China´s Global Power Status: Ramifications for the EU
The growth of China's international status is likely the most plausible explanation (not the only one, though) behind the China-West structural competition.
Growth of international status means that the rising actor (China) increases its influence at the expense of the rest established actors (the USA, EU, or Russia, if you will). Therefore, one's ascend means a relative decline of others (relative because you do not necessarily decline in material power – such as economics, military, etc.), as the distribution of power can be described as a limited pool of resources shared amongst the most powerful.
If one takes a closer look at China over the past 30 years, they would find out that China has multiplied its GDP more than 50 times, and increased its military spending more than 20 times(spends more than the EU, but still, it does not spend more than the USSR at the peak of its military spending), increased its research and innovation spending five times (spends more than the EU average).
With 1,4 billion people, China is becoming a far stronger power than the Soviet Union ever was. Though the Chinese one-child-per-family policy is a demographic time bomb, GDP per capita is not as impressive as absolute numbers (stuck in the middle-income trap) and the current economic slowdown- these issues are likely to impact China's ability to project its power internationally.
Moreover, China´s ascend is a troubling phenomenon as Chinese R&D model is based on intellectual property theft, and the USA estimated that Chinese IP thefts cost US companies between $200-600 billion annually. Despite this worrying trend, China has become the EU's significant trade partner accounting for €665 bn turnover in 2021 with a negative balance of 2:1 to China's advantage.
The tensions over Taiwan indicate that these relations might encounter a similar faith as the ones with Russia.
Additionally, the world mostly depends on microelectronics from Taiwan (63 % of the global semiconductor market+ 6% China). Losing Taiwan would mean disaster for heavy machinery and equipment production- the EU's most significant export category representing 12,6 % of all EU's exports.
Automotive exports are the EU's third largest export category accounting for 10,2 % of the EU's exports. In 2021, Volkswagen sold 38 % of its global sales in China.
Global trade would suffer a significant loss as the Taiwan strait is one of the most vital sea lanes, as 88 % of the global fleet passed through the strait in 2021.
Speaking of global trade, the worst-case scenario- war over Taiwan, would most likely disrupt trade with Japan and South Korea, our allies and key trade partners in the Asia Pacific.
Potential ramifications
The EU would highly likely encounter recession as the loss of commodity suppliers in Russia, micro-electronics suppliers (Taiwan), and an important export market (China) altogether represent a worrying scenario.
China is likely learning from the Western approach to the Russian invasion of Ukraine. China is already conducting numerous policies that are aimed at protecting the country's economy from potential economic sanctions. Such as China's 14th Five-Year Plan (2021–2025) and achieving a high degree of self-reliance is one of the major Xi Jinping's strategies:
Industrial policies focused on eliminating foreign dependencies across the value chain
Efforts to identify and mitigate vulnerabilities to US sanctions and organise its bureaucracy for the imposition of countersanctions
Expedited efforts to reduce China's dependency on the US dollar for international finance via renminbi internationalisation
Stockpiling of critical supplies, especially commodities and technological inputs that China imports
Trade policies to foster greater global reliance on Chinese exports and investment policies to tie key foreign firms to the Chinese market
Mandates for state entities to move away from foreign software
A shift in Chinese lending and investment away from the United States and its allies, in favour of potentially neutral countries, especially in the developing World.
The loss of China and Taiwan as economic partners would highly likely cause economic depression in the EU.
As the EU lost Russia as the primary supplier of cheap primary industrial inputs (commodities, energies), the absence of the Chinese export market will cause a dramatic decrease in international trade of the EU.
The absence of electronic products from China and Taiwan will also paralyse the final production of high-end products such as automobiles and heavy machinery.
It is highly likely that shortages of various components, such as semiconductors and electronics, will occur. Global electromobility might also encounter shocks of battery shortages.
Therefore, the EU countries, especially Germany and Central and Eastern European countries, are unlikely to maintain their industrial products.
The lack of supplies from China and Taiwan will likely drive high inflation rates as the supply will not match the demand.
The three main preconditions for stagflation are loss of industrial output, declining GDP and high inflation.
The result of such an economic crisis will likely impact geopolitical gravitas within the EU and political stability in the member states.
In the worst-case scenario, anti-system parties criticising the hard stance on China can come to power and impact the EU level if more countries will follow.
Domestic instabilities can vary from civil unrest due to economic decline to frequent government changes that will restrict domestic reforms and enhance the crisis.
The conflict will likely enhance the global redistribution of labour and wealth due to the global economic system's fragmentation (likely multipolarisation). There are many European companies in China as EU foreign direct investment in China accounts for approximately €140 billion.
It is hard to estimate whether these companies would leave the 1,4 billion consumers market or what the Chinese government would do in the event of the EU's hard-line stance. The Russian example shows that it is possible that foreign assets could be nationalised or government will force companies to onboard local CEOs.
