(Bloomberg) -- European Union leaders will arrive in China later this week with a tough message: Time is running out for Beijing to address a list of economic grievances before the bloc is forced to react.
Trade will top the agenda when European Commission President Ursula von der Leyen and European Council President Charles Michel, who runs gatherings of the EU’s 27 leaders, meet with Chinese President Xi Jinping and premier Li Qiang on Thursday.
In their first in-person summit with China in four years, the EU officials will seek tangible progress on long-standing issues ranging from data flows to market access, according to people familiar with the bloc’s plans.
The EU will also ask for more effort cracking down on Moscow’s ability to circumvent sanctions as China has emerged as Russia’s primary route to secure banned technologies and so-called battleground goods. But the bloc is remaining realistic about the outcomes, with no specific deliverable expected, they said.
Meanwhile, the EU expects Beijing to raise concerns about an ongoing anti-subsidies investigation into electric vehicles made in China and the bloc’s economic security strategy, said the people, who spoke about the non-public agenda on condition of anonymity.
The EU is concerned that Beijing’s flagging economic recovery including weak domestic demand will result in China pushing to export even more, threatening critical industries in Europe and their workers. The EU’s trade deficit with China grew to more than $400 billion last year and the bloc is eager to continue its strategic approach that views Beijing as a partner, competitor and a rival.
The issue is of critical importance to the EU, which counts Beijing as one of its most important trade partners, and in particular for Germany, for whom China is the biggest market for carmakers including Volkswagen AG. China for its part has been more open to dialog with the bloc, not wanting to inflame an economic relationship worth $900 billion, especially as an economic slowdown at home deflates expectations it will ever overtake the US as No. 1.
A spokesperson from the European Commission didn’t reply to a request for comment; the European Council declined comment.
“China is still moving up the economic ladder, and the EU is losing value added in its exports,” said Alicia Garcia Herrero, a senior fellow at Bruegel, a think tank in Brussels. “China is not to blame, but of course there are some issues for which the EU could blame China.”
Von der Leyen and Michel will look to reassure China’s leaders that its so-called de-risking plans are about reducing dependencies in industries such as pharmaceuticals, electronics and defense. That’s a tough sell given that it also means discouraging Chinese investments in critical domestic infrastructure, and reducing the chance that European know-how and advanced technologies are used for military purposes by rivals.
For some supplies in those sectors, EU imports from China are as high as 90%, the people said. Beijing recently restricted exports of gallium, germanium and some graphite on security grounds. The two senior EU officials will recall that in addition to working on the resilience of its supply chains in critical areas, the EU has identified a list of sensitive technologies that could be subject to controls in the future.
China’s focus will be on pushing back against the EU’s “de-risking” drive, which Beijing sees as akin to an attempt to decouple economic ties, analysts said. Beijing could offer compromises on issues like data flows and climate change co-operation but is unlikely to change its stance on economic policy, such as subsidies to industry which it sees as part of its economic development strategy.
“I don’t think China welcomes either de-risking, or decoupling. China is aware of the EU’s de-risking, and they are trying to engage with it economically,” said Lucie Qian Xia, lecturer on Chinese international relations at Oxford University. “They would appreciate normalizing economic engagement back to pre-Covid levels.”
Beijing is expected to bring grievances of its own to the table, starting with complaints about the EU’s probe into EVs — especially its decision to only sample Chinese manufacturers, rather than also include Tesla Inc. and European carmakers that operate joint ventures in China and export from there.
The aim of the ongoing investigation is to determine whether, and the degree to which, China has subsidized manufacturers, and to take any necessary countervailing measures such as tariffs to level the playing field for the EU’s industry.
The sampled firms have been selected because they are highly representative of the EV sector in China, the people said. The decision doesn’t mean that carmakers like Tesla would be spared from any tariffs that emerge from the probe, as they and others could be hit with a weighted average of the duties imposed on the sample.
The EU will make clear that it’s following due process and carmakers have been invited to collaborate. The probe is part of the EU’s efforts to shield its firms from unfair subsidies and growing concerns about Chinese overcapacity in clean-energy technologies that leads to Beijing pushing those goods onto foreign markets.
With EV imports from China growing fast, the EU is keen to avoid intervening before it’s too late. Several Chinese EV brands already had an 8% market share in the EU last year and that figure is expected to nearly double in the next two years. The same isn’t happening in the US because the Trump administration put a 25% tariff on Chinese EVs and the Biden White House has maintained it.
The Israel-Hamas war and Russia’s invasion of Ukraine will also feature prominently on the summit’s agenda.
China’s position on Russia’s war against Ukraine has not changed much over the course of the fighting since the February 2022 invasion. Though it positions itself as a neutral broker and hasn’t provided Russia with lethal aid, Beijing is seen by the EU to lean toward Russia’s side and to have done little to pressure the Kremlin to end its act of aggression.
A key EU ask will be to demand that Beijing does more to curb Moscow’s ability to circumvent western sanctions on high-priority goods and technologies that it uses in weapons or arms production.
More than 80% of Russia’s foreign purchases of those high-priority items are now coming from China and Hong Kong, Bloomberg previously reported.
--With assistance from Tom Hancock, Jorge Valero and Colum Murphy.
©2023 Bloomberg L.P.
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