(Bloomberg) -- A typically routine forum for trade talks between China and the European Union this weekend becomes a high-stakes test of an economic relationship involving more than $900 billion in bilateral commerce.
That’s because the EU’s ties with China are in a precarious state, and during high-level meetings over the coming days, the 27-nation bloc’s trade chief will tell Beijing concrete agreements are needed in an effort to reset the relationship. If not, things could get even worse.
The need to stabilize the relationship will be one of the main messages the EU’s Valdis Dombrovskis will bring during a four-day trip to China starting Friday, according to people familiar with the plans.
But a new EU anti-subsidy probe into Chinese electric vehicles — and the prospect of a potential tit-for-tat tariff war — will complicate his work.
Read More: Europe Fires First Salvo at China With Probe of EV Subsidies (1)
The EU will use the opportunity to try to cool down some of the fallout from the EV investigation, the people said. Some businesses fear an outsize reaction from China that they worry could come in the form of its own tariffs or other trade curbs that could target industries beyond just cars.
The trip comes as China’s tone toward Europe has hardened following the EV probe, which Beijing called “a naked act of protectionism.” The EU is trying to strike a new balance in its strategy toward China, seeking to “de-risk” and reduce its dependency on the Asian nation while maintaining access to its market.
Dombrovskis, who is an executive vice president at the commission, will be looking to explain to his Chinese counterparts that the EV investigation will strictly follow procedural steps, which include consultations with the authorities and companies, before any potential action is taken, according to the people. He will seek Beijing’s cooperation for what will be a months-long process.
It’s in China’s interest to cooperate as the alternative would mean that the process relies on publicly available information, which usually means a harsher outcome as it assumes higher subsidies, said the people, who asked not to be identified because the talks haven’t happened yet.
French Finance Minister Bruno Le Maire told Bloomberg Television last week that the EU needs to be ready to defend its priorities with respect to China, adding that “it is maybe the beginning of a new period, new era where the EU starts thinking about its own interest.”
The EV issue is now expected to feature on the agenda of both the high-level ministerial gathering as well as in smaller, and more frank, bilateral meetings that will take place on the margins of the main event.
The talks are happening under the the EU-China “High-Level Economic and Trade Dialogue” — a major forum for senior officials to discuss issues relating to macroeconomics, trade irritants, supply chains and financial services. It could also be a stepping stone for a summit between President Xi Jinping and the EU’s Ursula von der Leyen later this year.
European businesses have raised concerns about potential retaliations, with even unrelated sectors such as spirits and drinks worrying they could get caught up in the cross hairs of a trade dispute or a disproportionate response. Their fear is that Beijing could hit back in a broad way, such as curtailing access to its massive market or limiting exports of critical supplies.
Dombrovskis is also expected to bring up Russia’s war against Ukraine and take the opportunity to reiterate the EU’s position, as he feels it’s not fully understood by China, according to the people. He’ll also raise the issue of sanctions.
Since last year’s invasion, Beijing and Moscow have forged a strategic partnership and deepened their trade ties.
While stopping short of providing Russia with lethal weapons, China and Hong Kong have become important channels for Moscow to get around some of the EU’s restrictions. Russia has been relatively successful at doing so by importing banned goods it uses for military purposes through third countries.
Mercedes Favors Resilience in Open Global Markets: Supply Lines
The EU is focusing its efforts to crack down on Russia’s ability to circumvent its measures by prioritizing a list of some 45 categories of “high-priority battlefield items,” which include advanced technologies, electronics and other components used in cruise missiles, drones and Ka-52 helicopters used by Russia in Ukraine.
The bloc’s sanctions envoy, David O’Sullivan, told an event this past week that the “latest figures would indicate that as much as 70% of the re-export of these sensitive products is happening through China.” He added that the EU was still looking to better understand if the parts were “produced by China copying our technology, how much of it is produced in China, but with Western technology and how much is coming directly from other sources and then re-exported via China.”
The dialog is expected to produce some positive outcomes in the area of financial services like the creation of a joint working group that may focus on areas such as how to improve financial data flows, said the people. In addition to electric vehicles, EU officials expect their Chinese counterparts will want to focus time on discussing on export controls and the bloc’s carbon border duty.
Some of the most difficult discussions will be on issues related to market access, where pinning down tangible deliverables is proving more difficult, especially as the Chinese government becomes more controlling, according to the people.
One major issue that will be brought up is data flows across borders where European companies are currently facing many months of waiting to get the approval required to send industrial data out of the country, the people said. The issue, which effects nearly every sector, means that important product information is stuck in China and companies can’t send it to their headquarters back home, one of the people said. Firms are also having to hand over large amounts of data to Chinese authorities the person said.
Other high-priority issues include European medical devices access to procurement, invasive data requirements imposed on the cosmetics industry, slow approval processes for infant formula and the discrimination faced by some European meat exporting countries.
In all these areas, failure to make progress risks triggering calls from EU member states for a tougher response from the bloc’s executive, one of the people said. Several member states and senior EU officials are already pushing to make more use of an international procurement instrument and other tools to target sectors such as wind power.
During the trip, Dombrovskis will also visit a Knorr-Bremse plant, a German manufacturer of braking systems, and will deliver a speech at Tsinghua University in Beijing.
--With assistance from Stephanie Bodoni and Jorge Valero.
(Updates with Le Maire quote in the ninth paragraph.)
©2023 Bloomberg L.P.