Just Showing Up

European policymakers once hoped that the EU-China summit could be an occasion to stabilize bilateral relations and advance a few limited agreements on trade, investment, and climate change. They have instead been faced with a single-issue test: Could the EU hold its nerve in the face of China’s rare earths blackmail, and do so without the ballast of an economic deal with the United States? The answer, somewhat to Beijing’s surprise, is yes.

Just a few weeks ago, it was far from certain they would pass the test. China’s decision to impose the same export restrictions on rare earth minerals and permanent magnets that it was deploying against the United States initially caught the Europeans off guard. A number of firms suspended output, and others were on the verge of shutting down production. Even those that could secure licenses have been subjected to extraordinary demands from the Chinese side for sensitive business information, from customer lists to critical intellectual property. The urgency of the need to fix the problem quickly overwhelmed every other bilateral issue.

Beijing’s move took place just as European officials were in the midst of trying to negotiate a modest recalibration of the relationship. The fundamental issues—China’s backing for Russia’s war and the damage Chinese economic practices were doing to European industry—had not improved. Quite the opposite. But the EU was exploring whether a limited set of deals might still be tactically advantageous, whether on alternatives to its electric vehicle tariff framework, models for Chinese investment that could benefit European supply chains and technologies, or specific climate commitments. While there was zero chance of a “grand bargain” or a return to the aborted Comprehensive Agreement on Investment, the question was whether the pressures and uncertainties that both sides faced from Washington could create the conditions for a few stabilizing steps.

Instead, the Chinese side appeared to see the success they had achieved in their trade negotiations with the United States as offering a fresh point of leverage with Europe. The May talks in Geneva, when Washington substantially pared down its tariffs as a quid pro quo for the resumption of rare earth exports, changed the backdrop significantly. If even the United States was ready to cave so quickly to Chinese pressure, what might be extracted from everyone else? This was accentuated by the further US-China talks in London in June, when Washington explicitly put its export controls into the negotiating mix and subsequently eased restrictions on sales of advanced semiconductors. If the United States was now more open to trading off its long-term national security interests for the short-term benefit of its firms, surely everything should be on the table from the European side, too? So instead of discussing moves that might address concerns about the damage China’s surging exports were doing to European industry, Beijing made clear that it was the EU that needed to concede to Beijing’s demands by disarming its trade defenses and swallowing its security concerns. EU tariffs, export controls, measures against Chinese firms for their transfer of sanctioned materials to Russia, and the use of the EU’s new economic toolkit—such as the powerful Foreign Subsidies Regulation—were all now supposed to be up for negotiation.

Yet the United States' and EU’s starting points with China were radically different. Washington’s concessions reduced tariff levels from “embargo scale” to “still very high”, and most of its moves on export controls involved measures that had been specifically added ahead of the London talks. Beijing’s demands of the EU, on the other hand, would have risked paralyzing its ability to defend European economic and security interests while trapping Europe in a cycle of coercive pressure. So rather than making placatory moves, the EU has pushed back. President Ursula von der Leyen’s remarks at the G7 accused China of pursuing a strategy of “dominance, dependency, and blackmail”. Senior European officials made clear that progress on the licensing situation was a threshold issue for the summit. These concerns were also conveyed through close coordination of messages from Brussels, Paris, and Berlin during Foreign Minister Wang Yi’s recent visit to Europe. In the meantime, the EU has not eased up on any front. This has included action on a notably clear-cut case for using the International Procurement Instrument to deal with China’s discriminatory practices against EU medical device suppliers and, in the EU’s 18th sanctions package, the first measures against Chinese firms that really caught Beijing’s attention: the targeting of two regional banks, which elicited alarmed reactions from the most senior Chinese banking officials.

The last few months have been a salutary experience for Europe. Tensions with the United States led to the creeping re-emergence of some wishful thinking about China. Instead, Beijing has delivered a few clear lessons. Any hopes that China might want to establish a more benign Sino-European relationship due to transatlantic tensions were fundamentally misplaced. Beijing treats this simply as a moment of vulnerability to exploit. Europe is at best seen as acceptable collateral damage in the context of China’s broader strategic contest with the United States, at worst as another target of its “struggle” against the West. While top-level communications with Chinese counterparts still have value, investing serious political energies in summits and high-level dialogues as a means of addressing the substance of any European concerns with China has now run its course. Any and all European dependencies will be used for coercive purposes whenever China sees fit. De-risking needs to speed up drastically. And if none of this can be undertaken in cooperation with the United States, that does not change the need for Europe to act. If the EU ends up in a trade war on one front with Washington, the importance of defending European industry from a ”China shock“ on the other front is all the greater.

Despite China’s surface bullishness, the very demands it is making of Europe correspond to weaknesses of its own. Its economy remains stagnant, with producer deflation at its worst level in two years, property prices headed back down, bank lending weak, and private sector investment tepid. The growth numbers are only juiced by state-financed investment and the export of China’s prodigious excess capacities. Despite the reduction in US tariffs from their most stratospheric levels, that export juggernaut is now facing a real squeeze from Washington, including on transshipment from third countries. Patience with China’s vast surpluses and its push to control every level of the value chain is running out among developed and developing countries that still want industries of their own. Meanwhile, for all the bluster about how technology restrictions have been such a boon for Chinese indigenous innovation, the chokepoints in sectors such as civil aviation and advanced semiconductors have not gone away. In the midst of this, for all of Beijing’s complaints, Europe is by far the largest developed market that still remains mostly open for China’s exports and much technology cooperation. If Beijing decided to move even further into a zone of retaliation and coercion, that could see far more dramatic changes.  

Barring a late twist, the summit itself will be purely an exercise in message delivery and positioning rather than deliverables. The more important question is what happens in the aftermath. It is certainly possible that China will decide to twist the knife with its export restrictions and retaliatory measures, especially if US-EU trade tensions escalate. Alternatively, there may be an uneasy equilibrium in which China continues to drip out its rare earth supplies, and reluctantly acquiesces to the fact that the EU will not allow crucial European industries to die or its security to be compromised. Delivering that message, holding its nerve, and learning the right political lessons for what comes next was the best EU could do in the circumstances. As a result, this week is a success for Europe, although it will certainly not feel like one.