Events such as the US-China trade war, the Covid-19 pandemic and the Russia-Ukraine conflict have accelerated this shift, leading to a marked deterioration in the global trade environment. Geopolitical competition has increasingly replaced the free market as the foundation of international trade rules.
In this context, global supply chains have been restructured. Some countries, including the United States, Japan and South Korea, have reduced their trade dependency on China. Conversely, resource-exporting countries like Brazil and Australia, along with several emerging markets, have strengthened their trade relationships with China. Notably, Southeast Asian countries have further integrated into a supply chain with China, resulting in significant trade expansion.
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Why the EU, US are concerned about China’s overcapacity
Why the EU, US are concerned about China’s overcapacity
Against the backdrop of US-China decoupling, the strategic importance of the EU market to China has become more prominent. First, the overall economic strength of the EU rivals that of the United States. According to the International Comparison Programme, in 2021, the EU accounted for 15.2 per cent of global gross domestic product (GDP), adjusted for purchasing power parity (PPP), comparable to the US’ 15.5 per cent, making it the world’s third-largest economy. Although China is the world’s largest economy measured by PPP, its per capita GDP was only 39 per cent of the EU average.
Second, the EU maintains a global leadership position in many traditional manufacturing sectors and emerging industries, making it one of the few economies with technological innovation capabilities that can rival those of the US.
Third, after more than 30 years of integration, the EU’s single market has become increasingly competitive and attractive, further enhancing its significance in the global trade system.
As the US intensifies its trade and technology blockade against China, the EU’s role is indispensable in key areas driving China’s economic growth, such as foreign direct investment, exports, technology upgrades and the overseas expansion of Chinese enterprises.
From the EU’s perspective, although it aligns with the US in terms of ideology and geopolitical security, US economic policies like the Inflation Reduction Act have harmed the EU’s interests. The bloc is eager to compete with the US in emerging technologies to enhance its own competitiveness and influence.
A model of an engine powered by hydrogen fuel cell technology is displayed at the VivaTech conference in Paris, France, on May 24. Photo: Bloomberg/Getty Images
Moreover, the EU has aggressively pursued a green transition, aiming to become a global leader in sustainable development and climate crisis mitigation. This ambition drives its immense demand for affordable new energy products.
For instance, after the outbreak of the energy crisis triggered by the Ukraine war, the EU dramatically increased its energy transition by expanding imports of Chinese solar panels. This example underscores how trade with China can play a positive role in helping the EU achieve a low-cost green transformation.
However, the EU is justified in its efforts to diversify its supply chain and support its domestic industries. Consequently, the EU inevitably has mixed feelings towards China’s green products. On the one hand, the rapid growth of China’s “new three” exports – electric vehicles, lithium-ion batteries and solar panels – poses a potential threat to European industries. On the other hand, the EU has a significant demand for affordable green products, which China is well positioned to supply.
Considering these factors, China and the EU need a bilateral green industry agreement to break the deadlock and create a new win-win trade balance. Addressing the climate crisis represents the greatest common interest between China and the EU. From an economic standpoint, scaling up green industries with government support aligns with the international community’s goals of addressing the climate crisis and achieving sustainable development.
A spectator cools off in a mister near the Paris 2024 Olympic Games Concorde stadiums in Paris, France, on July 30. The EU’s climate monitor said this month it is “increasingly likely” 2024 will be the hottest year on record. Photo: Bloomberg
Both the US’ Inflation Reduction Act and the EU’s Net-Zero Industry Act implement fiscal and credit policies favouring green industries. However, such policy tools for promoting green development sometimes may not be aligned with existing international trade rules.
In the absence of updated rules and international agreements, trade conflicts are inevitable, fuelling protectionism, high inflation and hindering the global green transition process. Therefore, reforming international trade rules to better suit green development is in the interest of all parties involved.
Amid current trade tensions, China and the EU are in a unique position to lead the way in negotiating new international trade rules that would promote the green transformation of both economies, setting an example for future WTO reforms in this area. The two sides need to establish a coordination mechanism for green industry policies, ensure bilateral transparency and openness and jointly commit to a win-win green future.
Ju Qiu, PhD, is a researcher at the CEIBS Lujiazui International Instituteof Finance. The views in this article are the author’s own
