EU De-Risking Will Be Minimal at First, Witnesses Say

Noah Barkin, a senior adviser at Rhodium Group, said that while the appetite to constrain China is not as strong in Europe as it is in Japan or the U.S., the trade deficit between the EU and China doubled in the past two years, and that changes the politics of maintaining good relations with China for the sake of exporting firms. "This is likely to color the larger relationship going forward," he said.

However, he said, even as smaller companies withdraw from China due to compliance costs, and new EU companies are not establishing operations there, overall investment from EU firms in China has been steady over the past four years, between 8 and 9 billion euros each year. He said 84% of that investment is from German firms.

Barkin said Germany is having a vigorous debate about what its China policy should be, with Green Party coalition ministers, who lead the economy and foreign ministries, "pushing for more of a fundamental rethink, particularly of the economic relationship," including leaning on German companies to reduce their presence in China.

Andrew Small, a senior fellow at the German Marshall Fund, said in his written testimony that China wants to bolster its relationship with European governments, because "since the tightening of U.S. technology controls on the [People's Republic of China] -- most notably the U.S. export controls of October 2022 -- Europe is seen as an even more important conduit for continued access to advanced technologies, in areas where China itself still lags behind."

Barkin said "China needs access to the European market; they would like to retain access to European technology. China was spooked, to a certain extent, by the Dutch decision to go along with the U.S. and Japan" in ending sales of advanced chip manufacturing equipment.

But Small said China is not willing to change much of its approach to smooth over relations with Europe. He wrote that China offered the EU an investment agreement "as a means of undergirding the relationship and undercutting the Biden administration’s coalition-building efforts before it had even taken office," which "seemed at least to be a successful tactical move. But it was considered less important to ensure that the agreement was ratified than to retaliate against EU sanctions, especially those pursued jointly with the United States."

Commissioner Michael Wessel said after talking to folks in Berlin and Brussels, "I came away confused as to what the European policy really is." He complained that the ports of Antwerp, Rotterdam and Hamburg are using Chinese software and that Huawei is getting EU research funding. And while the EU is considering outbound investment restrictions, Wessel said the outcome of those discussions is unknown.

Small said he thinks the U.S. and the EU are "still headed toward convergence," but "we are in the most intense phase of the debate of some very high-stakes decisions." He said European Commission President Ursula von der Leyen's description of "de-risking" as the goal is at the far edge of consensus (see 2303310036), and that initially, de-risking will be fairly minimal.

More export controls will push de-risking further, he said, but he added that there is a "huge number of gaps" in the EU's stance on Huawei in the region. "There is resistance from companies," he said, and some "rear guard action" to try to reduce the move toward de-risking.

Barkin warned that "overt public pressure" on the EU to align itself with the U.S. on China "can backfire, can play into the narrative of the EU as a U.S. vassal."