On September 9th, former President of the European Central Bank Mario Draghi released a lengthy report outlining a blueprint for the economic policies of the European Union over the next five years. The report reveals a hardening stance of the EU towards China due to evidence suggesting that the EU’s own economic competitiveness has been significantly weakened by China’s unfair trade policies.
About a year ago, President of the European Commission Ursula von der Leyen requested Draghi to write a milestone report on the future competitiveness of the EU. Mario Draghi, the former Prime Minister of Italy, was hailed for his role in saving the eurozone during the sovereign debt crisis by proposing to save the euro “at all costs”. The challenges he faces this time might be even greater, possibly requiring measures to prevent Europe from falling behind in economic competitiveness compared to other regions like the United States.
After months of effort by a small team led by Draghi, the report was finally released on September 9th. During the press conference to announce the report, von der Leyen stood beside Draghi. In July of this year, von der Leyen was reelected as President of the European Commission, marking the beginning of her second five-year term.
Addressing the media in Brussels, Draghi stated, “Since the end of the Cold War, we have had to genuinely worry about our self-protection for the first time, and the reasons for taking unified measures have never been so convincing.”
The Draghi report spans 69 pages for “The future of European competitiveness,” outlining a vast blueprint and vision, and 328 pages for a deep analysis and development recommendations for the EU’s 10 key industry sectors. Let’s summarize some key points of the report.
In recent decades, the EU, which has benefited from the globalization trade system, has suddenly found its corporations facing more intense competition from abroad and a decrease in entering foreign markets.
Draghi’s report highlights, “The EU’s competitiveness is currently squeezed by two fronts. On the one hand, EU companies face weak foreign demand (especially from China), and increasing competitive pressure from rising Chinese companies.”
The European Central Bank found that Chinese companies directly competing with Eurozone exporters now account for close to 40% of industrial sectors, higher than the 25% in 2002.
Slow economic growth in the 21st century has resulted in European households paying the price, with a much slower increase in living standards compared to countries like the US and China.
With the end of geopolitical stability era, the EU realized its vulnerability in the supply chain, with limited key material suppliers mainly from China and energy suppliers from Russia. The risks these countries pose to EU’s economic growth and freedom are on the rise.
The EU acknowledges its significant lag in technological innovation compared to countries like the US. For example, only 4 out of the top 50 global tech companies are European. In the last 50 years, no EU company valued at over €100 billion has been founded from scratch, whereas all 6 US companies valued at over €1 trillion — Apple, Nvidia, Microsoft, Google’s Alphabet, Amazon, and Meta Platforms’ Facebook — were started during this period.
Lured by better funding and less regulation, innovative companies tend to relocate outside Europe. For example, from 2008 to 2021, nearly 30% of European “unicorn” companies (start-ups valued over $10 billion) relocated their headquarters overseas, with the majority moving to the US.
The EU aims to establish a foothold in emerging industries like electric vehicles and green energy technologies but faces serious threats from state-subsidized Chinese companies.
Draghi’s report warns that the EU must increase productivity, significantly increase investment, and reform its industry policies; otherwise, the EU will continue to lag behind countries like the US and face a “survival challenge.”
The report suggests that the EU should increase annual investment spending by €800 billion (€883.5 billion), which is considered unprecedented. This amount equates to 5% of the EU GDP, more than twice the Marshall Plan implemented for post-war reconstruction after WWII. Currently, US companies increase investment by about €700 billion (€770.7 billion) annually.
Draghi presented 170 recommendations in the report concerning reducing regulation, improving decision-making, and enhancing cooperation among the governments of the EU’s 27 member states, a challenging magnitude for the Union.
In general, the Draghi report indicates that the EU should focus on sustainable competitiveness, economic security, open strategic autonomy, and fair competition as key pillars for its economic prosperity.
Sustainable competitiveness aims to ensure efficient and thriving businesses while protecting the environment.
Economic security seeks to ensure the EU’s economic capacity to respond to challenges and protect employment.
Open strategic autonomy signifies that Europe strives to maintain global leadership while remaining open for business amidst new challenges and a constantly changing world, ensuring the EU can control its future.
Fair competition ensures equal opportunities and conditions for all to achieve success, shaping a better and fairer world.
The report states, “The fundamental values of Europe lie in prosperity, fairness, freedom, peace, and democracy within a sustainable environment. The existence of the EU is to ensure that Europeans continually benefit from these fundamental rights. If Europe fails to offer these to its people — or is forced to make trade-offs between them — it will lose its reason for existence.”
Regarding the economic threat posed by Communist China to the EU, the report highlights three major warning points worth noting.
The EU introduced clean tech rules last year, but it has fallen behind in the production of low-cost “green” technologies and lacks a consistent energy strategy.
The Draghi report not only calls for an increase in “green” capacity but also emphasizes the need to raise demand for cleaner technologies with more added value. However, the report notes, “Given China’s continuing increase in capacity and scale, it cannot be guaranteed that the EU’s demand for clean technologies will be met within the EU itself.”
The European Commission estimates that China’s national subsidies for clean technology manufacturing are double that of the EU share, when compared as a proportion of GDP.
The report states, “Increasing reliance on China may provide the cheapest and most effective path to achieve our ‘decarbonization’ goals, but China’s state-subsidized competition also poses a threat to our high-efficiency clean technology and automotive industries.”
Europe, while still dominant in the wind turbine assembly sector, has seen its market share decline in recent years due to China’s rise — from 58% in 2017 to 30% in 2022.
Concerns arise that Beijing is replicating its successful model of subsidizing the solar panel industry to gain international market dominance in promoting its electric vehicle sector.
The report states, “According to simulations by the European Central Bank, if China’s electric vehicle industry follows a subsidy trajectory similar to the solar panel industry, EU production of electric vehicles would decline by 70%, and EU manufacturers’ global market share would drop by 30 percentage points.”
The report also indicates that taking a laissez-faire attitude towards the large-scale import of electric vehicles from China is “unlikely to succeed in Europe, as it may pose a threat to (Europe’s) employment, productivity, and economic security.”
Draghi points out, “The automotive industry is a key example of Europe’s lack of planning and implementation of climate policy without industrial policy.”
Chinese automobile manufacturers have increased their market share in the European electric vehicle market from 5% in 2015 to nearly 15% in 2023, while European manufacturers’ share has dropped from 80% to 60%.
The European automotive industry directly and indirectly employs nearly 14 million Europeans.
The report suggests that as lawmakers seek to develop an industrial action plan, they should especially “avoid entirely moving production out of the EU or quickly allowing state-subsidized foreign manufacturers to take over EU factories and companies.”
One solution to address the plight of automobile (including electric vehicles) manufacturers is to enter the Chinese market through legally mandated partnerships and then reverse the situation in the European market. However, Draghi believes that EU leaders should be cautious about such proposals, as recent tariffs targeting anti-electric vehicle subsidies “will help create a fair competition environment.”
In a speech this summer, Draghi hinted at following the US approach, mainly using tariffs to counter trade protectionism by countries like China.
Draghi calls for coordinated efforts among EU countries to review China’s “Foreign Direct Investment” (FDI) in the EU single market.
The report warns, “In recent years, China’s investment in the green sector in the EU has significantly increased, especially in Central and Eastern Europe.” While this can promote Europe’s technological development and create high-quality job opportunities, the “asymmetrical situation formed by negotiations between small member states and large foreign investors may lead to unwelcome concessions by smaller countries to foreign exploitation.”
“For decades, our single market has been fragmented, leading to a chain reaction affecting our competitiveness.”
In this scenario, Communist China could become a “security threat” to Europe. Draghi emphasizes in the report that when dealing with potential security threats and geopolitical rivals of the EU, the FDI issue is particularly concerning.
For the solution, Draghi states that the EU should strengthen its mechanisms for overall investment review. The current model is based on rules among member states themselves, “this fragmented mechanism hinders the EU from utilizing its collective strength in FDI negotiations and complicates the formulation of common FDI policies.”
The report states that Europe possesses immense collective consumption/investment capabilities, but these shared resources are often wasted and diluted.
The report recommends that the EU needs to boost productivity to increase fiscal space. Additionally, while promoting a Capital Markets Union, the private sector needs the support of the public sector to be able to undertake a significant portion of financing investment.
Decades of globalization have created a high level of “strategic interdependence” among major economies, increasing the cost of decoupling. The EU is largely dependent on China for key minerals, and China also relies on the EU to absorb its surplus industrial capacity.
Draghi clarifies the EU’s reliance on China for global supply chains of critical minerals. He states, “China… is the primary source for numerous critical minerals, accounting for nearly 70% of global rare earth production. Additionally, China has a quasi-monopoly position in the processing and refining of critical minerals.”
From 2017 to 2022, global demand for lithium doubled, cobalt demand grew by 70%, and nickel demand increased by 40%. According to the International Energy Agency (IEA) forecast, by 2040, demand for minerals in clean energy technology is projected to increase by 4 to 6 times.
The risks Europe faces first involve price fluctuations, followed by the possibility of critical minerals being used as “geopolitical weapons,” as most mining and processing of minerals are concentrated in non-aligned countries strategically with the EU. For example, China is the largest processor of nickel, copper, lithium, and cobalt, accounting for 35% to 70% of processing activities. China has also shown willingness to leverage this market power.
Draghi points out that Communist China significantly increased restrictions on the quantity of exports of critical minerals, increasing ninefold from 2009 to 2020, making it “the most extensive in enforcing export restrictions on critical raw materials.”
This indicates that while the dependence is mutual, Europe is more susceptible to coercion. With more adversaries utilizing “dependence” as a “geopolitical weapon,” this uncertainty will adversely affect business investments, making it challenging for the EU to maintain its unified position.
The report prescribes a strategy to reduce dependencies through trade agreements, particularly focusing on raw material dependencies, and increasing joint procurement.
All major economies worldwide are actively seeking to reduce dependencies and expand their scope of independent actions. The US is investing in domestic semiconductor and clean technology production capacity while reshaping its key supply chain deployment.
To counter unfair competition from Communist China, more countries are raising tariffs and non-tariff barriers against China. Yet, one result is compelling China to redirect more of its surplus capacity towards the EU market if the EU itself does not take barriers against China’s dumping practices.