China’s inward-looking economic strategy has put European firms in a more challenging position and it could also hit the country’s growth, an EU business group warned on Thursday.
It said Beijing’s goal of self-reliance, rising nationalism and more focus on national security had left European companies “between a rock and a hard place” in terms of their operations in the country.
In its annual position paper, the European Union Chamber of Commerce in China also called on Beijing to reinvigorate its reform and opening up that began in 1978 and to take a more conciliatory approach to diplomacy to improve soft power.
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“China has a DNA of trying to stay independent as far as possible from other countries. The big question is to what degree it is willing to pay for it,” chamber president Joerg Wuttke said.
Although the outlook for European firms doing business in the country was positive overall, the paper said there were “troubling signs that China is increasingly turning inwards, as can be seen in the 14th five-year plan [for economic and social development], and this tendency is casting considerable doubts over the country’s future growth trajectory”.
Wuttke urged Beijing to “keep embracing globalisation”. “We hope that the national security [and] self-reliance will not impact innovation, but we see a receding diversity,” he added.
In the paper, the chamber noted that pursuing technological self-sufficiency was “a calculated risk” and could lead to a lack of diversity at home.
It also warned growth potential could be sacrificed in the move towards tighter political control.
“Privately owned enterprises are increasingly being pushed to align with China’s political objectives, which further constrain innovation and growth,” the paper said.
It also touched on the setting of industry standards, saying this “has become a key battleground in the fight for supremacy in emerging technologies and will have an increasing impact on global geopolitical development”.
Meanwhile, the chamber said a declining number of foreign professionals working in China could hurt Beijing’s ambition to become an innovation powerhouse, noting that in 2020 there were more foreigners in Luxembourg than in Shanghai and Beijing combined.
“Reducing international engagement will necessitate a steady flow of domestic subsidies and the maintenance of tariffs. The corresponding decrease in market competition will also dent China’s ambition to become a leader in high-technology sectors and compromise its 2060 carbon neutrality goals, while resulting in a less dynamic and innovative market overall,” the paper said.
The European business group also urged Chinese diplomats to pull back from an assertive and combative style seen in recent years to avoid becoming further isolated from the rest of the world.
It comes amid strained relations between Beijing and Brussels, including over China’s alleged human rights abuses in Xinjiang – an issue that has led to an exchange of sanctions and a bilateral investment deal being put on hold.
“Growing diplomatic tensions between China and the rest of the world have already had a negative impact on its companies going overseas,” the paper said, pointing to falling investment by Chinese internet companies in India because of their border dispute.
Another challenge was rising nationalism in China, with companies being held hostage to situations that were difficult to control, the chamber said, citing a consumer boycott of H&M and other international brands over the Xinjiang issue.
“European companies have no interest in politics, yet are increasingly having to respond to issues that result directly from the business environment becoming more politicised,” the paper said.
“China appears to be more concerned that it may lose credibility if its current rhetoric is de-escalated. Yet the opposite holds true: by making room for constructive discussions, China’s diplomats would be able to take a firmer stance on issues of genuine national concern,” it said.
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