"Europe is trying to "de-risk" its ties with China, without bringing their relationship to a screeching halt.
Two recent developments have brought that tension into clear relief -- and show how difficult it will be for Europe to secure its high-technology industries and supply chains without veering too far into self-defeating protectionism. Europe needs to tread carefully precisely because it has been so successful in China -- and because it has struggled to grow and innovate as rapidly as the U.S. and some other wealthy Asian economies like Taiwan.
The first development, earlier this week, was at the 30,000-foot level: Europe laid out what it actually means by de-risking. In an "economic security strategy" paper -- a first for the bloc -- the European Commission discussed minimizing risks arising from "certain economic flows" in the face of rising geopolitical tensions and technological shifts. While China isn't named in the strategy document, it looms large. And while it emphasizes maintaining the economic openness Europe has long promoted, the paper also suggested stronger controls on exports and outbound investments in key sectors like advanced semiconductors and artificial intelligence to prevent sensitive technologies flowing to "destinations of concern" for military use.
The second was at the company level, and illustrates some of the risks: The Italian government intervened to curb the influence of Sinochem, a state-owned Chinese company, at the iconic, 151-year-old tiremaker Pirelli. Sinochem is Pirelli's largest shareholder, with a 37% stake. The new rules bar Sinochem from picking the company's next chief executive and limit the sharing of strategic information. Pirelli, the sole tire supplier to Formula One races, produces a type of tire with sensors that can collect data on their surroundings.
The government said this technology is of national strategic importance and could transfer security information if used improperly. Perhaps that analysis is correct. But it also raises an obvious question: If a tire company is considered a national strategic asset worthy of special protection, then what sort of companies would fall outside that rubric?
Moreover, the dust-up is significant because Italy has long been considered one of the friendlier countries to China in Europe. It joined China's Belt and Road initiative in 2019 -- the only nation in the Group of Seven to do so. China's investment in Pirelli came at a time when Chinese firms were snapping up assets around the globe. State-owned ChemChina, which merged with Sinochem in 2021, bought the Pirelli stake in 2015. China's outbound mergers and acquisitions have fallen sharply since 2016 as countries have become more skeptical of Chinese investments.
Europe has stressed it is "de-risking" instead of decoupling from China, as the latter is simply not practical. China is an essential trading partner for the European Union -- it was the biggest exporter to the bloc last year and the third-largest importer of European goods. The country provides vast markets for German automakers like Volkswagen, who are key drivers of growth and innovation for the bloc as a whole.
But as concerns about China's influence continue to rise, even sectors that may not be deemed controversial -- tires, after all, aren't usually considered sensitive technology -- will risk getting sucked into politics. That could include deals that were struck when the relationship was more amicable, and will provide ample opportunities for companies to argue for special treatment by governments." [1]
1. EXCHANGE --- Heard on the Street: European Nations Look To Reduce China Ties --- Balancing security concerns with economic reality. Wong, Jacky.
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 24 June 2023: B.12.
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