Trust and trade-offs: How to manage Europe’s green technology dependence on China – Part I
“De-risking” is the guiding motif of the EU’s new approach to China, particularly in green technologies where Chinese companies are striving for full dominance.
For Europe, these same industries are supposed to generate future prosperity, enable the green transition, and enhance security through greater energy independence.
As economic growth, climate goals, and national security cannot all be maximally achieved together in these sectors, European policymakers need to weigh these up and decide which to prioritise, when, and how.
Instead of individually using incentives and trade tools ad hoc, at random, and in insufficient doses, member states should revolutionise their approach with: a real push in political leadership, enhanced coordination at the EU level, and clear prioritisation backed up by credible arguments.
Policymakers need to define politically where the risks are greatest and what constitutes a tolerable dependency, actively seek partners in the world to preserve competition, and communicate clearly about the necessary trade-offs.
A key question for Europeans to ask immediately is whether they trust Chinese companies to form the backbone of Europe’s green transition. The answer will determine the options available to them.
Time to talk trade-offs
As the world moves ever more deeply into strategic competition between China and the advanced industrial economies of the West, Europeans have to reassess their approach to this shifting landscape. Washington and Beijing are making their own calculations about how they balance their national security with their economic interests – and their ties to one another. Each is using legislative, trade, and other tools as part of this competition. The European Union is acting too, but it is facing a specific set of challenges.
China’s financial and material support for Moscow is fuelling the Russian war effort in Ukraine. Chinese industrial overcapacities are undermining the future competitiveness of important European economic sectors. China’s dominance of the green technology supply chain means decisions made in Beijing affect the EU’s ability to pursue the energy transition.
At the same time, the EU’s legal commitment – and public pressure within the bloc – to tackle the climate crisis is stronger than in either the United States or China, making it harder for European policymakers to resile from climate action. The EU’s deep integration into the global economy and the way its wealth is built on global trade means the bloc is less well equipped to follow a protectionist, or even isolationist, path. And Europeans are facing severe fiscal constraints due to Russia’s military aggression.
European leaders have adopted “de-risking” as their new mantra for this diverse set of challenges. But the term masks the complexity it purports to address. Leaders have a long way to go to transform de-risking into concrete actions that command broad support and deliver solid results.
This policy brief aims to elevate the level of this crucial debate. It assumes that the three vital dimensions of this issue – economic prosperity, climate action, and national security – all matter for democratic societies in Europe, and it zeroes in on the types of decisions policymakers will need to consider in the near future. It identifies the ‘China factor’ in three green industries – solar panels, batteries, and electric vehicles – and proposes scenarios whereby European leaders decide to ‘Do everything’, ‘Do something’, or ‘Do nothing’ in the face of potential Chinese dominance in each industry. The scenarios sketch out options available to the EU and member states and attempt to display the trade-offs.
Making sense of de-risking
China has secured an increasingly dominant position in established economic sectors and emerging green industries. The Chinese leadership has defined the “new three” (新三样) – solar cells, lithium ion batteries, and electric vehicles (as opposed to the old three of household appliances, furniture, and clothing) – as the core drivers of China’s economic growth. It has massively expanded its industrial capacity in these areas. This growth creates risks for European economic competitiveness, national security, energy security, and even for the EU’s climate goals.
In the solar photovoltaic industry – a sector once pioneered by European firms – China’s capacity is now peerless in terms of the speed and scale of production and the affordability of prices, which no other global competitor can match. In the battery industry, Chinese companies have been extremely effective in sourcing rare earths from across the world and have a commanding hold over access to these resources and the scale of production, both of intermediary inputs and the completed batteries. And the electric vehicle industry has emerged as the latest and most contentious ‘green’ economic battleground, with Chinese manufacturers beginning to push into the European market in full force.
The automotive industry remains a cornerstone of Europe’s economic ecosystem, not least in comparison to the remnants of the European solar industry and a battery industry that never really got off the ground in terms of global market shares in the EU. Carmakers directly and indirectly employ 13.8 million Europeans and make up 6.1 per cent of total EU employment. Electric vehicles will be more than just cars; they will be at the nexus for innovation from robotics to automation to artificial intelligence, sensing, and human-machine interaction. Losing ground in this industry will be more consequential than in others. Highly subsidised Chinese manufacturers have begun outcompeting European legacy car companies in electric vehicles, which are the industry’s most important future growth area. Crucially, Chinese firms beat their European competitors not only on cost, but increasingly also on quality. In terms
of global exports, Chinese battery and electric vehicle manufacturer BYD surpassed Tesla for the first time in the final quarter of 2023.
While Chinese electric vehicles’ market share is still relatively small in Europe, the trajectory is clear. European policymakers need to address the national security, economic prosperity, and climate implications of accepting Chinese dominance in these sectors – because dominance is Beijing’s goal. This is not only the stated aim of the Chinese leadership, but has long been amply evidenced in other sectors.
However, policymakers in European capitals have so far not spelled out a focus on China. “Actor-agnostic”; “non-discriminatory”; “industry-led”: the policy terminology they have reached for in the past was a way to avoid confronting the China challenge head on, and it grew from a fear of harming relations with Beijing. This reasoning is grounded in experience. Since 2017, at the outset of the second term of Xi Jinping, the Chinese leadership has increasingly (ab-)used trade relations in pursuit of political aims. China’s toolkit now includes instruments such as economic coercion, weaponising trade by abruptly imposing import restrictions, and introducing consumer boycotts, export embargoes, and non-tariff barriers. At the same time, the ever more highly connected nature of many modern products – including the new three – means that cyber security is now critical.
EU policymakers have responded. In recent years, the bloc has adopted the forced labour regulation, created the International Procurement Instrument, introduced the foreign subsidies regulation, revised its foreign direct investment screening process, opened anti-subsidy probes, passed the Critical Raw Materials Act, and agreed the Green Deal Industrial Plan with the newly passed Net Zero Industry Act at its core. On the surface, therefore, the EU appears ready to mobilise its economic resources to deliver on climate action and protect economic stability and national security.
Alongside these emerging measures, the EU’s leadership has proposed de-risking as the strategic paradigm to guide its relations with China. This gained prominence in March 2023 after European Commission president Ursula von der Leyen called for Europe to “de-risk, not decouple” from China. European leaders have since taken up the phrase as they attempt to outline a new relationship with Beijing. So too has the Biden administration in describing its own approach to China. Yet the EU is still only just beginning to make sense of the policy choices that de-risking will encompass.
European policymakers appear to have intended de-risking to be a strategic, non-confrontational approach to integrating national security questions into economic policy. They have also tried to sell climate considerations as the magic fix to the broader ‘positive and collaborative agenda’. The term implies the alleviation of risks while avoiding a hard break. It has an aura of ‘reasonableness’ in contrast to the competing idea of “decoupling”, which implies more drastic change.
But the processes described as de-risking will inevitably involve a highly dynamic approach to risk management, assessing different sets of risk exposures under complex conditions with multiple, constantly moving variables. Decisions about the (re)allocation of political and economic resources to enhance security will invariably come with other costs and trade-offs. In setting out to reduce the risk in their relations with China, Europeans must assess all three sides of a triangle that contains security, economic, and climate risks. Shrink the exposure along one side of the triangle, and risks will grow along another side. At the same time, getting the de-risking geometry right will also mean understanding the impact of EU decisions on third countries. The United States’ Inflation Reduction Act (IRA) is a useful test case here. If it becomes a lot easier and more attractive to produce in the US, why import from India? Or Indonesia? If the EU decides to fully embrace Chinese market dominance in certain industries, other players will have an equally hard time competing globally if this effectively shuts them out of the European market.
The trust question
The matrices provided in the scenarios are an attempt to help advance the political conversation on de-risking and demonstrate the complexity of the trade-offs involved. They display some of the consequences of certain policy choices in each sector examined.
Under the current geopolitical circumstances, however, the first question for European policymakers to ask is: Do we trust Chinese companies – which are inherently interlinked with the Chinese Communist Party because of the structure of the Chinese political and legal system – to form the backbone of our green and digital transitions? The different possible answers to this question lead to diverging paths for European climate action and the EU’s economic and industrial future.
Yes, we trust Chinese companies to form the backbone of our green transition
If the political answer to the trust question is generally “Yes”, then Europeans should shape policy choices that accept greater dependence on Chinese products. They would do so confident in the knowledge that they will reap the benefits of low consumer prices and gain a quick, clear route towards the green transition. Within this framework of trust, policymakers would need to find ways to mitigate the downside risks of severe dependence and, by extension, great susceptibility to economic coercion, cybersecurity vulnerability, and loss of competitiveness of Europe’s own green technology industry. But they would already have taken the primary decision to embrace, and where possible capitalise on, these dependencies on Chinese companies. They would use the available resources to invest in research and development for future innovation and support the green transition with the help of Chinese technologies.
For the three industries studied here, this would mean choosing to ‘Do nothing’ at all on solar panels and batteries. It would involve letting market forces battle it out while financially supporting only these products’ rapid adoption – agnostic about product origins – and directing other resources towards global climate mitigation measures rather than Europe-focused industrial policy measures. For electric vehicles, such a positioning would imply that decision-makers agree merely to ‘Do something’ with regard to incentivising Chinese companies to produce in Europe. This would be to hedge against job losses in Chinese-owned and Chinese-controlled car companies that manufacture in Europe, while trying to provide a broad regulatory framework that governs the flow of data from connected vehicles.
No, we do not trust Chinese companies to be at the heart of our green transition
If the political answer to the trust question is “No”, any de-risking strategy has to focus on minimising the exposure to China in the green technology sector as much as possible while ramping up alternative capacity. Policymakers would need to draw on all possible resources to do so – even if it comes at the cost of (at least temporarily) higher consumer prices or a slower (but perhaps in the long run more sustainable) achievement of climate goals.
Consequently, European leaders would need to impose high tariffs on Chinese products to protect existing industries in Europe and build new supply chains both in Europe and among friendly third countries. This would imply doing everything they can in all three sectors covered in this paper, from restricting Chinese solar panels as quickly as possible to banning Chinese batteries and the electric vehicles they power.
Additionally, diversification would have to operate on a whole new level, meaning the EU would have to conclude sectoral agreements with third countries such as India or Indonesia to enable alternatives to Chinese products. Policymakers would also have to assemble positive incentives for competition within the European green technology market. This could take the form, for example, of providing not only market access but also access to subsidies or tax credits to companies from the US, Japan, South Korea, India, Indonesia, Vietnam, and others with key players in these fields. They would also have to incentivise emerging economies to invest in manufacturing or the processing of raw materials by providing additional financing or underwriting risk and bringing down the cost of capital for these countries.
We do not trust Chinese companies, but …
The answer to the trust question is likely a sophisticated “No, but …” This means another set of conclusions follows. Under this logic, European policymakers would decide that they trust Chinese companies enough to embrace their role in less security-relevant areas such as solar panels (not necessarily inverters or other connected devices used in the production of solar energy) or existing electric vehicle batteries that currently have no connection to what in the future could be smart grids. They would then invest all available financial and political resources in mitigating the challenges that connected technologies present, prioritising the most likely threats. While solar inverters are connected to the grid and create a high degree of vulnerability, any large-scale weaponisation would amount to an act of war and is thus less likely as a scenario. A risk management approach that looks to reduce the dependency on Chinese vendors over the course of three to five years might be a ‘good enough’ solution under current conditions. Indeed, a ‘good enough’ approach to the different industries could be a serviceable philosophy that allows a suite of actions to be quickly identified for implementation over different timescales.
In contrast, the potential to weaponise highly connected electric vehicles for political reasons – such as targeting specific individuals – carries a much sharper and more probable risk and is thus more urgent to mitigate. This surveillance and weaponisation potential grows ever greater as the density of such products increases in European markets. European policymakers could therefore direct their political energy to this area first.
An approach that looks into very specific technical risks is politically and technologically the most complex because difficult decisions have to be made for every existing and new technology, and done so under conditions of limited knowledge about the products on the part of the governments. This could amount to a bureaucratic checkmate where the technical analysis hampers timely decision-making. The political conclusion in this regard may thus also be that the administrative costs of trying to mitigate the risks associated with a specific green technology are too high; or the complexity of the regulatory and verification process is too great to be practical, leaving a full ban as the only option. For Chinese electric vehicles this could be a solution in the short term.
To operationalise this approach, a categorisation in threat assessments on a “to deal with in the next six months”, “to deal with in the next three years”, and “to deal with in the next 15 years” may help to guide decision-making and focus energies where the effect may be the greatest – from a national security, economic prosperity, and climate risk perspective.
For solar panels, this could mean doing nothing now, while over the course of the next three years investing in support for alternatives in the inverter industry and panel production capacity in third countries. In the next 15 years this could mean focusing on investing in innovation while fostering the creation of multiple production hubs around the world.
For batteries,this could mean immediately – albeit temporarily – incentivising Chinese production in Europe, using strict input diversification criteria, while over the course of the next three years investing in research and development for domestic capacity and in production in third countries. With an eye on future technological developments and grid integration, this could prepare the EU to phase down Chinese supply in Europe over the course of the next 15 years.
For electric vehicles, this could mean immediately imposing significant tariffs that have a real market effect while conducting a full risk assessment, creating transparency requirements, and pushing the European Commission’s nascent trustworthiness agenda at the G7 level as well as blocking investments by Chinese companies in the EU. Over the next three years, it would also require EU member states to jointly invest massively in a diversified supply chain and to create a subsidy scheme for all producers that adhere to trustworthiness standards at the EU level. In the long run this could help Europeans not only regain a competitive edge in the electric vehicle industry, but also contribute to competition globally for the rapid, sustainable decarbonisation of the mobility sector.
Decision time
EU leaders have long talked of building European sovereignty, and they have indeed taken steps to strengthen the bloc as a geopolitical entity. Yet the strategic competition between China and the West is becoming ever sharper, ever more quickly. The only way for Europeans to keep up now is to define their own rules, use their market power, and generate political will and support by taking an assertive stance and an inclusive approach on the critical questions confronting them in green technology industries. Naturally, there will be varying degrees of risk tolerance and trust within Europe vis-à-vis China. Clearly spelling out all the risk calculations is the very first step to managing them. The question of the level of tolerance within European societies with regard to the different dimensions of risk is something only elected politicians can truly decide as they navigate the tricky terrain ahead and attempt to build consensus. The visualisation of trade-offs presented in the following sections aims to create greater transparency around these risks. As the kernel of vital public communication about these challenges, this should also help avoid populist hijacking of the conversation by parties at the political fringes.
The scenarios
The scenarios approach emerged following conversations and workshops held by the European Council on Foreign Relations with stakeholders – from green industry leaders to climate specialists, trade economists, China-watchers, and European and American policymakers. Fierce debates erupted among many of them when it came to the relative weight of their own area of expertise or investment in de-risking decisions.
The sections below open with an exploration of the current state of play in three crucial green industrial sectors. Each section then presents a range of scenarios that could play out in each industry area – depending on how extensively European policymakers decide to intervene to reduce their risk exposure to Chinese decisions. Each scenario serves as archetypical example of possible policy decisions.