European firms in China have to negotiate a ‘political minefield’, trade group says

European firms in China have to negotiate a ‘political minefield’, trade group says

Companies fear retaliation from Beijing over its political disputes with their home governments, European Union Chamber of Commerce says in annual position paper. China should ‘depoliticise the business environment’, it says

Foreign companies in China are having to negotiate a “political minefield” as a result of Beijing’s strained relations with Brussels and Washington, a leading European business association said on Thursday.

In its annual position paper, the European Union Chamber of Commerce in China said firms were concerned about the threat of retaliation by Beijing as a result of its political spats with their national governments. The situation was made more difficult by foreign politicians’ calls for a tougher stance on China over issues like Xinjiang, Hong Kong and Covid-19, and the related US sanctions on Chinese individuals and entities.

There was a risk of a long-term, downward spiral in relations between China and Europe, which “have the potential to seriously impact European companies”, it said.

“Companies are left navigating a political minefield during a health crisis of truly overwhelming proportions, and this situation is becoming more precarious, with the previously isolated voices that were intent on sowing political discontent slowly building into a chorus,” it said.

“All of a sudden, we find ourselves not just in a delicate situation in Beijing, as usual, but also now we have a delicate situation on the home front where parliamentarians, public opinion, governments, NGOs are questioning us why we are operating in a country that does A, B, C, D,” Joerg Wuttke, the chamber’s president, said.

He said that although “everyone does their homework to make sure there is no forced labour” in Xinjiang, there was now “no more appetite to invest in new projects [there] … because it’s politically toxic”.

He also warned of the possible detrimental impact on foreign manufacturers in China if the United States continued to restrict the export of hi-tech components and research exchanges, and maintain its sanctions on Chinese banks.

“The [US-China] decoupling story is supposed to prove that even if Europe does not change its policy, the fact that we rely on US products and services and systems actually might have a significant impact on how we do business here,” Wuttke said.

The annual report said it was “entirely plausible” for European companies to experience a sudden disruption to their operations should they become targets for Beijing’s ire over foreign governments’ comments and actions related to issues such as the national security law in Hong Kong, the independent inquiry into the origins of Covid-19 or European officials’ visits to Taiwan.

It recommended Beijing “depoliticise the business environment and de-escalate wolf warrior diplomacy”.

Wuttke said the situation had been made more complicated by the boycott of Chinese products and investment in India as a result of their border clashes and that any further decoupling could threaten supply chains for the chemical and pharmaceutical industries.

However, despite the political headwinds and disruption caused by the global pandemic, European firms were committed to staying in China and were “ready to act as the transition catalyst” to help drive economic growth in the country, the report said.

A long-term critic of China’s sluggishness in reforming and opening up its markets to foreign competition, the chamber said Beijing was “punching below its weight” and should make its reform plans a reality to “release a vast reserve of untapped potential”.

“The China of 2020 seems to buy into a different way of thinking market access is not seen as a right, but instead a privilege that is either extended to or removed from certain areas, depending on whichever part of the economy China’s leaders want foreign investment to flow to at any given time,” it said.

But a “robust and binding” investment agreement between China and the EU, with substantial commitments on opening up, fair competition and subsidy transparency, would help offset the headwinds for Beijing, it said.

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