Dutch advisory council urges EU to seek China deal – but brace for backlash - South China Morning Post

To correct growing economic imbalances, policymakers advise taking stronger defensive measures, despite risk of rising domestic costs

The Netherlands and the EU should press for a trade deal with China to address imbalances, but must be ready to consider measures that could invite retaliation – and bear the associated costs – according to members of a council that advises the Dutch government.

The recommendation marks a significant shift in mindset for one of the European Union's most committed free-trade nations as the next round of China-EU trade talks in October approaches.

Both sides traded fire again this week, with EU trade chief Maros Sefcovic urging Beijing on Wednesday to deliver concrete results by October or face "harsher measures", and China's Ministry of Commerce hitting back on Thursday by urging Brussels to stop "threatening market closure at every turn".

"It would be quite important to get an agreement with China that will be beneficial for both," Ab Klink, a member of the Netherlands Scientific Council for Government Policy and a former health minister, told the South China Morning Post on Monday. "On the other hand, if it's impossible to reach an agreement, then you have to think as the European Union about the next options."

Klink chaired the project group behind a report that the council presented to the Dutch government on Thursday. Focusing on "rebalancing trade" and "boosting innovation", the report urged the Netherlands to reduce its economic dependencies in an era of increasing geopoliticisation.

The Netherlands is no stranger to such actions. The report's introduction highlights Washington's successful pressure on The Hague to restrict tech giant ASML from exporting advanced chipmaking machines to China in 2019, then expanding that ban in 2023. Additionally, the ongoing saga surrounding Dutch chipmaker Nexperia and its Chinese owner, Wingtech, has unleashed chaos across the European automotive supply chain.

The report acknowledged that acting would carry its own costs. Government support would be needed, trading partners might retaliate, and prices could rise – drawbacks that the scientific council said had discouraged the EU and member states from employing such robust responses.

But the report urged policymakers to weigh these costs against the potential damage of geoeconomic coercion, trade shocks and long-term economic costs, and to "seriously consider" all policy options, even if they prove painful.

The Netherlands was not trying to strike first against China, and an agreement would be greatly preferable to a trade conflict, Klink said. However, he noted that the Netherlands and Europe must develop a similar policy capacity to China for a worst-case scenario.

This "strategic symmetry" – where Europe would pursue the same policy towards China that China pursues towards Europe – is one of three potential approaches presented by the council to address the trade imbalance with China.

International coordination could be another option, as the report said it was preferred by economists and proposed by the IMF, where countries with excessive surpluses or deficits work cooperatively on macroeconomic adjustments.

French President Emmanuel Macron has been advocating for similar coordination between Europe, China and the United States, but so far with little visible success. The report also rated it unlikely, noting that it would go against China's national strategy while no international body could enforce the changes.

Stronger trade defence measures are the third path presented by the report, as it deemed the EU's current instruments – designed for product-by-product review – inadequate for what the report called economy-wide market distortions.

"The goal for us is still open, free trade. It's not about closing our markets, but about making sure there is this level playing field," said Haroon Sheikh, a research fellow with the council and member of the report's project group.

"We are cognisant of the legitimate concerns that China has here, and what we hope is that China sees the same thing in the situation with Europe," he said, noting that China should understand the EU's legitimate concerns about China's "artificial advantage" that could lead to the deindustrialisation or the destruction of European industries.

As an independent advisory body, the scientific council provides only analysis and does not make decisions. The more challenging part, some analysts said, would be implementation.

"It's easy to agree on the idea that action is needed – the sooner the better, the more the better – but the Netherlands trying to use its choke point … that is the difficult one," said Frans-Paul van der Putten, founder of Dutch consulting firm ChinaGeopolitics.

The fact that China was catching up in the semiconductor sector, where the Netherlands has held a commanding lead, was another source of concern, according to van der Putten.

Media reports that China had begun manufacturing home-grown immersion deep-ultraviolet lithography machines sent ASML stocks falling in July. While analysts said China's progress remained modest, further restrictions were seen as likely to accelerate Beijing's domestic push to build its own semiconductor industry.

Article by Xiaofei Xu.