'De-risking' challenge with China complex for Europe

By Andrew Hammond

European policy toward China is increasingly being framed by senior politicians as one of "de-risking" rather than "decoupling." However, there is little conceptual clarity on what this means, thereby increasing the possibility of EU policy failure, rather than success.

The debate over "de-risking" versus "decoupling" has been turbocharged by recent interventions by key political leaders such as European Commission President Ursula von der Leyen who spoke on this issue again on April 18 in Brussels. In advance of her trip to Beijing recently, she rightly reiterated that "it is neither viable, nor in Europe's interest, to decouple from China" in a manner that she has sometimes characterized as being the policy of the United States.

Von der Leyen, instead, advocates a more modest form of cautious engagement with Beijing which she calls "de-risking." While this may be a politically viable distinction, it still lacks conceptual clarity in a debate that will have enormous implications in the months to come for Europe.

Firstly, there are significant disagreements within the EU 27 on these issues so it will not be straightforward to secure policy consensus. So "de-risking" looks less extensive to policymakers in Germany, given those nation's deep economic ties with China, than it would for key Eastern European nations like Poland, and Lithuania (which allowed Taiwan to open a representative office in the capital, Vilnius, in 2021).

Germany is, by far, China's biggest trading partner in the EU, with the nation's firms also holding sizable investments in the country. In the first two months of 2023, Germany accounted for 27 percent of all trade between the EU and China.

Meanwhile, Poland tends to be more skeptical about ties with Beijing, and has long been one of the EU states most reluctant for Brussels to ratify the currently stalled Comprehensive Agreement on Investment. Poland also reacted strongly to comments recently from French President Emmanuel Macron that the EU should reduce its dependence on the United States and aim to become a "third pole" in world affairs alongside Washington and Beijing. Both President Andrzej Duda and Prime Minister Mateusz Morawiecki have stressed in recent days that the alliance with the United States is essential for European security, cautioning against any idea of Macron-style strategic autonomy for the continent.

A second challenge is that Europe is trying to make policy in a fast-changing geopolitical landscape. This dynamic dimension of "de-risking" makes it a moving (and harder) target to hit.

That is, the amount of "de-risking" Europe collectively feels it will need to take may change significantly over time, depending on China's posture. If Beijing is perceived to behave "badly" in the coming months/ years (e.g. by invading Taiwan), there may be much more consensus in Europe toward more comprehensive "de-risking" (which may see political rhetoric move towards decoupling). Conversely, if Beijing is perceived to behave "well" (e.g. possibly playing a key role in ending the Ukraine war in 2023/24 by helping bring Russia to the negotiating table) the policy debate may become more nuanced.

Within this policy vortex, there are some clues to what "de-risking" could look like based upon what von der Leyen asserts is the need for "having a clear-eyed picture of what the risks are." This builds from tools such as the new Critical Raw Materials Act with which the EU wants to become less reliant on Chinese refining capacities.

The new framework is likely to become clearer when the EU introduces a new Economic Security Strategy later this year to address what von der Leyen has called a still "unbalanced" economic relationship. This includes reducing dependency and diversifying supply chains away from Beijing, especially in areas where the EU needs to build its green and digital economy.

Key elements of the new framework are likely to comprise what von der Leyen asserts is a need for a "bolder and faster use" of new economic tools against China. This includes the screening of foreign subsidies and a new policy against economic coercion with an anti-coercion instrument to help the bloc fight off attempts from third countries, which was recently agreed upon by the European Parliament and member states.

The EU is also planning to roll out a Foreign Subsidies regulation, giving it the extra muscle to fight distorting subsidies that firms get in third countries. The ambition is giving Brussels greater powers to prevent state-subsidized companies from China ― or other nations ― producing in Europe.

Another tool that Europe looks set to develop is what she calls "a targeted instrument on outbound investment." This is especially for sensitive technologies which can lead to the development of military capabilities that pose national security risks.

Beyond that, von der Leyen has added that the bloc needs to "define its future relationship with China" in sensitive high-tech areas. These include microelectronics, quantum computing, robotics, artificial intelligence and biotech.

A key question now, however, is how much this emerging tool kit can truly deliver on von der Leyen's de-risking goal. Seeking to differentiate the EU position from U.S.-style "decoupling" may be clever positioning, but implementation may turn out to be very difficult, both politically and economically.

Andrew Hammond (andrewkorea@outlook.com) is an associate at LSE IDEAS at the London School of Economics.