Competition and cooperation
In the current complex geopolitical system, development is almost inconceivable without cooperation, especially if we take into account the main driving forces of the 21st century, the green transition and digitalisation, which also serves sustainability goals to a large extent.
Competition and cooperation
New Sustainable Economics

Competition and cooperation

Photo: iStock
Marcell Horváth 31/05/2024 11:46

In the current complex geopolitical system, development is almost inconceivable without cooperation, especially if we take into account the main driving forces of the 21st century, the green transition and digitalisation, which also serves sustainability goals to a large extent. The world is characterised by ever closer connectivity in all aspects of life, from infrastructure to economic and financial relations, to technological and innovation developments. This is why it is crucial for the European Union to work with China, a leader in green technologies and innovation, to address the current challenges.

Economic relations between the EU and China have developed steadily over the past two decades and have become each other's most important trading partners. China overtook the US to become the EU's largest trading partner in 2020, and the European Union is China's second largest export partner, overtaken only by the Association of Southeast Asian Nations (ASEAN) in 2023. We see that between 2018 and 2022, EU imports from China doubled from 342 billion euros in 2018 to 627 billion euros in 2022. This is one reason why the EU has accumulated a significant trade deficit over the years, reaching 400 billion euros in 2022.

The China Railway Express (CRE), which has become a pillar of connectivity between Europe and China, plays an essential role in maintaining such close economic ties. The value of freight transported by rail between China and Europe will exceed 75 billion dollars in 2023, a 50 percent increase over the average of the previous three years. This is also advantageous compared to maritime freight because rail transport takes roughly 12 days, compared to 35-45 days for transit by sea.

In the nearly 13 years since CRE was established in 2011, trains have made 85,000 journeys and services from China now reach 209 cities in 25 countries. Despite the fruitful economic relations, the European Union has repeatedly reassessed its relations with the Asian giant in recent years. Since 2020, the EU has seen China as a partner, an economic competitor and increasingly a rival.

In recent years, the EU leadership has gradually issued policy statements against China and has become increasingly concerned, among other things, about China's support for Russia in the midst of the conflict in Ukraine. Josep Borrell, the EU High Representative for Foreign Affairs and Security Policy, has on several occasions threatened China with an outright trade war. To put this into practice, last year the EU adopted the Foreign Subsidies Regulation (FSR), which allows the European Commission to investigate and fine unfair, distortive state aid from non-EU countries. Using this new power, Commission President Ursula von der Leyen has announced that she will be the first to launch an investigation into Chinese car manufacturers.

Most recently, EU competition chief Margrethe Vestager called for concerted action against China's economic advance during a visit to the US. At the same time, the European Commission has repeatedly stated that reducing risks is not about taking action against China, but about building resilience and reducing excessive dependencies.

However, this has not always been the direction of EU-China relations. Until the early 2020s, under the EU policy of German Chancellor Angela Merkel, cooperation between the two global players was characterised by an interest-based, win-win approach, of which Chancellor Merkel herself was the main proponent. It was under her leadership that the EU-China Comprehensive Agreement on Investment (CAI) in 2020, which would have been the most ambitious investment agreement ever concluded with a third party, was ratified but not ratified and Merkel also withdrew from politics.

However, despite the CAI freeze, China and Europe remain significant investment partners.  In Europe, there is also a trend of Chinese investors increasingly moving towards green investments. According to June 2023 data, in 2022, Europe received 4.5 billion euros of greenfield investments from China, representing 57 per cent of total investments. This is in line with China's strategy, dubbed the "new three strategy", to become a leading player in electric cars, lithium-ion batteries and solar cells. China is already the world leader in solar cells, with 90 percent of manufacturing capacity, and a key player in lithium production, with Australia and Chile accounting for 90 percent of global lithium production.

The electric car industry could be key to Sino-European cooperation. China is already the world's largest electric car producer, ahead of Tesla in the US, with 40 percent of cars sold in China being electric. Germany's Mercedes-Benz, for example, sold more cars in China (732,000) than in Europe (659,000) or North America (339,000) in 2023.

Development aid can also give a new boost to Eurasian cooperation, with the European Bank for Reconstruction and Development (EBRD) investing 1.2 billion euros (1.3 billion dollars) in Central Asian countries in 2023 to promote sustainable and inclusive growth, especially in areas such as renewable energy, sustainable infrastructure and water use. China's investments in Asia and the Pacific are much larger, reaching 18.3 billion euros in 2023, up 37 percent from a year earlier.

Chinese investment has been concentrated in areas such as new technology manufacturing (batteries), renewable energy production, trade support infrastructure development and mining. This also represents an excellent interface and cooperation opportunity, as both the EBRD and Chinese investors are interested in investing in sustainable industries to promote green economies and connectivity.

In the turbulent global economic environment, Europe has no interest in disengaging from China, nor is it a viable option, as Ursula von der Leyen has pointed out. The IMF has also pointed out that in the long term, bloc-formation could lead to a GDP loss of up to 7 per cent, equivalent to around 6.7 trillion euros. Although the EU does not see disengagement as an option, it is urging the EU to reduce the Sino-European relationship and maintain healthy competition. But Europe currently has no alternative to China for the green and digital transition, with a 98 per cent dependence on raw materials exports for rare earths essential for the transition, while China supplies four-fifths of the EU's solar imports, 71 per cent of the gallium needed for semiconductors, solar cells and satellites, and 45 per cent of germanium.

Given China's technological and sustainability advantage, and the EU's dependence on areas such as green technologies, access to and imports of critical minerals, it is crucial for Europe to pursue a pragmatic and interest-based geopolitics with the world's second largest economy. To ensure long-term sustainability, it is important to find common goals and opportunities for cooperation, cooperation rather than fragmentation and fragmentation, while maintaining a healthy competition between the parties.

The author is Executive Director for International Relations at the Magyar Nemzeti Bank, the central bank of Hungary

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