Beijing’s strategy, Mario Draghi’s report and Agatha Kratz’s studies
By Francesca Pistone
“The previous global paradigm is fading. The era of rapid world trade growth looks to have passed, with EU companies facing both greater competition from abroad and lower access to overseas markets”. “The EU faces a possible trade-off. Increasing reliance on China may offer the cheapest and most efficient route to meeting our decarbonisation targets. But China’s state-sponsored competition also represents a threat to our productive clean tech and automotive industries.”. “The EU exists to ensure that Europeans can always benefit from these fundamental rights. If Europe can no longer provide them to its people – or has to trade off one against the other – it will have lost its reason for being.”[1]
These quotes from Mario Draghi’s report “The Future of European Competitiveness” repeatedly depict China as a major strategic rival. Newspapers are reporting about new tariffs on Chinese products and growing tensions with Beijing[2]. How did this dependence on China arise? What are the consequences and possible solutions?
How did China become such an important player on the international stage and its products so competitive?
Between the ‘70s and ‘80s of the last century, China was emerging from a deep crisis caused by years of civil and political wars that caused hunger and destruction throughout the country. At the time, almost the majority of the population lived below the poverty line and the economic system was faithful to the communist ideological theory where property and private initiative were banned. It was after the arrest of the Gang of Four, accused of the atrocities of the Cultural Revolution, and the awareness of the limits of this type of system that Deng Xiaoping made his reappearance on the Chinese political stage. His four modernizations and the gradual restoration of market dynamics have revived the Chinese economy, which naturally has raw materials and a large workforce. These were the beginning of a series of economic policies that in a few years achieved the so-called Chinese economic miracle in order to achieve the goal of the Communist Party of national renaissance[3].
What makes the Chinese economy competitive, however, is actually its political model. China is considered a major adversary for Western powers not only for economic competition but as well as systemic. The economic liberation that occurred at the end of the last century did not translate into the exclusion of the state in market dynamics or in other spheres of Chinese society. This system is efficient and competitive because the Chinese Communist Party has no limits in controlling its population in every sphere of public and private life and is able to focus all the energies of an immense state rich in raw materials to meet the needs of the moment. Furthermore, unlike democracies, Chinese political authorities have a stability and room for maneuver that allows them to govern in the most efficient way possible4. The freedom we were talking about, especially limited to the productive and commercial point of view, has been circumscribed and contained only to give the minimum space to private initiative to free the immense productive capacity of China. We are talking about a real systemic competition between democracy, which values certain values and certain standards, against a dictatorship that has proven to be very efficient, certainly in achieving economic objectives.
The economic strategy used by China that according to Agamennone Edoardo, researcher at the Turing World Affairs Institute and director of the TOChina Summer School Business Program, has allowed the great regrowth that occurred at the turn of the new millennium consists of forced concentration plans. This tool consists of merging public companies with private ones through direct intervention (through the purchase of fractions of the capital of the companies) or indirect intervention of the state. This was functional to bring together the then very numerous new Chinese private companies that had no possibility of competing on the domestic and foreign markets into larger national champions. There have been two campaigns of forced concentration plans since 2000 and they have achieved their goal by transforming these Chinese companies into champions abroad as well. These policies have concerned strategic and emerging sectors such as transport, space, automotive and that of new technologies and artificial intelligence as well as in less central sectors4.
It can be said that since the Tiananmen Square crisis and especially since Xi Jinping came to power, the role of the Party in the economy has been increasingly pervasive until 2017 with the adoption of the new Cybersecurity Law, which allows Chinese authorities to control the actions of all Chinese companies as well as providing a basis for the active participation of the authorities in their governance[4].
The large participation of the state in the economy and market mechanisms, an efficient system of orientation of the country’s energies combined with aid to the most competitive companies allow China to enter the international market with significant advantages. It must be remembered that the lack of compliance with standards of protection and support for workers and the environment significantly lowers production costs compared to European ones. If we add to all these factors the restrictions on companies and foreign investments in China, it is clear why the Chinese economic strategy is considered highly competitive and a danger to the integrity of the international order.
What risks does Chinese competition pose for Europe?
Europe’s dependence on China lies in the gap in the development in the technology sector1. It is important to invest in that sector because new and increasingly sophisticated technologies are necessary for carrying out daily activities and for achieving sustainability goals such as the Green Deal. Europe has not followed the pace of the United States and China and for this reason has relied on imports from abroad. However, the Union is vulnerable both to possible price fluctuations, which can be voluntarily caused by the Chinese authorities as a coercive measure. What is worrying is Beijing’s systemic alignment with Europe. The threat of interrupting the exchange of these sensitive goods can be used as a weapon to interfere with the democratic machine of the member states and undermine the independence of the EU1.
What is Europe doing?
In this last year, Europe has aligned itself with the measures first undertaken by the United States which consist especially in the imposition of duties in sectors where competition with China is stronger, such as the automotive sector. This July, Europe imposed tariffs on Chinese EVs of 15% but now there is a debate to impose new ones of 45%; the latter could represent a concrete disincentive for Chinese companies to export to Europe.
Here we see the rift between the two powers France and Germany, the first in favor of the increase in tariffs while the second, which sees in China a third of its sales in the automotive sector, condemns to the possible start of a trade war. In fact, a counter measure from China (that has already been threaten by Beijing) consisting in precluding German electric cars in the Chinese market might constitute a significant loss for the major European economy.
Finding a compromise is difficult and the European Commission will have until October 30 to reach a decision4.
During an event of the Turin World Affairs Institute of this summer I have asked the opinion of Agatha Kratz, director of the Rhodium Group and expert in EU-China relations and Chinese economics, about the eventuality that European authorities might consider cuts to the environmental protection or labor rights budgets in order to lower production costs; the expert answered that luckily Member States are going in the opposite direction, excluding from the market those products produced with unsustainable process both for people and the environment.
What more can be done?
Agatha Kratz explains better this concept in her paper Ain’t No Duty High Enough[5] of 29 April 2024, in which reports alternative strategies to the increase in duties that Brussels could consider to counter Chinese competition, particularly in the electric car sector.
The paper refers to a whole series of measures aimed at adding criteria for access to the European market, for example cybersecurity, respect for workers’ rights and sustainability, therefore excluding all those goods that have sensors and cameras considered harmful for European citizens or that are produced through exploitative and polluting practices. A second proposal is to review subsidies for the purchase of electric cars; many member countries offer subsidies to encourage their citizens to switch to purchasing electric cars but excluding Chinese goods from these subsidies would mean hitting their demand in Europe hard.
Furthermost, in Mario Draghi’s report on the future of European competitiveness[6], he draws attention to the need to increase internal productivity in order to be able to count on greater self-production and consequently protect member countries from the vulnerabilities regarding depending only on Chinese supplies. The report indicates that to finance a plan for innovation and productivity of European strategic industries, it will be necessary to add to the current standard annual investments around 800 billion euros, possible only with an orderly public intervention and a shared plan at European level.
Chinese competition poses a great challenge for Europe and can undermine its independence and survival. There are good possibilities of success but to maintain the Union and independent and active player in the international arena, member states will have to cooperate and focus on the common needs and rights of European citizens[7].
Note
[1] The future of European competitiveness: Report by Mario Draghi, European Commission, 9 September 2024, https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en
[2] Tina Teng, China and EU set for talks aimed at easing tensions over trade tariffs, Euro News, 16 September 2024 https://www.euronews.com/business/2024/09/16/china-and-eu-set-for-talks-aimed-at-easing-tensions-over-trade-tariffs
[3] M. Sabattini e P. Santangelo, Storia della Cina; Editori la Terza, 2024
[4] Giovanni B.Andornino, Cina, Prospettive di un paese in trasformazione
[5] https://rhg.com/research/aint-no-duty-high-enough/
[6] https://commission.europa.eu/topics/strengthening-european-competitiveness/eu-competitiveness-looking-ahead_en
[7] Guarieri Padoan-Europa Sovrana