Main goal: EU to develop a new model based on strategic autonomy
The US-China rivalry should not obscure the strategic partnership between the EU and China: China is an important EU trading partner -- it accounts for 22.4% of all EU imports -- and an important partner on climate policy. At the same time, China is a systemic rival on issues of governance, values and multilateralism. The EU recognises and accepts this ambivalence, which “requires a flexible and pragmatic whole-of-EU approach”2.
It will be difficult for the EU to find the right balance between the United States -- a longstanding strategic and economic partner -- and China, its second largest market. Most EU countries see the United States as their main ally, especially militarily, and, at the same time, want to do more trade with China. On the one hand, China is seen as a key partner in addressing global challenges (e.g., climate change, WTO reform and Iran nuclear deal). On the other hand, Europeans are very concerned about several features of the Chinese model, which are incompatible with their own model for many and various reasons: a lack of fair competition, infringement of intellectual property rights, cyber-espionage, acquisition of European strategic technologies and infrastructure, and lack of respect for human rights (especially in Xinjiang). China is challenging hard these views voiced by Europe, evidencing the need for a close and constant dialogue.
These positions are difficult to reconcile, but one thing is certain: the EU needs its two main partners to maintain its prosperity. Europe is at a crossroads: to establish itself as a key player on an increasingly fragmented world stage, Europe must be prepared for difficult debates and negotiations, as tensions between the three blocks are inevitable. The main lines of action are beginning to emerge. The concepts of strategic autonomy and European sovereignty are increasingly emphasised. The EU wants to avoid a bipolar system, in which it would be forced to choose sides, at all costs. For instance, this is the reason why some EU member states refuse to ban Chinese companies from their 5G markets3.
For EU Commission president Ursula von der Leyen, the EU is ready to assume and strengthen its power. With this in mind, the EU has announced that it wants to double its semiconductor production by 2030 to 20% of world production. The Commission relies on several countries (e.g., France, Germany, and Spain) to strengthen the EU’s strategic autonomy and economic sovereignty, in particular its ability to develop key technologies independently of China, while managing its dependence on the United States. So far, the EU strategy has been to continue building the liberal system with like-minded countries (e.g., freetrade agreements with Canada, Japan, and Mercosur4), but also to harden itself in order to be able to compete digitally with the United States, China and Russia.
Strategic autonomy is a relatively flexible concept that refers to the ability of Europe to control strategic (i.e., potentially critical) technologies. This includes technologies that can have a significant impact on political institutions and values. Strategic autonomy can be defined as the minimum degree of control needed to maintain freedom of decision and action. It does not necessarily imply reproducing and developing an entire industry for each of these technologies. For the EU to play an active role in shaping a new international order, it needs to undertake reforms both internally and on the world stage, in coordination with other partners, such as recasting the WTO and redefining its foreign policy and economic policy (e.g., industrial policy, strategic autonomy).
Europe has assets and real potential in several strategic technologies (e.g., R&D, quantum computing, green energy, 5G, robotics, space). However, Europe remains very dependent on the United States and increasingly on China (data centres, cloud computing, information and communication platforms, supercomputers, artificial intelligence, undersea cables). Now Europe needs a significant political impetus in terms of technology policy. The lack of cohesion and cooperation between EU members is hampering action. European-based advanced technologies cannot be developed without the single market. And the EU strategic autonomy cannot be achieved without strong capabilities in advanced technologies.
Moreover, Europe must defend its model of responsible capitalism. Long-term social and environmental issues are at the heart of this model. To do this, Europe must address the issue of financial and accounting standards as soon as possible. It is clear that US companies currently dominate the market for nonfinancial data and ratings. The development of a ‘green taxonomy’ is a crucial issue for European companies. Europe also needs to assert itself quickly on the performance criteria used in ESG investments, in particular to highlight the social and governance criteria that are at the heart of its development model. These issues are deeply political and the EU will not be able to avoid power struggles, particularly with the United States.
To promote its model, Europe has major assets, such as its very abundant savings. The Eurozone benefits from a recurrent currentaccount surplus. Provided it is channelled into regional investment projects, it is a strength. The Next Generation EU (NGEU) recovery fund will make it possible to deploy investments in key areas. Any delay in the start-up of the fund would have serious consequences. Cooperation, flexibility and speed of action will be the sine-qua-non condition for meeting the challenges. Time is of the essence.
EU-China CAI: a way towards European sovereignty
On 30 December 2020, the EU and China concluded in principle the negotiations on the Comprehensive Agreement on Investment (CAI). The agreement grants European investors greater access to the Chinese market and improves the level playing field for those already there. The CAI will provide increased legal certainty, improved market access and fairer engagement rules in this key global market for European companies, investors and service providers.
In the agreement, China has committed to ensure fairer treatment for European companies, allowing them to compete on better conditions in China. These commitments cover stateowned enterprises, transparency of subsidies and rules against forced technology transfers. China also agreed to provisions on sustainable development, including commitments on climate and forced labour. The CAI commitments are enforceable (under a state-tostate dispute settlement mechanism) and subject to a monitoring mechanism seeking implementation of the commitments on the ground.
From the Chinese side, this is the most ambitious agreement that China has ever concluded with a third country. It is seen as a turning point in EU-China relations, paving the way for further steps. Both sides agreed to continue separate negotiations on investment protection to be completed within two years of signing the agreement:
- The agreement covers various manufacturing sectors, in particular electric or hybrid cars. Private hospitals are opening up to European investment in some large cities, such as Shanghai and Beijing. Telecommunications, financial services, cloud services, and those linked to air transport, such as online reservation systems, are included in the agreement.
- The EU has obtained a promise of transparency in Chinese public subsidies in the area of services and a ban on forced technology transfers in the sectors covered by the agreement. Finally, Chinese state-owned enterprises (SOEs) should not undertake a ‘discriminatory’ attitude.
The conclusion of CAI after Biden’s election, but before he took office, is a good indication of what Europe means by strategic autonomy. The EU did not consult with the new US administration. The text of the agreement will now be legally reviewed and translated before it can be submitted by the Commission for adoption and ratification by the EU Council and the European Parliament.
Source: European Commission, March 2021
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China is among the EU’s largest trade partners
China is a key trading partner for the EU, with a fast-growing domestic market of 1.4bn consumers. It is expected to contribute to almost 30% of global growth in the next five years. Over the past 20 years, European companies have invested €148bn in China. In 2020, China was the third largest partner -- the second non-European one -- for EU exports of goods (10.5%) and the largest partner for EU imports of goods (22.4%):
- China (€2,233bn, 16.1%) was the largest exporter in the world, followed by:
1. EU (€2,132bn, 15.4%); 2. United States (€1,468bn, 10.6%); 3. Japan (€630bn, 4.6%); and 4. South Korea (€484bn, 3.5%).
- China (€1,857bn, 13.1%) was the 3rd largest importer in the world:
1. Preceded by the United States (€2,293bn, 16.1%) and the EU (€1,940bn, 13.7%); and 2. Followed by Japan (€644bn, 4.5%) and the United Kingdom (€622bn, 4.4%).
- Both EU exports to and EU imports from China increased between 2010 and 2020:
1. Third largest partner for EU goods exports (10.5%), after the United States (18.3%) and the United Kingdom (14.4%); and 2. Largest partner for EU goods imports (22.4%), followed by the United States (11.8%), the United Kingdom (9.8%), Switzerland (6.3%), and Russia (5.6%).
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A new world order, a new international monetary system
The 1944 Bretton Woods agreement established the dollar hegemony and allowed the United States to establish a Pax Americana. Since then, the dollar has dominated the international monetary system thanks to the preponderant role of the United States in the global economy. The US’s military power and technological lead have reinforced its position. Having a reserve currency has allowed the United States to finance itself easily and maintain its leadership, which has strengthened the dollar’s international role over time.


The Treasury market is now one of the deepest and most liquid in the world. As a result, no currency could replace the dollar in the short term. The dominant role of the dollar is often summarised by the famous words of John Connally, Richard Nixon’s Treasury secretary. In 1971, he said to European diplomats worried about the fluctuations of the dollar, “the dollar is our currency but it is your problem”. Now, half a century later, the dollar may start to become a problem for the United States.
Becoming a currency power is not only about being a dominant economic and trading power. The country that aspires to have a reserve currency must also offer a pool of assets denominated in its own currency. Above all, it must inspire confidence. Hard power is not enough. As former US secretary of State Joseph Nye theorised, real power comes from ‘smart power’, i.e., the ability to exercise both hard power (coercion) and soft power (influence and persuasion). Economic power is a necessary, but not sufficient, condition. As far as ‘soft power’ is concerned, the United States still seems to have the advantage. However, in economic terms, the increase in US federal debt and the expansion of the Fed balance sheet since the Great Financial Crisis and particularly since the Covid-19 crisis threaten the stability of the dollar in the medium and long term.
Central banks have begun to diversify their reserves: the dollar’s share of international forex reserves has been eroding since 2000, falling below 60% in 2020 for the first time since 1995 (59% in Q4 2020).
Two other currencies can claim the status of major reserve currencies: the renminbi and the euro. The euro is the world’s second largest reserve currency (21.2%), but far behind the dollar, while the renminbi still has a marginal role (2.3%). With the recovery fund in Europe (NGEU), we are witnessing the beginnings of Eurozone debt pooling, which should lead to a strengthening of its international role.
With the rise of China, particularly on economic, technological and military grounds, it is the future international role of the renminbi that is attracting most attention. The PBoC will be the first significant central bank to launch its digital currency (Digital Currency Electronic Payment, DCEP). The digital yuan is already being tested in several major Chinese cities and is expected to be launched on a large scale in 2022. The challenge for China is both economic and (geo) political. A digital currency would give some countries the opportunity to circumvent US sanctions by adopting the ‘digital yuan’, enabling China to develop its area of influence to the detriment of the US one. The yuan will see its weight in international trade and foreign exchange reserves increase.