An annual summit between the European Union and China threatens to expose deep cracks in the foundation of one of the world’s most important trading relationships.
The leaders of Europe’s largest countries are increasingly wary of the brand of economic nationalism practiced by China, and are responding with new barriers designed to blunt Beijing’s influence.
The messages emanating from European capitals have not been subtle. In March, the European Commission said that China can no longer be considered a developing country and labeled it a “systemic rival.” French President Emmanuel Macron went further, accusing China late last month of trying to divide the bloc and declaring that “the period of European naiveté is over.”
“I think the Chinese have been surprised by how quickly the mood in Europe has turned,” said Erik Brattberg, director of the Europe Program at the Carnegie Endowment for International Peace in Washington.
A key test of the relationship between China and its largest trading partner will come Tuesday, when Chinese Premier Li Keqiang meets EU officials in Brussels for an annual summit. Trade in goods between the European Union and China was worth roughly €575 billion ($650 billion) in 2017.
Three sticking points loom large: Restrictions on Chinese investment in Europe, rules that shut European companies out of China and concerns over the security of telecoms gear made by China’s Huawei.
Chinese investment in Europe
Chinese foreign direct investment in the European Union dropped for a second consecutive year in 2018 to €17.3 billion ($19.5 billion), according to the Rhodium Group. It peaked at €37.2 billion ($42 billion) in 2016.
The slump came as some of the biggest EU economies updated their rules on company takeovers and subjected investment from China to increased scrutiny. At least one deal has been blocked and others have faced delays.
The European Union has since launched its own framework to screen state-supported foreign investment, especially in sensitive areas such as technology and critical infrastructure.
“There is a growing perception in Europe that investment from Chinese state-owned or state-controlled companies is strategically targeted at certain sectors and not motivated by a compelling business case,” said Brattberg.
European companies in China
China also faces accusations of failing to level the playing field for European companies doing business there.
“China has increasingly become a strategic competitor for the EU while failing to reciprocate market access,” the European Commission wrote last month in a strategic outlook on China. “China preserves its domestic markets for its champions.”
EU officials have accused Beijing of shielding its companies from competition through licensing and investment restrictions, subsidizing state-owned companies heavily and selectively enforcing intellectual property protections.
The European Commission has used the fintech and online payments industry as an example. Chinese companies in those industries are expanding in Europe, but European competitors are not allowed to do business in China.
“Given the magnitude of our trade and investment links, it is important to develop a more balanced and reciprocal economic relationship,” the Commission wrote in March.
The Huawei problem
The European Union has come under intense US pressure to ban Huawei equipment from 5G networks following accusations that products made by the Chinese company pose a security risk.
Huawei has repeatedly denied the allegations, and called on the Trump administration to provide evidence to back up its claims.
The European Commission has made clear that EU member states are responsible for making their own security decisions, but it has also asked them to complete 5G risk assessments by the end of June.
Countries will also complete a security review by the end of 2019 that will include steps to safeguard 5G at the EU level. A blanket ban on Huawei equipment appears unlikely, but targeted actions could also anger Beijing.
“This issue has major implications not only for Europe’s relationship with China, but also for Europe’s relationship with the United States,” said Brattberg.