Welcome to the 48th issue of the CEEasia Briefing.
In this issue, we dissect the following topics:
- EU-China summit in December
- Challenges around arms deals between Poland and South Korea
- Japan to buy US Steel
- EU-India MoU on semiconductors
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1. EU-China summit in December
What’s going on? The EU-China Summit held in Beijing in December, addressed crucial issues such as the Russia-Ukraine war, the Middle East situation, and climate change. The summit also showcased the EU’s concerns about unfair trade practices and structural challenges posed by China. But despite open discussion, only few concrete outcomes were achieved.
Going deeper… The EU-China Summit this year was the first one held in person since 2019. The EU sought frank dialogue on various issues; President von der Leyen emphasized the urgency of tangible steps by China to address the trade imbalances and unfair Chinese economic practices, with an estimated deficit of almost €400 billion in 2022, and reiterated calls for de-risking instead of decoupling. The EU also confronted China about firms supplying Russia with dual-use goods.
However… The summit produced few tangible outcomes; Beijing has dismissed Europe’s trade imbalance concerns and denied overcapacity in Chinese electric vehicle production. Amid China’s domestic economic challenges and the goal of achieving technological leadership by 2035, the country strategically aims to counter EU protectionism and the EU’s de-risking policy. There was limited progress on trade, which highlights the EU’s challenges in establishing a new framework under the de-risking strategy. Xi rejected EU trade deficit claims, emphasizing the need for fair terms. China also showed reluctance to influence its ally Russia, with Wang Luton suggesting EU countries communicate directly with Putin regarding the war.
That said… Xi seemingly displayed attentiveness to the EU’s list of 13 companies accused of supplying dual-use goods to the Russian military, arguing that Beijing maintains its export control regime. In addition, the two sides also agreed on the urgent need for de-escalation in the Israeli-Gaza conflict and emphasized the two-state solution as the sole path forward. This is despite China stopping short of condemning Hamas’s attack last October.
2. Potential cancellations of South Korea-Poland arms deals
What’s going on? The new government in Poland elected last October signaled in December it might cancel arms deals with South Korea signed by the previous government over the past two years. Amid this, Financial Times reported last month that South Korea officials were increasingly concerned about the potential cancellations.
Going deeper… In December, the newly elected Marshal of the Sejm (i.e., speaker of the lower house of the Polish parliament) said that the defense contracts ‘may be invalidated’. Since then, several other officials (including the new Prime Minister Donald Tusk) suggested that the deals will subject to review and analysis. The major concerns seem to be around financing of the second round of arms deals that are worth more than $22 billion and were announced earlier this year. These followed the 2022 deal worth $13.7 billion. As the amount exceeds the statutory lending limit of the Export-Import Bank of Korea (KEXIM), Seoul has reportedly proposed a syndicated loan plan to be financed by local Korean banks. However this has been denied by Tusk in late December.
This means… Cancellation of such a major arms deal would significantly strain the bilateral relations between the two countries. But for now, there are little alternatives to such a scenario; Western competitors are unlikely to offer better value for money than that allowed by South Korean large-scale arms production, not mentioning the generous terms of funding that have become the backbone of the country’s export strategy. Most recent reports suggest South Korean officials are in talks with the Polish government to ensure the deals go through.
3. Japan to buy U.S. steel
What’s going on? Japan’s largest steelmaker Nippon Steel has announced it would buy the US company U.S. Steel for $14.9 billion. The agreement comes months after the US manufacturer confirmed it was looking for a buyer, but has rejected smaller bids. The said transaction is expected to close in the mid-2024, and should also include the purchase of the U.S. Steel factory in Košice in eastern Slovakia. However, before the deal is finally closed, it must overcome challenges by the US.
Going deeper… U.S. Steel agreed to its take-over after Nippon Steel placed the highest bid on the purchase, countering the US iron supplier Cleveland-Cliffs and the Indian steel giant ArcelorMittal. Cleveland-Cliffs offered to pay $7.3 billion in August 2023 which was almost half the amount offered by Nippon Steel.
For the U.S. Steel factory in Košice, this means… if the deal goes through, the Japanese buyer will either have to heavily invest in new technologies or look for a new buyer, since Nippon Steel focuses primarily on the US market. Potential prospects would most likely be Chinese companies which have already expressed their interest in the past or major local finance groups, should any of them be interested.
However… The powerful United Steelworkers (USW) union, and both Republican and Democratic Senators have been criticizing the deal as a threat to US national security, despite Japan being one of the main US allies, dependent on U.S. military support. The critics would prefer the Biden administration blocking the acquisition under a federal law that allows it to do so if there are potential security risks related to the foreign investment. Indeed President Biden, who has pledged to revive US manufacturing and has already adopted a rather protectionist Inflation Reduction Act in 2022, has expressed concerns about the deal’s potential impact on the supply chains and said it deserved scrutiny.
Moreover… The other question is, what this will mean for US-Japan relations, especially if the deal is blocked. The two countries have been trying to strengthen defense cooperation in regards to China and the DPRK in the Indo-Pacific as Japan is crucial for the US presence in the region.
4. EU-India MoU on semiconductors
What’s going on? During the joint Trade and Technology Council call, India and the EU inked a Memorandum of Understanding (MoU) on semiconductor cooperation. The two sides are keen to build large-scale semiconductor supply chains and cooperate on innovation.
Going deeper… Semiconductors are a strategic commodity and crucial economic element. Chips have become even more critical in the aftermath of Covid-19, which highlighted the importance of supply chain diversification and resilience. In the light of the EU’s aim to de-risk its relations with China, the block is pursuing diversification of key commodities. The agreement is expected to align India with the EU on the future of chip-making and its supply chains. Under the MoU, India and the EU intend to share experiences, best practices, and cooperate in R&D and innovation among universities, research institutions and businesses.
This means… Although the MoU serves as a declaration of intent and is not legally binding, it signals an intention to deepen collaboration and create resilient value chains. India has established its Semiconductor Mission, under which Delhi commits to invest $10 billion into the sector and has already chosen several strategic localities for new chip-making facilities. Developing the semiconductor industry will not only serve an economic rationale, but it will also reduce Delhi’s over-reliance on imports from China, enhance its national security and strengthen international position. The European Chips Act, which has recently entered into force, addresses similar issues related to boosting EU’s capacities and building a more resilient semiconductor ecosystem.
Quick takes on CEEasia developments
CHINA | In 2024, Huawei will commence the construction of a mobile phone network equipment factory in France. Despite concerns in Europe about the use of Huawei’s 5G technology, the company intends to invest €200 million in the initial phase, and the factory is anticipated to be operational in 2025.
SOUTH KOREA | South Korea and the EU have initiated talks on a digital trade agreement with the objective of fostering broader cooperation in online and data industries. The discussions included topics such as data transfer, personal information, and cybersecurity.
TAIWAN | Taiwan and the Czech Republic inked an MoU to help rebuild Ukraine’s healthcare system, including establishing rehabilitation facilities and delivering medical equipment and healthcare services to Ukraine.
JAPAN | Japan and France issued a new roadmap on cooperation to strengthen their presence in the Indo-Pacific region amid tensions in the Taiwan Strait and North Korean missile tests. The two also agreed to reinforce bilateral ties in defense, maritime security, space, and other areas.
MYANMAR | The EU imposed additional sanctions on the military regime in Myanmar. The targets include a Union Minister, two members of the State Administrative Council, a chief commander involved in airstrikes against civilians, and two firms supporting the military regime through income generation and arms provision.
