We urgently need to rebalance EU-China relations

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is president of France

China’s trade surplus with the rest of the world now stands at a whopping $1tn. Its surplus with the EU has almost doubled to €300bn in 10 years. The combination of US tariffs and subdued domestic consumption means Chinese exports are now flooding into Europe. This is not sustainable — either for Europe or China. 

However, placing tariffs and quotas on Chinese imports would be an uncooperative answer. We must acknowledge that these imbalances are both the result of weak EU productivity and China’s policy of export-driven growth.

Continuing in this direction runs the risk of a dire trade dispute but both China and the EU have the means to reverse the imbalances. Strengthening the single market and unleashing European savings would spur innovation and growth on the continent. Levelling the playing field for investment across the two regions would raise the share of domestic demand as a source of growth.

On the EU side, the first thing we must do is deliver on a new economic agenda based on competitiveness, innovation and protection. 

To increase competitiveness, Europe needs to complete its internal market in the energy, health and digital sectors, as well as investing massively in innovation, disruptive research and technologies in industries with high growth potential. De-risking in all critical material, physical and digital technologies should be part of that agenda, too.

We also need to make it easier for companies to scale up and compete with their global peers. We should not be ashamed of a “European preference” as long as it means supporting strategic production — in automotive, energy, healthcare and tech — within our own borders. Protection against unfair competition is the foundation of resilience.

We must not be naive: a credible protection strategy requires that we have the means to defend ourselves against those who break the rules. That is why we have a range of trade protection tools, including tariffs and anti-coercion measures. No one should be in any doubt about our willingness to use them.

Second, in order to finance the investment we need, Europe must leverage its pool of around €30tn in savings. Each year €300bn is invested abroad. It is time we Europeans took the risk of investing in our own companies.

Regulation simplification, securitisation and unified supervision will free much needed capital. Implementing the Savings and Investments Union will ensure European savings circulate freely to finance innovation and growth. Europe should also seek to reinforce the international role of the euro through the development of euro stablecoins and the introduction of a digital euro, as well as the creation of safe and liquid assets to finance defence and technologies. Finally, European competitiveness should not be a casualty of dollar and renminbi depreciation.  

Third, China must address its internal imbalances. A more favourable fiscal policy, aimed at reducing savings and promoting domestic consumption and the development of a service economy, are essential for its long-term growth.

Fourth, rebalancing foreign direct investment flows is essential. China has long benefited from European FDI and co-operation, including on technology. The EU has invested close to €240bn in China while China has invested less than €65bn in the EU. Today, it leads in energy transition and clean mobility technologies, while Europe continues to lead in many service sectors. An optimal framework for our two regions is a co-operative one. The EU must stay open for China to invest in the sectors where it is a leader, provided the Chinese help generate employment and innovation and share technology. At the same time, Europe’s service industry must continue to invest and develop in the Chinese market.

During my last trip to China, I made it clear that either we rebalance economic relations co-operatively — engaging China, the US and the EU in a genuine partnership — or Europe will have no choice but to adopt more protectionist measures. I much prefer co-operation, but will argue for using the latter if need be. 

I am, however, convinced that by genuinely taking into account each other’s needs and interests, we can establish an international macroeconomic agenda that will benefit us all. That is why strengthening EU competitiveness, innovation and protection is so urgent. This also implies defending EU regulatory sovereignty, including with regard to the US.

Resolving global imbalances will be at the heart of the G7 French presidency agenda next year. Major and emerging economics alike will be invited to join forces. For this rebalancing to succeed for all, we need immediate and co-ordinated action.