry and achieve a national share of 70% in the production of the latest technologies. It’s on a massive scale. The subsidising of exports by the Chinese Government is one of the actions most strongly criticised by the head of the European Commission given the disproportionate relations between the EU and China.
Today, derisking and how to achieve self-sufficiency in strategic sectors are widely discussed in Europe. It is also important to remember that derisking is about building greater economic resilience, but it is not clear to which country it specifically refers.
Meanwhile, this strategy has, paradoxically, been employed by China for a long time. You rightly mentioned the Made in China 2025 plan, which clearly demonstrates it. Generally, from the very beginning of Xi Jinping’s leadership, the issue of self-sufficiency and independence from Western technologies was one of the most important. Xi Jinping is a leader with a strong focus on economic security. Moreover, he believes that this security cannot be achieved if the country is dependent on foreign technologies, primarily American ones.
At the same time, China has been experiencing clear production surpluses for some time. The sentiment among local households is so low that it is very difficult to stimulate internal consumption. Moreover, the natural tendency to save among the Chinese has even increased.
This means production surpluses from the pandemic cannot be sold on the internal market. Hence, they are primarily directed to the European market, which is still one of the most open. This can be seen, for example, in the case of customs duties. The taxes levied on electric cars from China in the United States is 27%, whereas in Europe, it is still only 10%.
Today, China badly needs to open its markets also because it is struggling with very high unemployment, mainly among young people. In June 2023, it exceeded 21%, causing great social anxiety. Ultimately, the authorities decided not to make such data public anymore.
However, all this means that China badly needs foreign investments to stimulate its economy after the pandemic. In a sense, they are dependent on the European market, but they can turn this dependence to their own advantage.
How did China become so dependent on the European Union compared to the United States?
There is bipartisan agreement in the United States that cooperation with China has strong national security implications. This is something that Europe lacks, hence the great resistance of some countries to implementing, for example, the European economic security strategy.
Another issue is that the United States is able to effectively build tools of economic pressure on China because the latter is still very dependent on some American technologies, for example, those related to the production of semiconductors.
The Americans even tried to take advantage of this during Donald Trump’s policy of decoupling, i.e. a complete and sudden separation from China. This policy ultimately turned out to be impossible to implement because even between these two countries, the economic ties were too strong, as was the resistance of American business.
When Joe Biden came to power, he prepared a system of tools that would cut off China from American technologies. It promised to be very effective, but in practice, it turned out that even the export restrictions on semiconductors introduced by the Biden administration in October 2022 did not achieve the intended goal of stopping or even reversing Chinese development in this type of production.
Nevertheless, it cannot be denied that Americans differ from Europeans in that, firstly, they still have very strong technological leverage over China, and secondly, a consensus on the approach to cooperation with China has already been reached at the cross-party level. In Europe, this is still a process that is becoming clearer.
One of the reports of the Polish Economic Institute noted that in Europe “there is visible restraint in tightening policy towards China”. You also mentioned this resistance from some Member States. It isn’t just a case of Germany either.
This is definitely not just a German issue. There, we talk about resistance primarily in the context of business.
However, there is also resistance from the Member States themselves. This is because when Ursula von der Leyen announced the European Union’s economic security strategy in June 2023, it turned out that in order to implement it, the European Commission would need to expand its competences at the expense of the Member States.
One of the most important ideas included in this strategy was the introduction of investment screening for outgoing European enterprises. It was about investments that would take place in so-called higher-risk markets, including China.
This is just an idea for now; the EU commissioner has not published any regulation, but recently it turned out that the slowdown in work on it is largely due to the resistance of both Member States and business. The latter indicates that if forced to disclose investment plans, it will lose its competitiveness.
The aforementioned European Union economic security strategy also called for the harmonisation of export controls. What happens at the moment is that each Member State decides on these controls independently, focusing especially on dual-use products, i.e., those that can be used for both civilian and military purposes. There was an idea that decisions on this matter should be made top-down.
An example showing how important these types of decisions are is the Dutch company ASML Holding, which supplies the most advanced lithography machines for the production of semiconductors. It uses American technologies, which is not surprising because the Americans actually have a global monopoly in this field.
In September 2023, the company had to adapt its policy to U.S. export restrictions related to semiconductors. Over time, however, the Americans began to exert even greater pressure to increase these restrictions, including prohibiting the sale of further batches of advanced lithography machines to China.
China, meanwhile, was a key market for ASML. The problem became clear, and voices began to be heard throughout the Netherlands that export restrictions should be discussed not at the level of a given Member State, but at the level of the entire EU. A single country may not be able to effectively negotiate with such a strong partner as the United States.
Today, however, this topic is not closed. Just like the others we mentioned earlier. Since 2019, an investment screening mechanism has been in place in the Member States, through which the European Union can verify whether EU countries are investing in third countries that could threaten EU security due to our dependence on them.
However, there are no binding decisions yet on checking investments of European companies in third countries. So far, as part of the implementation of the economic security strategy, only a list of critical technologies of the European Union has been developed and a mechanism for protection against economic coercion from third countries has been introduced.
On the other hand, we must concede that the latter is very important. We must remember how strong economic pressure the Chinese exerted on Lithuania after it agreed to open a Taiwan representative office in Vilnius.
Derisking during and immediately after the pandemic was closely related to the strategy of bringing production closer to sales markets. Recently, however, I read in a report from the above-mentioned Polish Economic Institute that the key question seems to be whether in practice we should focus on this strategy or simply on maintaining diversified supply chains.
Diversification must also be implemented – it is not possible for 100% of production to take place in Europe. However, production related to strategic sectors, or at least a significant part of it, certainly should. This may constitute a huge opportunity for the countries of the Central and Eastern European region.
I have heard the opinion that the policy of derisking leads to deglobalisation, so it is ultimately doomed to failure because we are unable to stop globalisation. Can you really put an equal sign between these two concepts?
I think not. Derisking is not decoupling. The latter led to deglobalization and was intended to completely cut off trade and investments from certain countries, for example, China.
Derisking, in its assumptions, is not so radical; it is a softened version of decoupling. It involves strengthening economic security only in certain strategic sectors, such as energy transformation or the development of new technologies. It assumes that European Union Member States will achieve security without drastically cutting themselves off from external partners.
Do you think it can be possible?
Much will depend on political will. We do not yet know how important the derisking policy will be for the new European Commission.
Moreover, for derisking to be successful at all, it must go hand in hand with European business. The need to accept it, for example, on the same basis as an insurance policy. They should see that there is a certain risk, but that they protect themselves just in case so in front of him. Generally speaking, however, this policy must not harm the business, otherwise, it will fail.
It is also important to what extent individual Member States will see the benefits of this policy. And therefore, to what extent will they be willing to transfer some of their competences to the European Commission to harmonise, for example, export controls.
A lot will also depend on the extent to which China will support Russia. This is always an issue that acts like a cold shower on the Member States of the European Union.