The phrase “de-risking” from China is ubiquitously used in Europe’s economic strategy debates but is often misunderstood by the outside world. It does not entail severing trade ties with China, nor does it mean maintaining the status quo. Both extremes miss the broader objective of sustainable trade, which has become more strategic, transcending the simpler era of cowboy capitalism. The truth is constantly evolving and lies somewhere in between.
The European Union (EU) has come a long way from its first generation economic security strategies that operated in a simpler world. It is imperative that the bloc’s efforts are as cross-sectional as the challenges it seeks to tackle. Today, the EU’s economic security policy has shifted from its earlier enthusiasm for the Comprehensive Investment Agreement, with European companies now taking a more cautious approach to investments in China.
Waking up to a post-cowboy capitalist world has surely come with costs that the bloc is struggling to bear. National interests of EU member countries, particularly major economies like Germany, often come in the way of EU’s collective economic manoeuvres. For instance, despite directives from the German government to reduce their exposure in China and an unprecedented collapse in investment guarantees, German companies continue to heavily invest in China. In 2023 alone, Berlin’s efforts to end over-reliance on the country have been noticeable. From €745.9 million in guarantees issued in 2022, the figures have plummeted by one tenth already this year. However, this is still a small step in tackling dangers of over- reliance on a single source.
Reconciling mutually exclusive interests between Brussels’ bureaucrats and powerful business lobbies is a work in progress and likely to remain in the grey zone. Brussels’ evolving approach to de-risking its economy in an ambivalent world needs to be understood for its instruments, future projections, and what such diversifying might mean for India.
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Systemic rival and partner
European disillusionment with China is becoming more palpable over the years. There are long-standing unresolved concerns about unfair competition from Chinese firms. Chinese influence operations in Europe and human rights violations in Xinjiang have been exacerbated by China’s rigid stance on Russia’s invasion of Ukraine and Beijing’s tacit support to Moscow. Additionally, the growing risk of conflict over Taiwan has further strained relations. European think tanks are spending significant time and resources in studying potential scenarios in case of a war in the Taiwan Strait.
However, despite all that geopolitical tension and geostrategic premonition, complete decoupling, incontestably, will choke the global economy in myriad ways. But de-risking too, though accepted in principle, isn’t finding takers in member states’ industrial lobbies, especially German firms. These companies have strengthened trade ties with Beijing by shifting production to China due to unsustainable energy costs resulting from the Ukraine war and the challenge of rapidly diversifying away from cheap Russian pipeline gas and oil.
Germany was one of the first European nations to start a China mapping exercise in 2018, revealing a worrisome pattern of China exerting influence through the proliferation of Confucius Institutes and creating dependencies that made diversification costly and challenging. China’s huge manufacturing miracle was made possible through German export of sturdy and precise tools. By the time Europeans, especially the Germans, realised that China is not such an open place for trade, almost half of Europe’s burgeoning trade with China involved Germany and the cost of diversification had risen steeply.
The risk averse approach is understandable with Italy withdrawing from China’s Belt and Road Initiative (BRI). Italy was the only G7 nation to sign up for BRI in 2019. Bitter experiences were waiting in the wings for Rome, whose trade deficit with China rose to $20 billion in the following years. On the other hand, the promised resources for BRI projects never met their schedules.
That said, Italy is well aware of its humongous trade with China and wishes to replace its BRI involvement with a trade deal.
EU’s economic security strategy
Currently, Europe is working on the effective implementation of its evolving toolkit for “de-risking”. When Von der Leyen unveiled Europe’s economic strategy a few months ago, she summed it up as the EU’s efforts towards promoting competitiveness, protecting against risks, and partnering (diversifying) based on trust. This strategy provides a political framework for ongoing measures and paves the way for more complex proposals in the future. She underscored the importance of the framework’s evolving nature while pledging another €50 billion for Ukraine.
As the first step towards de-risking, Europe is devising a map for ensuring and improving its competitiveness via STEP, Strategic Technologies for Europe Platform, with plans for a €160 billion investment. This will be supported by other initiatives like Horizon Europe for scientific research, pandemic recovery through NextGenerationEU, the Green Deal Industrial Plan for a clean tech revolution and digital transition, and workforce upskilling.
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EU’s evolving tool kit for de-risking
In a parallel development, the EU has developed a range of instruments to de-risk its trade and investment. These include screening mechanisms for outbound investments and foreign direct investments (FDI) into regions whose regulation entered into full force in October 2020. These efforts are supported by the Foreign Subsidies Regulation, which entered into force on 12 January 2023 and aims to address distortions caused in the single market while ensuring a level playing field for all companies operating in the single market.
Export control regimes for dual use items have also been enhanced and an International Procurement Instrument (IPI) aims to improve reciprocal access to international procurement markets. The IPI gives the EU greater leverage to get access to public procurement markets outside the EU, boosting opportunities for EU companies.
Next is perhaps the best known effort by the EU on protecting its digital security via a toolbox for 5G security. Finally, a mention must be made of the EU’s plans to enforce the Anti-Coercion Instrument in autumn 2023.
While updating the above mentioned measures is key, the EU will also have to tone down its rhetoric for strategic autonomy. Better impact is expected when coordinated with the US, the bloc’s transatlantic partner. This coordination is already visible in the EU’s alignment with the US chip export controls and negotiations on an EU-US deal on critical raw materials. As a caveat, it wouldn’t be too far-fetched to imagine that this policy invokes a risk of retaliatory measures from Beijing.
The EU’s de-risking is not only aimed at China. All these policies have global definitions but they do have a specific meaning for Beijing. Once in place, they will have an impact on the EU’s trade with China because that is where most of the risky dependencies are.
What does it mean for India?
While the EU is one of the topmost trading partners of India with promising connectivity projects, the Netherlands and Germany are the only two EU countries that figure in the top 10 FDI investors in India in 2023. The currently negotiated investment agreement seems to hold immense potential for Brussels and New Delhi. The aim is to provide a predictable and secure investment environment, through commitments on protection against expropriation without compensation and unfair treatment of investors and their investments. It also seeks to put in place an effective dispute settlement mechanism to enforce such rules.
Clearly, there is more work to be done when it comes to India being a direct beneficiary of the EU diversifying its investments from China.
The writer is an Associate Fellow, Europe and Eurasia Center, at the Manohar Parrikar Institute for Defence Studies and Analyses. She tweets @swasrao. Views are personal.
(Edited by Prashant)