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Exploring a ‘Green List’ for EU-China Economic Relations

This study aims to strip the geopolitical emotion out of the decoupling debate and provide a fact-based, transparent framework for assessing which areas of the EU’s trade, investment and broader economic relationship with China are benign

Mounting evidence that China is not converging with the liberal market economy principles of European and other OECD countries has triggered a range of policy responses and a broader debate, amplified by the COVID-19 crisis, about how much economic engagement with China is desirable and safe. This study by Rhodium Group for the Bertelsmann Stiftung aims to strip the geopolitical emotion out of this debate and provide a fact-based, transparent framework for assessing which areas of the EU’s trade, investment and broader economic relationship with China are benign. We call this the “green list.”

The study also shows how the EU can broaden the scope of this green list, preserving substantial portions of the economic relationship with China, through a range of targeted mitigation measures.

Among our conclusions is that, based on 2019 data, much of the EU-China trade relationship can be preserved without the need for mitigation. Some 56% of EU exports to China are completely benign, while 83% of China’s exports to the EU qualify as “green.” On this list are sectors that are at the heart of EU trade relations with China, such as motor vehicle parts, food and drinks, luxury goods and a healthy portion of machinery and industrial goods.

We find that FDI vulnerabilities are more acute. In the absence of mitigation measures, some 46% of China’s FDI in the EU and 32% of the EU’s FDI in China in 2019 do not make it onto the green list. Investments with potential security implications can be found in the areas of sensitive individual data, critical in- frastructure and emerging computing technologies.

These results are a first and exploratory attempt at green listing EU-China economic interactions. Our findings are not meant to be definitive, nor should they be considered normative. We show besides that through credible mitigation measures, the green list can be substantially extended to cover more of the EU’s trade and relations with China.

The study makes three recommendations for EU policymakers. First, the EU needs to state clearly that some aspects of its economic relationship with China pose security risks, while others do not. Only by acknowledging this dichotomy can it credibly keep the door open to benign economic engagement and mitigate the risks in areas that are potentially problematic.

Second, the EU needs to have a frank and open debate about what areas of its economy are relevant for its national security. At the moment, no European consensus exists on this question. Without clear definitions, Europe will struggle to defend its point of view in talks with other countries and could find itself in a position where foreign definitions of national security are imposed upon it.

Third and finally, the EU needs to launch a reflection on credible mitigation measures, in order to ensure that the scope of mutually beneficial economic interactions with China remains as broad as possible.

This study presents a framework for understanding the areas of the EU’s economic relationship with China that pose no security risks. More granular analysis

is required to reach definitive conclusions about whether certain dual-use, emerging technologies or “essential goods” are risk-free or not. Due to the rapid pace of technological advances in some sectors, and quick evolution of related debates, the cost-benefit calculus is likely to evolve rapidly, requiring a flexible, dynamic approach. The EU “green list” also needs to be benchmarked against the approaches of other OECD countries in order to achieve the highest possible degree of alignment on this issue.