As Europe Dithers, the Cost of Derisking from China Rises

In March 2023, European Commission President Ursula von der Leyen called on Europe to unite behind a policy of economic derisking from China. In a speech in Brussels, she warned about Europe’s deepening dependencies on Chinese rare earths, called for more robust trade measures to protect European industry from unfair competition and for new tools to restrict the flow of sensitive technologies to China. More than two and a half years later, it is clear that her warning has gone largely unheeded.

Today, Europe is more dependent on critical inputs from China than ever before. China’s export restrictions on critical minerals and chips produced by the Chinese-owned Dutch firm Nexperia have hit European companies in the auto, medical, and defense sectors in recent months, laying bare Europe’s failure to derisk. EU trade defense instruments cover less than 10% of imports from China despite evidence of systemic state support for Chinese companies and an economic model that has relied for years on flooding global markets with cheap goods. Efforts to restrict the flow of artificial intelligence, quantum, and chip technologies to China have stalled amid resistance from European member states.

There are many reasons for this failure. The EU has been consumed by more urgent crises, from Russia’s war in Ukraine to Donald Trump’s trade war. It is a bloc of 27 countries in which policy consensus can be slow and painful. New regulatory instruments can take years to put in place, and when they finally arrive, there is often resistance to deploying them with full force. The bloc’s anti-coercion instrument, for example, has been sitting idle at a time when Europe has been subject to economic coercion on an unprecedented scale—both from China and the United States.

But this caution has come at a high cost. Every day that action to protect European workers from cheap, subsidized Chinese competitors is delayed, the EU loses an estimated 500 manufacturing jobs. With every month that passes, China’s trade surplus with Europe widens by 7 billion euros compared to the previous year. Every quarter, European wind companies lose 1% of their global market share to Chinese counterparts, increasing the risk that these firms go bust and that Europe’s dependence on Chinese renewable technologies deepens. Every year, China exports one million more cars—almost equal to France’s annual automotive production—even though global demand for autos is flat. The effect is to destroy production capacity elsewhere.

The longer tackling the derisking challenge is delayed, the harder and more expensive it becomes. In the two years since von der Leyen gave her speech in Brussels, China has increased its share of the so-called “legacy chips” market (in which Nexperia operates) from 32% to 40%, laying the ground for the next major China dependency in Europe and the West. Over the past four years, China’s share of refined cobalt production has risen from 65% to close to 80%, further entrenching Europe’s reliance on China for a core input in energy and defense supply chains. The idea for an ambitious project to open Europe’s first rare earths magnet recycling and refining plant in the southwest of France was first floated in 2020. But it didn’t secure the necessary financing from French and Japanese government-backed sources until this year. Commercial output of heavy rare earth magnets will only begin in 2027, leaving Europe at the mercy of China’s export controls.

While Chinese authorities have been openly pursuing a policy to reduce their country’s dependence on the rest of the world and increase the reliance of others on China, Europe has been busy writing new strategies, conducting risk assessments, establishing task forces and launching expert commissions to assess how Europe should respond. These initiatives, no matter how well-intended they are, have become damaging distractions because they are not producing concrete results—at least not any that measure up to the size of the challenge. They create the illusion of action, when too little of that has taken place. Europe, despite the best efforts of leaders in Brussels, is wasting time. It is clear by now that the bloc needs to be much nimbler and bolder in responding to the economic risks emanating from China.

How could this be achieved? First, member states could decide to transfer more powers to the Commission in a range of security-related policy areas, from investment screening and conditioning, to export controls, and cybersecurity. Second, EU processes could be accelerated through a greater reliance on emergency procedures or provisional trade measures. The bloc’s response to the euro financial crisis, COVID-19 pandemic, and Russian invasion of Ukraine provide a blueprint. Third, where EU-27 consensus is not possible, big member states could decide to build coalitions of the willing, pressing ahead with policies and inviting others to follow. Fourth, the EU could dust off its dormant anti-coercion instrument to take more drastic measures against China, using Beijing’s export controls on critical raw materials and chips as a trigger.

All of this will require political leadership in European capitals, from Berlin and Paris to The Hague, Warsaw, and Rome. The cost of confronting China will be high. But the cost of waiting—for Europe’s economy, security, and sovereignty—could be far higher.