EconomyBrussels treads fine line with China on Russia

Brussels treads fine line with China on Russia

Good morning and welcome to Europe Express.

With the EU-China summit taking place tomorrow, the first time since 2020, we’re exploring why Brussels is treading a finer line than Washington in its relationship with Beijing, even as the transatlantic allies are aligned in trying to dissuade China from siding with Russian president Vladimir Putin in his war in Ukraine.

Meanwhile, Germany and Austria yesterday took the first formal steps towards gas rationing in case Russia turns off the tap. But in a call with Germany’s chancellor, Olaf Scholz, Putin hinted at a potential compromise, saying that payments by European gas customers could continue to be made in euros.

As calls are mounting for what diplomats call “a fund for everything”, we’ll have a look at the problems maintaining customs revenues, one of the few “own resources” that fuel the EU’s coffers.

And with Brussels making another effort at bringing companies and polluting industries to task for their environmental harm, we’ll bring you the latest in what the European Commission is due to put forward next week on this topic.

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Do no (significant) harm

It’s being billed as the most difficult summit the EU has ever held with China, as the European Council and European Commission presidents prepare to deliver a blunt message to Beijing over its relationship with Vladimir Putin, write Sam Fleming and Henry Foy in Brussels.

Charles Michel and Ursula von der Leyen will urge President Xi Jinping and Premier Li Keqiang to keep their distance from Russia’s bloody war in Ukraine, warning of the reputational damage that China would suffer if it supported Moscow’s conflict.

While they are not planning to deliver explicit threats of sanctions, and officials are not working up penalties at this stage, both the US and the EU are keeping that option firmly on the table as they gauge China’s “no limits” friendship with Russia.

Yet despite the tough rhetoric, the EU is going into the discussions with deep trepidation. That is because while the EU’s geopolitical interests are diverging ever more sharply from those of China and Russia, the EU-China economic partnership remains critical to the two sides.

China’s gross domestic product is, after all, around 10 times larger than that of Russia. It is the EU’s biggest trading partner, accounting for 16 per cent of EU trade in 2020, compared with less than 5 per cent for Russia.

The EU is now engaged in a project to wean itself off Russia’s all-important hydrocarbon exports as rapidly as possible. But it would be far more painful to attempt to unwind the tightly integrated trading relationship with China.

The EU-China investment treaty agreed in 2020 remains a distant prospect, and the EU remains focused on hardening its trade defences against China, rather than pursuing deeper integration.

But both sides have huge incentives to avoid a fundamental breakdown in their economic relations. Officials make no secret of the fact that while the EU’s relationship with China has become increasingly fractious, it remains a very different one from that of the US, which is engaged in taking a more open adversarial track with Beijing (and pressing the EU to follow suit).

The EU presidents, said one official, “agree that we need to continue working with China”. A very clear case will be made that “our economies both gain from the trade relationship, which feeds both societies . . . And the current global turbulence is not good for that.”

The goal of the EU-China call, scheduled for tomorrow morning Brussels time, is therefore damage mitigation. The EU is not expecting China to play a positive role in ending the war in Ukraine but it is hoping Beijing will keep its distance.

That may seem a singularly unambitious goal but it may be the best the EU can hope for.

Chart du jour: German vulnerability

In past years, China exploited divisions in the bloc, with Germany often prioritising friendly ties with Beijing. But China’s position on the war in Ukraine changed the calculus. (More here)

EU seeks refined customs

The calls on the EU’s budget are only growing as the union faces mounting common challenges — including the need to push forward the green agenda, respond to the refugee crisis, decouple from Russian fossil fuels and bolster common defence projects, writes Sam Fleming.

Yet the reality is that the budget is based on fragile foundations. Member states have yet to agree the fresh “own resources” — or bespoke revenue lines — that will be needed to repay the common borrowing under the €800bn NextGenerationEU programme, for example.

And there are gaps even in the EU’s most long-established streams of revenue. A report from a Wise Persons Group on Customs for the European Commission will today set out the particular problems in the realm of customs revenue — and propose a set of reforms to improve the situation.

The recommendations are set to feed into a customs reform package, which the commission will present by the end of this year.

The EU in 2020 collected close to €25bn of customs duties, of which €20bn went to the EU budget. But the Wise Persons report, a draft of which was seen by Europe Express, finds that billions of euros remain uncollected.

Changes in trade and technology, including the shift to ecommerce, call for a modernisation of the system, it finds. The Wise Persons group, chaired by Arancha González Laya, a former Spanish foreign minister, sets out 10 recommendations to overhaul the system.

These include upgrading sources of customs data rather than relying only on declarations, boosting data sharing between authorities, creating a European Customs Agency, while simplifying rates for low-value shipments.

“The reality is also that European customs do not yet currently function ‘as one’,” the report finds. “This leaves the Customs Union at the mercy of its weakest link.”

Tough on polluters

The EU wants to toughen up on companies that pollute the environment by setting stricter limits on hazardous waste, requiring better reporting of emissions and imposing harsher penalties on those who breach the measures, writes Alice Hancock in London.

The proposals form part of a revision of the EU’s outdated industrial emissions directive and will expand the areas of industry affected by the rules to include a bigger number of livestock farms and large-scale battery manufacturers, according to a draft paper seen by Europe Express.

While the industrial emissions directive, which covers around 20 per cent of the EU’s air pollution by mass and around 40 per cent of greenhouse gas emissions, has been “generally effective” in reducing pollutants, the paper says, it is not clear that it has encouraged companies to trial new technologies that prevent emissions, nor that it has done much to decarbonise the bloc.

The directive has also not been implemented “homogeneously” across all member states, the draft suggests.

It has been a busy week for green policy in Brussels. The European Commission published a package of proposals yesterday intended to promote a “circular economy”. These include better recycling of textiles and an extension of energy-efficiency labels commonly seen on white goods to almost all consumer products.

The extension of the industrial emissions directive, due to be published on April 5, would ensure that European citizens have better access to information on pollution from heavy industry and that they would be able to take action against companies and demand compensation if their health was affected.

Mohammed Chahim, a Dutch MEP on the environment committee, said the proposals marked an important effort to stop hazardous waste at source rather than simply making companies pay for their pollution through the emissions trading system.

But Christian Schaible, policy manager for industrial production at the European Environmental Bureau, said the directive “falls short” of pushing industry into “a comprehensive shift” towards climate neutrality. It was a “huge blunder” to keep in an article that prevented permits issued to industrial polluters from stipulating limits for greenhouse gas emissions, he added.

What to watch today

  1. Nato secretary-general Jens Stoltenberg presents his annual report for 2021

  2. Ukrainian president Volodymyr Zelensky speaks to the Belgian parliament

Notable, Quotable

  • Gloomy outlook: Russia’s war in Ukraine is delivering a “supply shock” to the eurozone economy that will push up prices, slash growth and drain consumer and business confidence, says ECB chief Christine Lagarde. Separately, the outlook for the labour market is also worsening by the day, aggravated by rising inflation.

  • Slow bureaucracy: The UK has processed fewer than half of visa applications from Ukrainian refugees, and fewer than 10 per cent of those applying under a scheme that allows British people to volunteer as hosts, the minister for refugees said yesterday.

  • Buy American: Germany opted this month to replace its ageing Tornado fleet with a batch of US-made F-35 fighter jets, prompting dismay in France. Europe’s defence industry is angered that the choice of an American weapons system seemingly goes against bolstering Europe’s own capabilities.

  • Gazprom, raided: Investigators carried out a dawn raid on the offices of Gazprom’s German divisions yesterday, as EU officials seek to understand the Russian company’s possible role in the recent surge in gas prices to record highs.

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