Will the EU De-link from China?

Over the past several months, EU leaders have been increasingly vocal about “de-risking” the economic relationship with China.

The EU published its first “economic security” strategy in June. Germany’s national “China strategy” followed in July. Then this month, a list of “critical industries” where trade with China will be prohibited was published.

The impetus for these measures is clearly the Ukraine invasion. Stung by the need to withdraw from Russian fossil fuels, the EU is investigating where they might be caught out in future. 

Yet the actual list of critical industries is short. The EU is blocking export of semiconductors, AI technology and advanced biotech, which have direct military implications, but leaving aside other important sectors.

The numbers make it clear why. Approximately 20% of the EU’s imports originate in China. This includes almost complete Chinese capture of industries like lithium refining, rare earths extraction and refining, and solar panel manufacture. This means the EU cannot sanction these sectors without hamstringing its own energy transition and future energy independence.

European companies also have extensive interests exporting to China. This is especially the case for Germany’s auto, chemical and telecom giants: revenues from German companies operating in China, and selling mostly to China, make up a whopping 6% of Germany’s entire GDP. Exports from Germany proper to China make up a further 3% of the country’s GDP.

The US under the Biden presidency is pushing an agenda of de-linking from China, including a ban on export of advanced computer chips to China. But it will struggle to convince its European allies, at least, to pursue the same course.

The US currently receives more of its imports from Mexico than from China, and nearly as much again from Canada. The EU has no such relationship with its non-European neighbours.

This interconnection will make it more challenging to leverage China economically in any future disputes. But it has the benefit of making outright conflict with China less probable.

Sign Up To Our Free Newsletter To Receive Our Upcoming Report On A Low P/E Stock With An International Growth Runway