Angela Merkel promised on Wednesday that developing EU-China trade relations will be a top priority for her government once it takes over the EU presidency on July 1.

“We Europeans will need to recognize the decisiveness with which China will claim a leading position in the existing structures of the international architecture,” Merkel said in a video speech to the Konrad-Adenauer-Stiftung think tank. The German Chancellor also added that the EU wants to maintain a “critical constructive” dialogue with Beijing.

Good News for China

EU leaders are scheduled to meet with Chinese leader Xi Jinping in the German city of Leipzig on September 14.

Marcus Schürmann, the CEO delegate of German Industry and Commerce in Japan epitomises that the pandemic is changing trade relations between China and the EU. With Japan pressuring its 32,000 companies manufacturing their goods in China to return home and diversify their branches all over South-East Asia, China is under immense pressure to find replacements for this loss.

These China-EU trade talks are good news for China, which has seen foreign direct investments within its borders decrease by 11% this year. With the Japanese and American governments offering billions of dollars to firms that choose to relocate home, China is in desperate need to maintain and build its commercial relationship with the EU.

Big Tensions Remain

The China-EU relationship is, nevertheless, fraught with diplomatic and economic tensions. Last year US President, Donald Trump imposed a record $7.5 billion punitive tariff on European agricultural and aircraft products in retaliation against the EU for subsidies for European aerospace manufacturer Airbus. These punitive measures have forced the EU to turn to the world’s second largest economy for financial survival. Likewise, Merkel’s home nation of Germany boasts the world’s biggest trade surplus and is highly dependent on other countries buying their products. With both US tariffs and a trade surplus, Germany needs China to survive.

Despite the EU’s financial dependence, it is cautious about becoming too dependent on China. China, on the other hand, has made efforts to attract foreign investments from the EU. Jörg Wuttke, President of the EU Chamber of Commerce in China, said last month in Beijing that the coronavirus pandemic had “tremendous impact” on European investment in China.

“The Chinese Ministry of Commerce has undertaken a lot of efforts to signal to the EU that they want to help us. Of course, now, we wait for the implementation of all this.

“They have to realize that the competition globally for investment from European companies will be more severe,” he continued. “We will definitely look at more options. The China-only story, I think, is over.

“China is just a really effective economy, has wonderful infrastructure, has the educated people, so to relocate, for example, from a province of Guandong – which in itself has the GDP of Russia – or from the city of Shenzhen – which has the GDP of South Africa – to other places is a major challenge,” Wuttke added.

“But I can imagine that diversification will happen in areas where our home governments in Europe will feel that they have to be closer to home, with pharmaceuticals mentioned as one of them.”

Reservations about China

In May, an EU-backed inquiry into the coronavirus was submitted to the World Health Organisation, prompting criticism from China who claimed it was being victimized by the 116-country coalition. Reservations about China’s lack of transparency during the pandemic are a great deterrent towards forging EU-China trade relations.

“China’s actions during and after the COVID-19 would result in further disagreements and fragmentation within the European countries [on] how to settle the relations with Beijing,” argued Velina Tchakarova, Head of Institute at the Austrian Institute for European and Security Policy.

Looming in the background are China’s new security laws in Hong Kong, where human rights groups have accused the Chinese government of torturing anti-Hong Kong protesters. Global mistrust for China remains a stumbling block for Merkel’s vision of a successful EU-China trade relationship.

‘We Cannot Walk Away from China’

“It will make us rethink, but at the same time we cannot walk away from China,” an EU diplomat said earlier in May. “All of our economies rely on supply chains that run back to Wuhan and beyond. We’ve always said no one’s interests are going to be served from not trading with them. So that problem will always be there.”

With US tariffs against China and the EU, it was inevitable that both ostracized nations would form an alliance in order to survive the post-coronavirus world. Yet, Merkel’s hope that a trade relationship would empower the EU to enforce better human rights and other ethical policies from China is an unattainable dream. China’s long-term financial strategies, having been built on the denigration of human rights, would require profound institutional and governmental changes to successfully implement strategies that place human rights, climate change and global health concerns at the forefront of its success.

Boasting ambitions as great as its US $1 trillion Belt and Road Initiative, China’s main concern remains power and financial prosperity above all else.

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