Europe has picked a side in second Cold War

In the new Cold War economy, trade will be restricted, technology fenced off, and intellectual property fiercely protected. Manufacturing capabilities will be built up, and supply chains brought closer to home to ensure resilience whatever happens.

As relations between the West and China deteriorate sharply, every developed economy will have to pick a side. And it is already becoming clear which one the major powers of Europe – and the European Union itself – have chosen. China.

Over the past few weeks, we have seen example after example of major industrial and commercial ties with China deepening.

Renault is partnering with Geely, presumably with the blessing of President Emmanuel Macron. Chinese investors are buying up a port in Hamburg, a crucial piece of infrastructure. And Chinese companies have announced three major new battery factories in Europe, the key industrial technology of the next decade.

Add it all up, and we can forget about the rhetoric of siding with the United States. With its investment decisions, Europe has chosen the East instead.

It may have taken the Russian invasion of Ukraine to crystallise, but it has now become clear that there is a Cold War emerging between China and the West. With the ‘re-election’, if that is the right word, of Xi Jinping as president for an unprecedented third term, China’s ruling Communist Party has taken an increasingly authoritarian turn. It has clamped down on any form of democracy in Hong Kong while using Zero Covid as a way of controlling its own population, and has been aggressively bullying Taiwan into submission with threatening military exercises, while supporting Vladimir Putin’s invasion of Ukraine.

It is still possible that as it grows wealthier, China will follow South Korea and gradually turn into a liberal, democratic state. But there is very little sign of that right now.

In response, the US has been preparing to defend itself against a resurgent and powerful China. It has beefed up support for Taiwan, preparing to defend the island with force if necessary. And it has imposed a draconian round of technological sanctions, forcing American engineers to leave the country and American companies to look for alternative suppliers – often at huge cost. Perhaps in their first face-to-face meeting since he became president, scheduled for next week, Xi and Joe Biden will find a way to dial down the tension. If not, the two sides are likely to engage in full-blown economic warfare.

We will hear lots of rhetoric from the main European powers about how the West needs a united front, about how it should stand up to China’s growing political influence and unite behind shared values with the US. The trouble is, at the same time Europe is also deepening its economic ties with China at an accelerating rate.

Just take a look at a handful of decisions over the past few months. Last week, the giant French auto conglomerate Renault re-organised itself into new units. One of them, making engines, will be a joint venture with ambitious Chinese business Geely (which already owns Sweden’s Volvo and its electric vehicle unit Polestar, as well as 51pc of the UK’s Lotus).

Germany has just allowed China’s Cosco to take a major stake in Hamburg’s port, one of the Continent’s most important terminals, while Chancellor Olaf Scholz flew to Beijing this month to drum up trade.

And even though it is a strategic industry, China is massively increasing production of batteries across Europe.

So far this year, China’s Svolt Energy has expanded a big new factory in Germany, manufacturer CATL announced plans for a second big plant in Hungary alongside an existing one in Germany, while three more Chinese manufacturers have unveiled plans for plants in Spain, Germany and Portugal.

There may be lots of talk about creating a European battery industry, but in reality all the major investments right now are Chinese-owned. We see the occasional attempt to limit China’s growing influence over the Continent – such as the German decision last week to block the takeover of two domestic semiconductor manufacturers – but these are very limited. In all the major decisions, the European powers are doing more business with China than ever, and working as hard as possible to increase it.

In contrast, trade frictions with the US are as tense as ever. Only this month, the EU hit out at the subsidies offered to American companies in Mr Biden’s Inflation Reduction Act, complaining that it was protecting its own industries at the expense of European rivals. At the same time, it has complained to the US about subsidies on electric vehicles discriminating against rivals from the EU.

The hypocrisy is breathtaking, given that the EU is pouring huge subsidies into its own green energies and recently passed a ‘Chips Act’ to make itself as self-reliant as possible in semiconductors.

And yet, almost no opportunity is ever wasted to inflame a trade war with the US, while it steadily builds up its trading and investment relationship with China.

In reality, this is a very dangerous path. Europe remains dependent on the US for its security, which the war in Ukraine has made painfully clear. It does not have the means or the willpower to defend itself against aggression. There is plenty of rhetoric about standing up to China, and how the Continent is on the side of the US as it tries to limit China’s ambitions to global dominance, at least economically if not militarily.

But industrial policy counts for far more than words and speeches ever can. It is becoming more and more obvious with its investment decisions that the main EU powers have picked a side – and it is in the East.

‘Almost no opportunity is ever wasted to inflame a trade war with the US’