BEIJING – Economic ties between China and Europe are set to hit a challenging patch in 2024, with several hot-button issues increasingly difficult to tackle, according to the president of the European Chamber of Commerce in China, Mr Jens Eskelund.

In an interview with The Straits Times, he said: “We are approaching a point where the old model doesn’t work, and the two sides need to recalculate and decide what the new relationship should be like.” Mr Eskelund took over the chamber’s top role about six months ago.

The “old model” referred to by Mr Eskelund, who is also Danish shipping giant Maersk’s chief representative for Greater China and north-east Asia, has resulted in the European Union having a record €396 billion (S$580 billion) in trade deficit with China in 2022.

This record trade deficit has made headlines and sparked concerns in Europe about its reliance on China. EU Ambassador to China Jorge Toledo in September described the bloc’s deficit with China as the “highest in the history of mankind”.

Chinese vehicles and machinery make up about half of China’s trade surplus with Europe. The rest comprises chemicals, energy and other manufactured products. 

Compared with China, the EU’s trade deficit with the United States was at US$202.5 billion (S$271 billion), and at US$56.4 billion with Asean.

Mr Eskelund, who has lived in China for 25 years, said that given China’s sluggish recovery since its Covid-19 reopening, the country has not been able to absorb its products domestically. As a result, the world’s factory has been exporting in bigger volume globally, including to countries in Europe.

Besides the export of China’s over-capacity, other contentious issues have surfaced. These include Europe’s drive to de-risk its economy so as to guarantee supply chains and limit how widely it wants to share its technology, as well as China’s move to step up security with a slew of new laws that foreign firms say make it more difficult for them to operate there.

Mr Eskelund said: “I do expect that 2024 is going to be difficult.”

During a visit to Beijing in September for an annual high-level trade dialogue, EU trade commissioner Valdis Dombrovskis said that ties between Europe and China are at a crossroads. 

Mr Dombrovskis said that China and the EU can choose either a mutually beneficial path or one that “slowly moves us apart, where the shared benefits we enjoyed… weaken and fade”.

China’s refusal to condemn Russia’s attack on Ukraine, European firms’ lack of access to the Chinese market and an ongoing EU probe into the Chinese electric vehicle industry to check for unfair prices are among the thorny issues. 

The EU probe into the subsidies that the Chinese government provides – for its new energy industries, in particular – has led to Beijing accusing Europe of protectionism, raising concerns in the world’s second-largest economy that the continent’s move to de-risk its economy and an increased scrutiny on the record high trade deficit will damage ties further.

“My personal fear, and the fear of the chamber, is that this is the start of many (probes),” Mr Eskelund said. “We hope to find ways to avoid turning this into a vicious downward spiral.”

He explained that Europe’s strategy to de-risk its economy comes after the continent’s realisation that it is dangerous to rely on one dominant source for necessities, as in the case with Russia, its top gas supplier, when President Vladimir Putin attacked Ukraine in February 2022.

The EU, which introduced sanctions against Russia after the invasion, is aiming to end its reliance on Russian fossil fuels by 2027. Europe had a gas and fuel crisis in 2022 due to the war in Ukraine, Russian oil sanctions and the fallout from the Covid-19 pandemic.

“When we saw just how dependent Europe had become on Russian energy, it makes sense to go out and (diversify)” to protect against black swan events such as Russia’s invasion and Covid-19, Mr Eskelund said.

He also called out what he sees as double standards by the Chinese, who have been trying to be self-reliant in areas such as technology and agriculture.

“China has been de-risking from the rest of the world on a massive scale in its own way, and it’s gone much further than what Europe would ever consider,” Mr Eskelund said.

He pointed out that “China is talking about self-reliance (and) Europe is talking about diversification”.

The result of EU’s de-risking move will “probably be a small single-digit percentage” reduction in trade between China and the EU for specific commodities that Europe needs and China is currently the primary supplier, he added.

China will also need to demonstrate better what the value creation for Europe is, given the existing vast trade deficit, “because I think that case has not been made”, he added.

“Now, it’s just about hey, we can provide cheap products, but really what (is China) doing for Europe?”

Using electric vehicles as an example, Mr Eskelund said that “if you import a car from China, close to 100 per cent of the value-add is in China. It’s not in Europe”.

“That’s clearly unsustainable. China exporting its overcapacity to Europe may lead to de-industrialisation. I’m not sure that Europe can accept that,” he added.

China’s move to step up its security has also worried European firms in the country – an issue that Mr Eskelund is working to get more clarity on for the sake of some 1,700 of the chamber’s members.

A new anti-espionage law came into effect on July 1, with foreign companies concerned that the vague areas of the legislation will put them in the authorities’ crosshairs. In 2017, China also implemented a cyber-security law that allows the state to “take measures to monitor, defend against and deal with cyber-security risks and threats both within and outside of China”.

Mr Eskelund said that the new security laws can be “inherently incompatible” with China’s drive to attract foreign companies and investment – as has been often repeated by state media and the country’s political elite – and that helping its members to wade through the uncertainty and vagueness of China’s legalese is one area that the business advocacy group is focusing on.

For example, leading European pharmaceutical companies face the problem of not being able to transfer data from their clinical trials in China out of the country because of the security and data privacy laws.

“European companies right now are uncertain about the relationship China really wants to have with them,” he said.

“A lot of companies are beginning to ask themselves, with the focus on security, with the focus on autonomous supply chains, will a presence in China necessitate that I begin to develop a separate supply chain for China and one for the rest of the world?”

To ensure that both sides are committed to a fairer relationship, it will be important to remember that trade ties between China and the bloc have been hugely beneficial to both sides, for consumers in Europe and for economic development in China, Mr Eskelund said.

“Europe is quite dependent in many ways on China for what it needs, for its decarbonisation (goals), and simply to function with components being sold from China. But Europe is also very important to China because the incredibly vast amounts of products that are being made here create jobs and tax payments (for China),” he added.

So, both “Europe and China have a very, very significant inherent mutual interest in finding solutions (together)”, Mr Eskelund said.

“But I think it begins with acknowledging concerns on both sides,” he added.