Europe shows diversifying from China’s economy is hard to do

ECONOMIC diversification from China has become perhaps the key buzzword in European, and wider Western, policy towards Beijing in the post-pandemic period. Yet, attempts to deliver on this ambition have been highly uneven so far.

Take the example of German Chancellor Olaf Scholz who is on his latest visit to China along with a big business delegation that included leading brands such as Siemens, Mercedes, Volkswagen, and Bayer. Last year, Scholz’s government drew up a strategy towards Beijing that urged reducing dependence. Yet, a recent study by the German Economic Institute shows that there is still a mountain to climb.

The report, the context for which is German direct investment in China rising to a record 11.9 billion euros (S$17.3 billion) in 2023, highlights how the two economies are deeply intertwined in a wide range of product and raw material areas. It found that there are still some 200 such goods for which Europe’s largest economy relies heavily on the Asian giant – only a small decrease from the 213 in a previous iteration of the study.

So, while total Chinese imports fell by almost 20 per cent between 2022 and 2023, the overall percentage of product groups for which Germany relies on China for more than 50 per cent of imports – including chemicals, computers and solar cells – has not changed significantly. Moreover, in some areas such as pharmaceuticals and rare earths, Germany’s dependence has increased.

Unsurprisingly, the study’s conclusion is that “a clear structural de-risking – in the sense of a continuing trend towards further significant declines in imports – is therefore not yet apparent”. The key challenge is perhaps that the German economic diversification policy from China is vague on specific measures or binding targets.

Scholz may have contemplated this core point during his current three-leg trip where he visited Chongqing, widely considered the largest city in the world, with around 32 million people living in the greater administrative area. Plus Shanghai, the nation’s most important economic and financial centre, and Beijing, where he met Chinese President Xi Jinping and Premier Li Qiang.

There is no question that European nations are increasingly cross-pressured over engaging China which they variously see as both a partner and a systemic rival. However, it is hard in practice to straddle these competing viewpoints, especially for nations such as Germany with longstanding, deep economic dependence on the Asian giant.

The context here is the attempts by European Commission President Ursula von der Leyen, and other top European Union officials, such as High Representative of the EU for Foreign Affairs and Security Policy Josep Borrell, to try to enforce a stronger, bloc-wide stance vis-a-vis China. Given the diverse views across the continent, Brussels is struggling to find common ground on Beijing across all EU member states.

Top EU officials have also become increasingly concerned in recent years about whether the nature of China’s external interventions in Europe represent a divide-and-rule strategy to undermine the continent’s collective interests. Borrell even asserted that Beijing is a “systemic rival that seeks to promote an alternative model of governance” to that of Europe.

The background to this is that Europe is becoming an increasingly important foreign policy focal point for Beijing too, including as an economic market. The rising superpower had, until recently at least, generally enjoyed growing influence across much of the continent.

Post-pandemic and after Russia’s invasion of Ukraine, Brussels has sought to bring the bloc together around a stronger policy towards China. Even on issues where breakthroughs have been made with Beijing in recent years, such as the bilateral Comprehensive Agreement on Investment, the “long grass” of Brussels has prevented ratification in the European Parliament owing to widespread EU concerns over China’s behaviour, and the measure may now never come into force.

A central challenge for Dr von der Leyen and Borrell, however, is the splits on Beijing within the 27-member bloc. It is too simplistic to refer to an East-West dichotomy in the continent, in part because Hungarian Prime Minister Viktor Orban favours strong ties with China.

However, there are nonetheless clear differences in outlook between hawkish Eastern European nations such as the Czech Republic, Poland and Lithuania, versus Western counterparts such as France, Spain and Germany which do much more bilateral business with China.

Perceptions of a divided EU have also been publicly highlighted by several Chinese officials, including erstwhile ambassador to the EU, Fu Cong, who has cast doubts about whether all member states are behind the agenda of Borrell and Dr von der Leyen. Fu has said that “Europe has not formulated a coherent policy towards China” and that it felt like “people quarrelling with each other”.

The positions of Western European nations such as Germany and France are particularly problematic for Brussels given that both want to continue engaging extensively, economically, with China. The longstanding, deep business ties that Berlin has with Beijing are widely documented; so it is no surprise that Scholz is more equivocal than Dr von der Leyen and Borrell on China.

However, what has surprised many is the relatively soft stance that French President Emmanuel Macron has taken. During a joint visit last year to Beijing with Dr von der Leyen, the French president took along a business delegation of several dozen executives, and deployed the language of economic reciprocity rather than diversification. Perhaps most surprising of all was the fact that Macron did not appear to apply significant pressure on Beijing regarding its support for Russia in Ukraine, and moved away from prior positions on Taiwan. So, whereas Dr von der Leyen asserted on the trip that “stability in the Taiwan Strait is of paramount importance” and that “threat of use of force to change the status quo is unacceptable”, Macron said Taiwan is a “crisis that is not ours” and that Europeans should not be “America’s followers”.

While the full motivation for Macron’s comments remains unclear, his position is out of sync with not just the EU stance, but also key G7 statements on Taiwan that France signed up to. His remarks are premised on a highly questionable assumption that Europe can completely insulate itself from tensions between China, Taiwan, and the United States.

Taken together, this challenging background underlines why so many European eyes were on Scholz’s visit. Germany is walking a political and economic tightrope on China between engagement and diversification, and this high-wire balancing act could yet be destabilised by the chill in overall EU relations with Beijing which may deteriorate further still in 2024.

The writer is an associate at LSE IDEAS at the London School of Economics