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European companies are facing the decoupling of China and the United States

This article is taken from the report Building Europe’s Strategic Autonomy vis-à-vis China published in December 2021 by the EU-China Working Group.

▪ The state of play

The trade and technology war between the US and China directly impacts European companies. Their value chains are exposed to the tremors created by export restrictions and other non-tariff barriers on both sides. The US Bureau of Industry and Security’s Entity List, which restricts exports to certain foreign companies, already includes 59 Chinese companies accused of supporting Beijing’s military activities. It has prompted the Chinese side to introduce a similar list in September 2020, the Unreliable Entity List, and a new export control law that came into force in early December 2020. Also China has just strengthened its regulations on the security and protection of critical information infrastructures, imposed data localisation requirements and urged Chinese companies to avoid using foreign technologies, particularly in the strategic priority sectors of the 14th Five Year Plan, notably infrastructure, to ensure “more autonomous and controllable” value chains. Finally, in June 2021, China responded to US measures that have extraterritorial reach with its own extraterritoriality strategy, which could equally target European companies.

As national security concerns take hold of economic policy, both sides are striving to reduce their mutual dependence on technological goods, even to the point of aiming for “self-sufficiency” on the Chinese side. If Xi Jinping is exposed to the economic cost of a more significant closure of the Chinese market, which risks limiting productivity, the EU’s growing dependence on intra-EU trade and the deficit in the European trade balance with China (181 billion euros in 2020) are becoming more problematic and prompt European companies to adapt.
European firms cannot give up access to one of its two most strategic markets for exports. The Chinese middle class, which will likely double to 800 million hyper-connected consumers in 2030, represents an unparalleled market that European companies cannot do without. The 2021 survey by the Europan Chamber of Commerce in China (EUCCC) shows that 60% of European companies in China plan to invest more in the Chinese market (up 4% from the 2019 pre-Covid survey). The gradual decoupling of the United States and China in the technology sector is nevertheless calling into question the development models of companies, which are forced to segment their offerings and processes between China and the rest of the world.

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