(Bloomberg) -- As Europe’s top trade chief headed to Beijing this month shortly after announcing a probe into China’s electric vehicle subsidies, some in the bloc braced for fiery criticism and any hint of retaliation.
Instead, the Europeans found President Xi Jinping’s government ready to talk, make promises and avoid aggressive rhetoric that could inflame an economic relationship worth $900 billion. While Vice Premier He Lifeng expressed “concern and dissatisfaction” over the probe, he agreed to set up several working groups including on financial services and trade curbs.
Beijing’s careful managing of its ties with a top trading partner comes amid a broader push to stabilize geopolitical relationships, as an economic slowdown at home deflates expectations it will ever overtake the US as No. 1. China has hosted four cabinet-level White House officials in Beijing in recent months, and reestablished working groups with the US ahead of a potential Xi meeting with President Joe Biden in November.
The Chinese leader Tuesday pledged to promote “stable” relations with Italy, even as the nation plans to exit his signature Belt and Road Initiative. Chinese Foreign Minister Wang Yi called on his Hungarian counterpart, Peter Szijjarto, to push the EU to adopt a more open China policy, in a phone call Wednesday.
Australian Prime Minister Anthony Albanese, meanwhile, is likely to come to China soon, in a clear sign ties have improved from a nadir in 2020. At that time, both sides were highly critical of each other and China was tariffing and blocking Australian exports.
“Beijing is aware that it’s in desperate need of repairing its ties with the EU,” said Alicja Bachulska, policy fellow at European Council on Foreign Relations’ Asia Programme, citing the Asian nation’s “increasingly protectionist and security-focused” economic policies. “That is why its rhetoric was relatively mild.”
When Europe announced the probe into subsidies for electric vehicles earlier this month, Beijing initially blasted that move a “naked act of protectionism.” That sparked concerns in Europe that China had over-reacted and could trigger a trade war, according to European officials who asked not to be named.
China didn’t publicly repeat that criticism during Valdis Dombrovskis’ four-day trip to the country. Instead, the European official was the one who delivered the strongest language — blasting China’s stance on the war in Ukraine as a liability for its image as a good investment destination, and threatening to be more “assertive” about rectifying a yawning trade imbalance.
Dombrovskis had reason to feel confident. Xi has struggled for years to find a response to US sanctions, tariffs and export controls that makes his nation look tough without scaring off foreign companies. Beijing responded to then-US President Donald Trump’s trade curbs with its own “unreliable entities” list, but only used the tool for the first time in February this year — on two US defense firms with limited business in China.
In July, Beijing imposed export restrictions on two niche metals, gallium and germanium, that are critical for electric cars and chips, in its most meaningful retaliation to US and European trade curbs. That sparked concerns about short-term disruptions to supply chains, and fears that a more serious trade war with Beijing could undermine the EU’s green ambitions.
The Chinese Commerce Ministry in Beijing, however, this month said it had already approved some companies to ship those products overseas. That came after reports China’s exports of the metals had plunged, at a moment when the economy is being hurt by slowing demand for its overseas shipments.
Any retaliation to Europe could undermine the Communist Party’s charm offensive to woo foreign investors exiting the nation. Cross-border flows of direct investment into and out of China have slipped to the worst deficit in seven years.
In August, a major EU business group warned that foreign firms in China are suffering from “promise fatigue.” While Xi’s government has pledged in the past year to step up help for private firms and treat them on par with state-owned ones, overseas companies are waiting for tangible progress on much-desired reforms, according to the European Union Chamber of Commerce in China.
China needs foreign capital and knowledge “for its own modernization program,” said Peter Hefele, policy director focused on China at the Wilfred Martens Centre for European Studies. “Next to the US, Europe is the only region to acquire those critical factors.”
Europe’s value to China was laid bare last year when the bloc’s trade deficit with Beijing for goods reached more than $400 billion. Dombrovskis said the huge spike in that number in recent years had prompted cause for scrutiny.
Those comments came after the EU unveiled a new economic security strategy earlier this year, seeking oversight of critical technology exports to China, a signal the bloc is edging closer to Washington’s approach toward Beijing. The US has imposed a slew of trade curbs on China to hold back Beijing’s military development as tensions flare over Xi’s territorial ambitions toward the self-ruled island of Taiwan.
“There’s no doubt the EU is being more assertive,” said André Sapir, senior fellow at Bruegel and former economic adviser to former EU President Romano Prodi, pointing to the announcement of the EV probe as a symbol of that. “It’s partly to send a message to the Chinese that we are toughening up.”
--With assistance from Alberto Nardelli.
(Updates with Chinese Foreign Minister comments in the fourth paragraph.)
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