EU-China Relations: Trade, Investment, and Recent Developments (2024)

European Commission President Ursula von der Leyen and French President Emmanuel Macron are making a joint visit to China this week. The visit comes amid fraughtEU-China relations and is likely to revolve around a series of contentious issues. However, it also comes after two years of strong trade between China and the EU and follows a series of dialogues between Chinese and European leaders aimed at deepening economic ties. We look at EU-China trade and investment numbers over the last few years and discuss the sometimes tense bilateral relations.

The President of the European Commission Ursula von der Leyen is visiting China from April 5 to 7, 2023, along with French President Emmanuel Macron. During their visit, the two leaders will hold a joint meeting with Chinese President Xi Jinping.

Meanwhile, in a regular press conference on April 3, Chinese Foreign Spokesperson Mao Ning also stated that President Xi will hold talks with President Macron in order to “chart the course for bilateral relations, deepen China-France and China-EU cooperation in various fields, and have an in-depth exchange of views on major international and regional hotspot issues.” The French President is also expected to meet with other high-level Chinese officials and visit Guangzhou in Guangdong Province, reportedly to meet with a group of students.

The visit comes during a fraught time for EU-China relations, with relations cooling as a result of a range of issues and in particular geopolitical tensions. On March 31, von der Leyen gave a speech in which she advocated for a more hardline approach toward relations with China, drawing criticism from Chinese officials.

At the same time, strong bilateral trade figures serve to counter the pessimistic narrative, suggesting that mutual interest and reliance remain strong, and prompting von der Leyen herself to state that economic decoupling is not an option.

In the run-up to these high-stakes meetings, we look at the development of EU-China bilateral trade, investment, and diplomatic relations in recent years.

The development of EU-China relations

The EU and China formally established diplomatic relations in 1975, when the EU was made up of only nine member states. In the decades since, the relationship has developed to become one of strategic importance for the global economy, particularly as China emerged from the 20th century as a growing economic power and the world’s main manufacturing hub. The relationship has been largely built on bilateral trade, with the EU becoming increasingly reliant on Chinese manufactured goods, especially since China’s accession to the World Trade Organization (WTO) in 2001. By 2020, bilateral trade between China and the bloc reached around EUR 1.8 billion per day.

Politically, bilateral relations have been relatively complex, defined at once by mutual reliance and opposing political stances. In recent years, relations have cooled significantly as European governments have taken a hardening stance toward various disputes, including alleged human rights issues, unequal market access, as well as the perceived growth of Chinese influence in Europe.

Relations have become even tenser in the wake of the Russia-Ukraine conflict, as China and the EU have found themselves on opposite sides of the conflict. Much of the rhetoric coming from EU leaders on China today is closely concerned with its relationship with Russia, with the EU urging China to use its influence over Russia to push for peace.

At the same time, EU countries have come under increasing pressure from the US, one of the EU’s closest allies, to side with it in its own campaign against Chinese activity, in particular as it pertains to the containment of Chinese technological development. For instance, EU governments and companies have come under pressure from the US to uphold its ban on chip exports to China, which has put companies like the Dutch chip company ASML in the crossfire.

It is also notable that, despite the tense relationship, EU-China trade has boomed over the last few years, indicating that the two regions maintain close economic ties and are highly reliant upon one another.

EU-China trade continues to record rapid growth

EU-China trade has grown rapidly in the last two years, accelerating from just 4.6 percent year-on-year growth in 2020 to over 20 percent year-on-year growth in 2021 and 2022. This acceleration has been driven mainly by China’s exports to the EU and is in line with China’s overall strong trade numbers over this period. The growth in China’s exports is in part thanks to the sharp increase in demand in western countries for Chinese-made goods during the pandemic.

China was the EU’s second-largest trade partner in 2022 behind the US, with total imports and exports reaching EUR 856.3 billion, according to data from Eurostat. This accounts for around 15.3 percent of the EU’s total trade that year.

The EU had a trade deficit of EUR 395.7 billion in 2022, expanding further from EUR 250.3 billion in 2021. Only one EU member state – Ireland – recorded a trade surplus with China in 2022. China remains the EU’s largest source of imports, with total imports reaching EUR 626 billion, accounting for 20.8 percent of all EU imports in 2022.

China is the third largest destination for EU exports, after the US and the UK, with exports to China reaching EUR 230 billion in 2022, accounting for 9 percent of the EU’s total exports.

China’s largest trade partner within the EU in 2022 was Germany, with total trade reaching EUR 236.9 billion, according to Eurostat data. Germany was also the largest exporter of goods to China, with total exports reaching EUR 106.9 billion. However, the Netherlands was the largest importer of Chinese goods, with total imports reaching EUR 130 billion.

The top-traded goods between the EU and China are machinery and vehicles, other manufactured goods, and chemicals. China’s top export goods to the EU in 2022 were telecommunications equipment, followed by automatic data processing machines, and electrical machinery and equipment. Meanwhile, the EU’s top exported goods to China are motor cars and vehicles, electronic tubes and valves, and auto components.

While machinery and vehicles dominate two-way trade, there are many other important trade industries. For instance, Europe remains highly reliant on China for light manufactured goods, such as toys, furniture, textiles, apparel, and footwear, while several EU countries also export significant amounts of food and agricultural products to China, as well as niche specialty products, such as leather goods and alcohol.

EU investment in China decreases but may be on the rebound

Investment from EU countries into China saw sharp drops in the years between 2019 to 2021. According to data from China’s Ministry of Commerce (MOFCOM), actual use of foreign capital from EU countries dropped from US$7.3 billion in 2019 to US$5.7 billion in 2020, a year-on-year decrease of 11.8 percent. This dropped further to US$5.1 billion in 2021, a year-on-year decrease of 10.4 percent.

The fact that the decline in EU investment in China began even before the pandemic suggests that the issue may be more systemic, with EU companies blaming the difficulties faced by EU countries in entering the China market.

However, preliminary growth data from 2022 suggests that the numbers may have bounced back. Data from MOFCOM shows that EU countries’ investment in China increased by 92.2 percent year-on-year in 2022.

It is tempting to look at this jump and say that EU investment in China is recovering, but it is possible this sudden reversal is the result of a few very large projects that took place in 2022, such as large investments from German companies Volkswagen and BASF, rather than a sign of an improving trend.

China-EU trade and investment treaties

China currently has active bilateral investment treaties (BITs) with all EU countries except Ireland. These BITs guarantee protection to investors and their investments from both contracting countries in the other contracting country, as codified by the most-favored-nation (MFN) clause. They also usually include clauses on dispute mechanisms in the event, including arbitration in a neutral international court.

In addition, China has signed avoidance of double taxation agreements (DTAs) with France, Belgium, Germany, Denmark, Finland, Sweden, the Netherlands, Poland, Bulgaria, Cyprus, Spain, Romania, Austria, Hungary, Malta, Luxembourg, Croatia, Slovenia, Lithuania, Latvia, Portugal, Estonia, Ireland, Greece, the Czech Republic, and Slovakia.

There are currently no trade or investment treaties between China and the EU as a bloc. In late 2020, the EU and China reached an agreement in principle on an investment deal called the Comprehensive Agreement on Investment (CAI). The CAI is a landmark agreement, in which China committed to improving market access and ensuring equal treatment for EU companies. This includes commitments to implementing “terms of disciplines for state-owned enterprises, transparency of subsidies and rules against the forced transfer of technologies.”

However, following China’s sanctions on several EU MEPs, the approval process for the agreement was halted, and negotiations have not resumed since.

Recent EU-China dialogue

Despite the ongoing tensions, China and the EU have maintained open lines of communication, and recent months have seen several high-profile visits and dialogue between EU and Chinese officials. In early November 2022, the new German Chancellor Olaf Scholz visited China, the first G7 leader to do so since the start of the pandemic. The meetings revolved around furthering bilateral economic cooperation, including promoting fair trade between the two countries.

The same month, President Xi also met with French President Macron at the sidelines of the G20 Summit in Bali, in which the French President reportedly stated that France is ready to “deepen cooperation in areas such as trade, economy, aviation, and civilian nuclear energy” and that “France welcomes Chinese firms to the country for business cooperation”.

In February 2023, China’s top diplomat and former Foreign Minister Wang Yi took a tour of Europe in which he visited France, Italy, Hungary, and Russia, and attended the Munich Security Conference. During the tour, Wang met with several high-level European officials, including President Macron and the President’s Diplomatic Advisor Emmanuel Bonne, the Deputy Prime Minister and Foreign Minister of Italy Antonio Tajani, and the Hungarian Minister of Foreign Affairs and Trade Peter Szijjarto. These meetings largely revolved around reestablishing and developing trade and business relations in the post-COVID era and also touched upon China and the EU’s role in peacemaking in the Russia-Ukraine war.

On March 31, the Prime Minister of Spain Pedro Sánchez met with President Xi Jinping during a state visit to China, as well as several business leaders. In addition to discussing issues surrounding the Russia-Ukraine conflict, the Prime Minister also announced two phytosanitary protocols for China to buy more Spanish persimmons and almonds, “for which the Chinese market has enormous potential”.

EU-China relations expected to persist amid tensions

EU and China still have very different stances on a series of issues, but EU-China relations and engagement are expected to persist in the foreseeable future.

For example, in President von der Leyen’s speech ahead of her visit to China, she criticized China’s “no-limits” relationship with Russia and stated that “how China continues to interact with Putin’s war will be a determining factor for EU-China relations going forward”, indicating that the EU’s stance toward China has not softened. However, she also emphasized that the EU would not seek to decouple its economy from China, calling instead for “de-risking”. She also called for continued dialogue and cooperation with China, stating that “our relationship with China is far too important to be put at risk by failing to clearly set the terms of a healthy engagement”.

It is also important to note that there are 27 countries in the EU, and there is therefore a diversity of opinions when it comes to cooperation with China. For instance, China’s relationship with Hungary has been considerably more amicable than that of other EU countries in recent years, and the country also broke ranks with the rest of the EU to welcome China’s Ukraine peace plan.

In addition, President Macron’s visit to China will almost certainly not solely be to discuss the current issues pertaining to the Russia-Ukraine war, but also be a concerted effort to further develop China-France trade and business ties. In fact, the French president is bringing a group of business leaders with him on the trip, including officials from French multinationals Airbus and Alstrom. These moves strongly suggest that Macron’s goals for his trip to China are starkly different from those of President von der Leyen and that France will ultimately not seek to distance itself further from China.

Dezan Shira & Associates’ Presence in Europe

Europe has significant trade and investment dealings with Asia – China, ASEAN, and India are all among the bloc’s top trade partners. With Asia emerging as a growth engine of the world economy and an area of certainty amid global volatility, there is a wealth of opportunities for European investors in the region. Incorporated in Munichin January of 2021, Dezan Shira & Associates’European officeunder Riccardo Benussi serves as a first point of contact for European companies wishing to do business in Asia. Meanwhile, our Europe-based team in both the Munich and Milan offices works with a variety of partners to connect European businesses with developing Asian economies. To set up a call with our Europe-based team, please contact riccardo.benussi@dezshira.com.

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