From the EU’s perspective, that relationship is in dire need of a rebalancing.

Relations between Beijing and Brussels have deteriorated over the last few years, following a wave of diplomatic incidents sparked by overzealous Chinese officials, human rights violations in Hong Kong and Xinjiang, and the fallout of the US-China trade war. China is Europe’s second-largest trading partner, and Europe is China’s largest export market. But by some measures, the relationship isn’t as profitable for Europe as it once was.

Chinese foreign direct investment in Europe has declined every year since it peaked in 2016 as Chinese regulators started to clamp down on domestic capital outflows. And European companies have been making less money in China because of rising labor costs, and a challenging business environment and economic slowdown there. In 2018, Beijing promised to accelerate reforms and improve market access for foreign companies. But, according to the European Chamber of Commerce in China, those reforms largely failed to materialize.

“European companies used to be able to compensate for their unequal position due to their advanced technology and business acumen,” a spokesperson for the Chamber told Quartz. “China’s fierce private companies are increasingly at parity with European firms in certain areas, and have surpassed them in others, meaning that the unfair position that European firms find themselves in becomes a significant problem.” In a survey of European firms in China, 20% said they felt compelled to transfer technology (pdf, p. 8) to maintain market access. This means that many companies were already looking elsewhere to make their goods.

“Business decisions are for businesses, but respect and trust that a country’s authorities will respect its commitments, and not arbitrarily change the rules of the game, are crucial, whether in China or elsewhere,” says Josep Borrell, the EU’s foreign policy chief.

In 2019, the bloc surprised the world (pdf, p. 1) by calling Beijing a “systemic rival” in a strategic outlook paper published by the European Commission. Since then, the EU’s approach has been haphazard and not overtly critical. That’s partly because Brussels has little appetite for finding itself in the same position as Australia. After Canberra called for an inquiry into the origin of the novel coronavirus, China slapped tariffs on its barley and stopped buying meat from its major abattoirs.

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What now?

Max Zenglein, chief economist at the Mercator Institute for China Studies, points out that the promise of developing new markets and the potential of cheaper production costs are what first drove European companies to China. Now, he argues, “companies need to factor political risk much more into the equation if they want to maximize their returns. That should be incentive enough to seek alternatives.”

And yet, says Jean-François di Meglio, president of the Paris-based research group Asia Center, the pressure on companies not to exit the Chinese market entirely is huge. “You’re not going to tell China, I’m divesting, because your funds will be frozen. You will not be able to repatriate your capital.”

While some European companies (pdf) have shifted supply chains out of China due to higher labor costs and regulatory factors, it’s been piecemeal and not backed by a concerted EU policy of decoupling—or, as officials like to call it, “supply chain diversification.” And the countries in line to serve as Europe’s alternative to China, such as India, have challenges of their own.

The US provides another illustrative example of the challenges ahead for the EU if it chooses to aggressively pursue a path of becoming more self-reliant. In spite of president Donald Trump’s efforts to decouple from Beijing, the US is struggling to secure its own rare-earth supplies and refining capabilities, which are necessary not just for civilian goods like smartphones and car batteries, but also for weapons like F-35 fighter jets.

“It’s easy to talk about decoupling. It’s much more difficult to actually do it,” summarizes John Seaman, a research fellow at the French Institute of International Relations.

The EU’s “new industrial strategy for Europe,” released in March, is a first step towards greater self-reliance. But much will also depend on external factors, from the economic impact of the coronavirus pandemic to the outcome of the US-China trade war. EU states will have to adapt to future moves the US makes against China, and decide how to respond. It’s a balancing act that is extremely difficult to coordinate amongst 27 countries.

China “is a competitor, a partner, an ally, a rival. Everything at the same time. So it is a complex relationship that cannot be reduced to a single dimension,” says the EU’s Borrell.

For now, Beijing seems eager to move forward on the joint investment agreement, perhaps seeking to project an image that China is once again open for business. Andy Mok, a senior research fellow at the Center for China and Globalization, a Beijing-based think tank, said China hopes to “as quickly as possible and with as little disruption as possible, get back to this path [to] a greater integration with the world.”

Mok acknowledges that it may be an uphill battle for Beijing to win public and political goodwill in Europe. But he also points out that China is playing a long game that is as economic as it is political. “Public opinion is reasonably malleable and perhaps fickle,” he argued, “whereas business, especially global business, is very patient.”

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