RELUCTANT PARTNERSHIP WITH NO ALTERNATIVE

Recent events have put not only the global political and economic system to the test, but also the relationships between individual countries and power centres. Among these, the relationship between China and the EU, which has been marked by both cooperation and competition, has been particularly strained.

Trade deficits: A reflection of trust deficits?

In the first half of December, Beijing was the venue for the second in-person China-EU summit since 2019. This time, EU heads - Charles Michel and Ursula von der Leyen of the European Commission - made their way to the Chinese capital. Other EU state leaders were notably absent from the summit.

During the meeting, Xi Jinping encouraged his guests to sustain the "momentum" of relations and distinguish European policy towards China from that of America. Beijing openly views the US as its primary strategic competitor, while it perceives the EU as a partner in achieving multipolarity. "As two major forces advocating multipolarity, two major markets supporting globalisation"… relations between China and the EU are founded on world peace, stability, and prosperity," Xi Jinping conveyed to his European counterparts.

However, his guests were more assertive, expressing a readiness to address issues such as non-competitive trade or the Ukraine conflict. The EU is apprehensive about China's expanding industrial capacity, particularly in the renewable energy sector. With China's domestic demand being weak and other trading partners like the US limiting market access, Europe has become a significant target for the overflow of Chinese exports.

European authorities view China's excessive economic and export potential as a "cause for concern", noting that many countries' markets are better shielded from inexpensive Chinese exports than European markets.

In fact, in 2022, the EU's trade deficit reached nearly €400b. According to Europeans, the deficit is partially due to China's state subsidies and barriers for foreign companies intending to operate in the domestic Chinese market. This year, the EU initiated "anti-subsidisation" of electric car imports from China. On December 6, Brussels announced a €3 billion fund to stimulate battery production for electric vehicles to lessen dependence on China.

Beijing has countered Brussels' accusations with charges of "blatant protectionism" and criticised the EU's "risk mitigation" efforts, which aim to reduce its reliance on certain Chinese goods.

Simultaneously, the stances of EU member states towards Beijing vary. Brussels underscores its desire to reach a compromise on trade disputes with China rather than resort to unilateral actions.

The EU's concerns stem from the fact that China's state-owned banks have reduced lending to the country's debt-laden property sector and targeted industries such as electric cars to boost their exports.

EU-China: An indispensable relationship

Despite a slowdown in bond issuance by Chinese industries and a rise in the percentage of outstanding bank loans to the sector by about 31 points (or RMB 5 trillion) in the third quarter from a year earlier, lending to the manufacturing sector in China grew by 38%.

In their financial reports for this year's performance, the heads of China's largest banks identified lending to the manufacturing sector as a priority. This aligns with Beijing's strategic objectives of stimulating industrial growth and reducing its dependence on foreign resources.

According to analysts, Chinese policymakers aim to stimulate economic activity while achieving long-term economic and strategic goals. Concurrently, Beijing prefers to invigorate the economy by financing "green" industries.

The EU's trade restrictions with China appear to have been effective. The trade imbalance between China and the EU has approximately halved, amounting to about $200b at the end of the first 11 months of 2023. As per Chinese customs data, during the same period, goods worth $458.5b were exported to the EU, while imports totalled only $257.8b.

The Ukraine conflict has also significantly impacted bilateral relations, particularly due to Beijing's refusal to condemn Russia's actions and join the anti-Russian sanctions. Ursula von der Leyen stated that China's stance on the Ukrainian conflict would also shape its relations with the EU, as Brussels perceives the Russian military operation as an "existential threat".

However, China has made it clear that it has no intention of renegotiating its fundamental approaches with either the EU or Moscow. Simultaneously, Beijing underscores its readiness to collaborate with Brussels on balancing trade and economic ties without compromising the interests of its commodity producers.

Taking into account the pressure exerted on the European Union by the United States, the Chinese leadership is striving to tread carefully in its dialogue with Brussels to maintain it as a trade and economic partner. Hence, Beijing is prepared for compromises, which it clearly communicates.

For the EU, the loss of Russia, one of its most crucial trade and economic partners and a source of raw materials, makes cooperation with China particularly significant. Despite existing disagreements, the EU recognises that there is unlikely to be a substitute for the Chinese market in the coming years. This applies to both the Union as a whole and its individual states.

On the eve of the summit, it was revealed that Italy had decided to withdraw from China's One Belt, One Road programme. Rome joined the large-scale project back in 2019 but has faced heavy criticism from its partners - primarily the United States - for this decision ever since.

However, despite this programme being considered toxic for many European countries, a number of EU states continue to cooperate with China on some of its key projects. These realities cannot be ignored.

EU and Chinese leaders reportedly had an open discussion on each side's economic autonomy strategy, with China discussing the "dual circulation" policy and the EU focusing on "reducing" supply chain risks. According to von der Leyen, both sides have similar strategic calculations, and a transparent dialogue reduces the risk of economic "disengagement," which the EU does not desire.

This is understandable. After all, EU countries are currently bearing both the burden of expenses in Ukraine and the consequences of the sanctions imposed against Russia. A breakdown in relations with China, considered Brussels' second trade and economic partner after the United States, could entirely paralyse the European economy. Additionally, there are the issues surrounding the Red Sea, the primary trade artery linking China and Europe.

The Caspian route as an alternative to the Red Sea

The situation in the Red Sea region, which transports about 12 per cent of the world's cargo traffic, has virtually eliminated the use of this route due to attacks by Houthi groups on merchant ships of Western companies. Consequently, the cost of sea freight transport from the Indian Ocean region to Europe has significantly increased. This has had a profoundly negative impact on the EU market, which is already incurring substantial costs due to anti-Russian sanctions.

The deterioration in shipping safety has led to an increase in the cost of insurance for ships travelling through the Suez Canal and the Red Sea. From now on, when passing through high-risk areas, ships must notify their insurers and pay an additional premium. The risk premium paid by shipping companies has seen a significant increase, rising from 0.07% of the ship's value at the start of December to around 0.5-0.7%. Concurrently, the risk zone continues to expand, leading to a substantial increase in the cost of shipping goods across the Red Sea by tens of thousands of dollars. The risk remains too high for most traders.

Prominent shipping companies, including Maersk, Hapag Lloyd, and MSC, have opted not to use the Red Sea. Reportedly, seven of the world's ten largest companies have suspended shipping operations in this area. On December 18, BP joined the list, ceasing all oil and gas shipments through the Red Sea.

The alternative Europe-Asia route via the Cape of Good Hope reduces cargo transport efficiency by 25%. Given that most long-term transport contracts on the Asia-Europe route will be concluded in the coming months, the instability and resulting costs are expected to persist. This will negatively impact global trade, even if the situation stabilises, with the greatest costs falling on European countries.

Recently, both European and Chinese companies have been actively exploring the Middle Corridor, which passes through the territories of Central Asia and the South Caucasus. The Trans-Caspian International Transport Route is a key part of this corridor. Compared to last year, transportation along this route has doubled to 2.5 million tonnes. But this is not the limit. It is expected that this figure will at least double pretty soon. To facilitate this, Azerbaijan, Georgia, Türkiye, and Kazakhstan have signed a road map, with each country taking measures to synchronously develop its own transport infrastructure. Both China and Europe are well aware of these plans and have expressed their support.

The complete stabilisation of the situation in the South Caucasus creates favourable conditions for further increasing cargo traffic along the Middle Corridor. This will also be facilitated by the construction of the Zangezur transport corridor. The primary requirement is the absence of war. Azerbaijan has made it clear that it will do everything possible to ensure lasting peace in the region. In these times, such promises matter a lot, both figuratively and literally.