What's the crux of China-Europe economic relations?

Today, our segment mainly explores the theme of "European Political Economy."

Let's discuss the China-EU trade relations from the perspective of "security and development."

Coincidentally, the EU is preparing to impose high tariffs on our electric vehicles, and we are expected to take some reciprocal measures.

Previously, the EU sanctioned some of our companies, claiming they were suspected of providing raw materials for weapons and equipment to Russia.

First, we should recognize that in the past decade, the world has undergone earth-shaking changes, as leaders put it, there has been a "once-in-a-century shift."

In such a globally transformative environment, analyzing economic issues solely based on data to find patterns has become insufficient, as it cannot explain the causes and consequences.

We need to consider political factors and geopolitical conflicts, which can be seen as a return to political economy.

Economics seems trivial in the face of politics.

Since Williamson proposed the "Washington Consensus," we have been analyzing economic issues with the term "open economy."

However, for now and the foreseeable future, we are facing a situation where we need to consider the "G2 framework."

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As I have been working in investment banking research, our conclusions must be grounded in asset allocation.

When geopolitical conflicts intensify, the first thing we think of is that global investors will reduce their risk appetite and choose to return to core assets.

Now, let's return to the discussion of China-EU trade relations.

The development of trade relations between China and the EU faces an insurmountable "wall," which is the "security" issue that the EU cares about.

I think not only the EU cares the most, but any economic entity would also care.

The Russia-Ukraine conflict and the Israeli-Palestinian conflict, apart from the countries directly involved, have the most significant impact on the EU.

The Russia-Ukraine conflict first cut off the relatively cheap raw materials and energy supply that European industry depends on.

More importantly, Europe began to worry about its own security, fearing that the conflict would spread to itself.

The instability in the Red Sea has led to a shock to the trade of goods between Europe, Asia, and Africa.

The impact on maritime trade will inevitably affect European prices and economic development.

Everyone has seen that Europe has recently been the first to start lowering interest rates.

On the issue of "security and development," Europe will definitely choose "security," as it is related to its own "survival."

However, Europe's defense relies on the United States.

The crux of Europe's integration is also here.

Since the United States provides defense security, it is difficult for Europe to deviate too far from U.S. policies in trade relations.

Once there is deviation, the "security issue" will be brought up, and the wars around Europe will appear like a "ghost."

Let's take a look at the global currency settlement system (SWIFT).

Before the Russia-Ukraine conflict, there was a trend of the euro's share rising, with a potential to replace the US dollar.

After the conflict, there was a sharp decline.

The euro not only declined in settlement but also saw a sharp decline in its share of global currency reserves.

Economic development without independent security and defense is doomed to be lame.

This reminds me of the "China-Japan-Korea Free Trade Area" in East Asia.

Before the pandemic, the three countries had gone through many negotiations and were about to sign, but the United States announced the deployment of the "THAAD system" in South Korea.

On the issue of "security and development," they chose "security," and the free trade area has been delayed indefinitely, with no clear prospect.

Similarly, the security and defense of Japan and South Korea are provided by the United States.

Once the United States feels that the development of trade relations has deviated too far from their expected trajectory, the security issue will be brought up, and trade relations will generally go sour.

Now that Europe cares most about "European security" and the challenges posed by Russia, if they believe that China has provided convenience in the military aspect during the Russia-Ukraine conflict, it will definitely affect the development of China-EU trade.

The total trade volume between China and Europe last year was $780 billion, and this number reached $840 billion in 2022.

The trade volume between China and Russia last year was about $240 billion, with an increase of more than 60%.

The trade level between Europe and Russia is now less than 90 billion euros, which was about 230 billion euros before the Russia-Ukraine conflict, a decline of about 147 billion euros, and it is still declining further.

Before the conflict, European industry enjoyed cheap energy and raw materials from Russia, but now it faces the challenge of importing from the Middle East and the United States at relatively high prices.

This is a fatal cost increase for industrial manufacturing.

However, it also shows that Europe will choose security on the issue of "security and development."

From the proportion of trade sales in each region, we can also see where our production capacity is mainly sold and where our major customers are.

So now we face the problem of what to do?

This reminds me of the sport of boxing.

If the opponent is too strong, then first, we should hold on tightly, at least to consume the opponent's strength and then look for opportunities and solutions.

So facing the United States defining China as a competitor, whether it is imposing high tariffs or building high walls, our choice is still to form alliances and seek space for peaceful development.

We should see that although the EU relies on the United States in defense, it has a relatively strong independence in trade relations and is not a monolithic block.

Therefore, in the development of China-EU relations, we should fully understand Europe's demands.

Our principle is to do business peacefully, to do business with anyone, but we will not supply fire to anyone and will not cross the "security" boundary when cooperating with anyone.

Trade between China and Russia is also open and transparent.

Once the Russia-Ukraine conflict eases and moves towards peace, the grudges between China and Europe will also be eliminated.

So in dealing with this geopolitical conflict, we still need to promote peace as soon as possible.

Nowadays, nationalism is on the rise globally, and right-wing political forces are emerging in the United States and Europe.

At this time, we should go against the trend.

Our national condition is still that of a developing country with relatively low per capita income.

We must not let narrow nationalism rise.

The Boxer-like nationalism cannot save the country.

By doing more business with everyone, improving the standard of living for the people, and strengthening the country's power, as people from Hunan would say, it's not too late to "hold the duck" then.