In competing with the US on clean energy programmes, the European Union plans to revise its business dealings with China, “de-risking, rather than decoupling” from the world’s second-largest economy, Ursula von der Leyen, the bloc’s president, told the World Economic Forum this week.
Acknowledging Europe’s “98 per cent” dependence on China for critical minerals that are expected to play key roles in transitioning to clean energy, von der Leyen still criticised Beijing for heavily subsidising its “energy-sensitive companies” and called for a “level playing field”.
However, she told the forum on Tuesday, Europe needed to “work and trade with China”.
“We need to refocus our approach on de-risking, rather than decoupling,” she added, underscoring the EU’s divergence from the US approach on trade with China.
Hosuk Lee-Makiyama, director of the European Centre for International Political Economy, said that both the US and China were using economics as leverage to support their national security and foreign policy objectives. While decoupling was the Cold War strategy of isolating adversaries by severing economic ties at extreme cost, he said, “de-risking is merely a way to deleverage any attempts to incentivise or coerce Europe into a policy direction against its own interests”.
Von der Leyen made her remarks while announcing the Net-Zero Industry Act, Europe’s response to the Inflation Reduction Act, the US climate legislation that is to allocate more than US$300 billion in subsidies for domestic green-energy projects and tax benefits for electric vehicles and batteries made in the US. Since US President Joe Biden signed the IRA into law in August, the 27-member EU has expressed apprehension over what it calls the law’s protectionist “America First” approach, an apparent violation of international trade norms.
“We Europeans also need to get better at nurturing our own clean-tech industry,” von der Leyen said on Tuesday while she broadly described the net-zero act as well as a European sovereign fund, both part of the same proposal.
Taking aim at the IRA, the “new industrial plan”, she said, would boost investment in European clean-tech production: “There’s a need to be competitive with offers and incentives that are currently available outside the European Union.” Von der Leyen indicated that negotiations with the US on contentious provisions of the IRA were continuing, but her announcement also suggested that the talks were having trouble gaining traction.
The Biden administration has also sent contradictory messages on the IRA. In October, US Treasury Secretary Janet Yellen ruled out any big changes to the legislation when senior French and German officials warned that the IRA could “upend the level playing field” on transatlantic trade. But two months later, Biden told French President Emmanuel Macron that the IRA was intended to curb dealings with China, not exclude US allies. Biden also promised “tweaks” to address European concerns.
Lee-Makiyama said that even though the Biden administration has tried to convince its German and French counterparts “to accept the IRA as a price for the greater good of addressing China’s tech threat”, Brussels argues that “IRA is not aimed at China, but against the EU and other US allies”. IRA subsidies are only the latest in a long series of US-EU trade feuds. A dispute over what the EU considered “unfair support” by Washington for the US aircraft manufacturer Boeing ended in 2021 after 17 years. And the two sides had imposed retaliatory tariffs worth US$11.5 billion on products like wine and cheese for five years before agreeing to a truce in June.
According to Lee-Makiyama, Europe views “the US as a country of concern on equal footing with China”. “We shouldn’t forget that the US and Europe may be treaty allies, but they remain their most commercial competitors.” Similarly, while both sides have remained aligned on their approach to Russia, a rift in how to deal with China has been evident for some time. Even as the US has imposed targeted restrictions on exports of high-end semiconductors and chip-making technology to China, Europe has not shown similar enthusiasm.
The Dutch trade minister said on Tuesday that the Netherlands would not immediately comply with US restrictions on China, and that it was consulting with allies in Asia and the EU. The Netherlands’ largest company is ASML Holding, a key supplier to semiconductor equipment makers. The ASML Holding NV global headquarters in Veldhoven, the Netherlands. Photo: Bloomberg US officials have urged the Dutch to also ban export of less advanced equipment. Since 2019, the Dutch government has denied ASML permission to ship its most advanced machines to China. However, ASML sold two billion euros worth of older machines to China in 2021.
China also remains Europe’s key trade partner. EU data shows that China was the third largest buyer of European goods in 2021. According to Susan Ariel Aaronson, a professor at George Washington University’s Elliott School of International Affairs, the EU and China “need each other”. “You have more leverage when you have a relationship. So taking out the risks in the trade relationship rather than breaking off the relationship makes sense,” she said.