The European Union has lost to China in the technology race. What does this mean?

The EU has moved to a risk management policy in its relations with China. A report by the MERICS analytical center published on June 30 showed that there is still no agreement within the bloc on how the European Union should develop cooperation with China, but at the same time it is aware of its dependence on Chinese supplies in key areas, from "green" technologies to the defense industry. Whether the EU has a chance to reduce dependence on China, what risks such a strategy implies, and how technology has become a determining factor in geopolitics — in the Izvestia article.

EU-China relations

• The European Union began to curtail cooperation with China in the field of science and manufacturing back in 2019 for several reasons — due to the growing trade imbalance (European imports from China significantly outstripped exports), attempts by Chinese investors to subjugate strategically important sectors of the EU economy, and US pressure to restrict China's access to European developments. In 2023, a "trade war" began between the EU and China: Brussels imposed duties on Chinese electric vehicles, and Beijing retaliated with measures against the products of European farmers.

• Sanctions against Russian energy sources have led to the flight of producers from Europe. German companies are moving production to China, where they have access to cheap Russian oil and gas. The same strategy is followed by other EU manufacturers, for whom the cost of production in China turned out to be more profitable than at home. This practice threatens Europe with deindustrialization and the loss of technological advantages and competencies necessary for the resumption of production. Despite these risks, European businesses are interested in continuing broad cooperation with China, so there is no consensus within the bloc on what relations between the EU and China should be.

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Split over cooperation with China

• France and Germany are aiming to limit cooperation with China – Paris considers dependence on Chinese technologies and goods as a security threat, and Berlin has lost competition with Chinese automakers. Despite duties of more than 40% on Chinese electric vehicles, they are still popular in the EU domestic market and surpass their European counterparts in sales. In June, Brussels announced the preparation of new measures to protect its market from Chinese imports — duties will also be directed at hybrid cars. On June 29, the French Senate passed a bill against Chinese marketplaces, explaining that easily ordered "fast fashion" products generate a lot of waste and harm the environment. At the same time, the bill did not affect the European companies Zara and Kiabi, which also occupy this niche.

• Skeptics about EU-China cooperation also include Romania, the Czech Republic, and the Baltic states, which previously had no close ties with Beijing, except for the import of Chinese goods. In particular, Lithuania not only restricted access to its territory by Chinese technologies for security reasons, but also aimed at cooperation with Taiwan, a separatist region of China. At the same time, Hungary, Spain, Portugal and Ireland continue to attract Chinese investments. Other EU members are aiming at pragmatic cooperation in certain areas.

Prospects for reducing dependence on China

• The European Union is critically dependent on Chinese rare earth metals, which are in demand in the most priority sectors of the European economy: from green technologies to the defense and space industries and digital services. It is impossible to eliminate this dependence in the near future, since the main global capacities and competencies for the extraction and processing of rare earths are concentrated in China, and Beijing uses the dependence of Europe and the United States on supplies as a lever of pressure.

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• China's restriction of semiconductor supplies from Chinese Nexperia factories has shown that European manufacturers depend not only on Chinese advanced technologies, but also on old-generation chips, the production of which the Europeans had previously moved to China to reduce costs. These chips are still used in the automotive industry and the manufacture of household appliances (we talked about the crisis in the European automotive industry due to the conflict between the Netherlands and China over Nexperia here).

• All alternative energy conductors and storage devices, which the EU has relied on after abandoning Russian oil and gas, are made from Chinese components, and in some European countries, Chinese companies are building and maintaining wind and solar generation facilities. The EU Directive on Renewable Energy sources aims to increase the share of "green" generation to 42.5% by 2030. In other words, the aggravation of relations with China will threaten the energy security of the European Union.

• At the same time, the EU retains some leverage over China. Chinese civil aviation depends on supplies from French, German and Italian manufacturers, and the cars of the leading Chinese brands BYD and Chery use chips from European companies Infineon, NXP and STMicroelectronics. China also needs European vaccines and components for robotics. But the main trump card of the European Union is the Dutch manufacturer ASML, which produces equipment for printing microcircuits. Not only China, but also the United States depends on its products. However, limiting sales of this equipment to China could seriously affect the revenues of European manufacturers.

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• A report by the MERICS China research think tank notes that the EU is on the path of reducing risks in relations with China, but a complete break in ties with Beijing could be a disaster for the bloc. The fact that the loss of technological advantages is only a matter of time is also evidenced by the concern of European leaders about the Chinese five—year plan, which provides for full autonomy of the country in the field of development and technology. Currently, China's investments in its own scientific developments significantly exceed the investments that the EU can afford.

• Due to the change in the approach to European-Chinese cooperation, EU manufacturers found themselves caught between two fires. On the one hand, the United States is putting pressure on them, threatening sanctions and duties for the development of joint production with China and trade in goods that Beijing has no analogues for. On the other hand, China can use a proven tool that previously helped it in negotiations with the United States — to limit the supply of rare earths or chips to the European Union and actually paralyze critical production. The paradox is that the reduction of cooperation with China in the field of production and research was done under pressure from the United States, but now the EU already sees the United States as a new threat rather than as an ally, and is paying for its previous decisions with the loss of technological and information sovereignty and lost advantage in the field of technology.

What does this mean?

• China has transformed from a recipient of European technologies to a supplier. Although European manufacturers are still interested in access to the Chinese market and innovation, Beijing's plans to ensure full autonomy and localization of production within the country increase EU dependence and deindustrialization of the European economy. The EU laws on cybersecurity (EU Cybersecurity Act), on accelerating industrial development (Industrial Accelerator Act) and on critical raw materials (Critical Raw Materials Act) are actually aimed at reducing dependence on China, and Beijing opposed these initiatives, but their implementation will also hit European companies that will lose access to cheap resources. and technology.

• With the interests of major world powers such as the United States and China clashing and an increasing number of armed conflicts destabilizing supplies, global cooperation is losing its value, and technological autonomy is becoming increasingly important. China has shown that technology is more important than resources. The EU can extract the same rare earth metals in Greenland and Ukraine, although it will take time and investment, but their processing is practically monopolized by China, and the European Union and the United States have no alternative to these technologies.