Europe wants to reduce its reliance on China, but a full decoupling would be neither desirable nor achievable.

• “De-risking” from China has become the focus of the EU’s policy towards China.
• This marks a departure from Europe’s stance towards China a few years ago, when EU countries were keen to enhance investment ties.
• The diversification of the EU’s supply chains in strategically important areas, such as raw materials, will accelerate.
• However, significant shocks to EU-China trade flows in the short to medium term are unlikely.
• We expect a tightening in transatlantic policy co-ordination on China, as seen in the EU’s alignment with US chip export controls and negotiations on a EU-US deal on critical raw materials.
• The EU’s de-risking strategy exposes the bloc to a high risk of retaliatory measures from China.

European attitudes towards China have been hardening for several years. Long-standing concerns over unfair competition from Chinese firms and human rights violations have been exacerbated by China’s refusal to condemn Russia’s invasion of Ukraine and the growing risk of conflict over Taiwan.

Despite this tense background, EU-China economic ties remain strong. Goods export and import flows reached a record high in 2022. Alongside the US, China is the EU’s most important trading partner—accounting for 9% of European goods exports and more than 20% of European goods imports. Chinese investment into the EU has dropped since the introduction of new EU investment screening rules in 2020, but EU investment in China grew by over 90% in 2022, despite COVID-related economic restrictions in China and slower growth in global foreign direct investment (FDI) into China.