[SCMP Column] EU Must Maintain Close Ties with China Despite Protectionist Stance

Concerns Over Chinese Companies in EU Supply Chain Due Diligence Law
EU and China Must Cooperate to Prepare for Trump 2.0

As the U.S. House of Representatives pushes legislation to force the sale of ByteDance's short-form platform TikTok's U.S. operations, making global headlines, the European Union (EU) has passed relatively modest rules targeting China's commercial interests. However, the EU's measures could have a greater impact on Chinese industries.

The most controversial aspect is the EU's new directive overseeing international business supply chains (Supply Chain Due Diligence Act). Large corporations based in the EU must monitor human rights and environmental policies in the countries where they operate concerning their local suppliers and other business partners.

Bab Sabic, Head of International Trade at the London Global Policy Institute and Visiting Professor of International Relations at the University of Nottingham
[Photo by SCMP]

This measure targets all developing countries with varying regulatory standards in the field. Many Chinese companies are expected to be subject to this regulation.

According to a survey conducted by the China Chamber of Commerce, Chinese companies are particularly concerned about the due diligence requirements of the legislation and anticipate significant costs associated with compliance.

In particular, Chinese solar energy companies and textile manufacturers are expected to face a high compliance burden when accessing the EU market. Over the past decade, as Chinese companies have pushed EU competitors out of the market, the industry has called on the EU to take action.

Alongside the new supply chain law, the EU has also provisionally agreed on new regulations banning goods produced by 'forced labor.' This measure appears to specifically target what China claims are labor practices in the Xinjiang Uyghur Autonomous Region in western China.

Considering that Xinjiang is a major production hub for clothing exported worldwide, the EU's new law banning forced labor will be interconnected with supply chain regulations. Xinjiang is also a key production area for China's solar panels.

This legislation comes amid last year's EU anti-subsidy investigation into Chinese electric vehicle manufacturers, adding fuel to the fire.

A significant part of the EU's trade strategy with China clearly aims to achieve geopolitical strategic autonomy. Another element of EU trade policy is to reduce the trade deficit with China. According to EU data, last year the trade deficit with China reached 291 billion euros (approximately 424.5 trillion KRW).

Although the trade deficit with China decreased by about 100 billion euros (approximately 146 trillion KRW) compared to the previous year, the EU and other Western governments have complained about China's 'industrial overproduction.' There is significant concern that China's overproduction could have ripple effects on their markets.

Think tanks in Beijing have countered that the EU and U.S. claims of overproduction reflect dissatisfaction over losing dominance in advanced manufacturing sectors.

However, as tensions escalate toward a trade war crisis, Chinese and EU leaders appear to be striving to avoid being swept up in the whirlpool of protectionism.

To this end, German Chancellor Olaf Scholz is scheduled to visit Beijing next month, and Chinese President Xi Jinping is expected to travel to Paris in May.

A better solution to resolving trade differences between China and the EU is near. This will be pursued amid growing mutual concerns about what a second term of former U.S. President Donald Trump's administration could mean for international trade.

Trump's election risks triggering an unprecedented wave of protectionism in the U.S., which could have a destructive impact on trade between China and the EU.

Earlier this month, Trump threatened to impose a 100% tariff on imported cars, including electric vehicles, declaring, "If I get elected, they won't be able to sell."

In light of a potentially more complicated trade environment, China and the EU may seek greater cooperation in direct investment policies.

Europe's economic considerations support such an approach. Some analysts view Europe's manufacturing and export competitiveness as structurally at risk. In particular, Germany's manufacturing sector is affected by reduced imports of cheap Russian energy.

As an alternative, Germany's major automobile manufacturers and chemical companies have been intensively investing in the Chinese market. While focusing more on luxury consumer goods, French companies have adopted a similar approach.

This process began several years ago but gained significant momentum following EU sanctions aimed at halting imports of Russian energy and metals.

According to China's Ministry of Commerce, despite a decline during the COVID-19 pandemic, European direct investment increased by 92% in 2022. Notably, Germany's direct investment reached a record high of $13 billion (approximately 17.53 trillion KRW) last year.

From this perspective, many products currently produced in the EU will increasingly be produced and consumed in China. Therefore, they may not appear in future EU trade data.

Although the German government has tried to reduce the dependence of its major companies on China while the EU introduces policies to screen overseas investments, the German Economic Institute argues that there is no trend of declining corporate investment in China.

In this context, the upcoming summit meetings in Beijing and Paris are expected to confirm plans to support direct investment in China, thereby enhancing European companies' access to the growing Chinese market while preparing for the rising risks of protectionism.

Bob Sabic, Head of International Trade at the London Global Policy Institute and Visiting Professor of International Relations at the University of Nottingham

This article is a translation by Asia Economy of the SCMP column titled 'EU has reason to keep things sweet with China despite protectionist rules.'