A Defensive Europe in Search of Rebalance
The COVID-19 crisis seems to have deepened the sense that a logic of divergence now prevails between China and Europe. Is a rebalance of the EU-China relationship possible? And if so, how?
Within the past five years, EU-China relations have experienced considerable change. The origin of this change is Europe, even though it came as a response to trends in Chinese governance and policy choices. Under the Juncker Commission (2014-2019), the EU undertook a complete reassessment of relations with China, resulting from three main factors. First, there was the experience of the Commission – particularly the experience of the External Action Service, the EU’s diplomatic service, and the department of trade, or DG Trade – in conducting relations with China. Second, perceptions of China were changing in several European capitals. Finally, there was a new international environment to contend with, characterized by US-China confrontation after the election of Donald Trump in 2016.
A first milestone in the review of relations came in 2016 as the Commission’s “elements for a new EU strategy on China” adopted the concept of “reciprocity” as a guiding principle to conduct relations with China. The release in March 2019 of the EU’s new “Strategic Outlook on China” marked the end of this process of review.
The “Strategic Outlook on China” paper begins with the observation that “the balance of challenges and opportunities presented by China has shifted.” This is a strong statement, breaking with the former emphasis on the Comprehensive Strategic Partnership. The paper also characterized China as a “systemic rival,” a term that reflected both the market distortions created by China’s state capitalism, and the competition between governance models. This change amounted to a formal acknowledgment that the illusion of convergence, long the main conceptual basis for Europe’s engagement with China – namely, the idea that deeper social and economic ties was leading to an embrace of democracy and human rights in China – had been replaced by a logic of divergence. This trend seems to accelerate as a result of the COVID-19 crisis, with the EEAS accusing China of conducting a “battle of narratives” and disinformation operations against Europe, and the discussion in Europe being focused on how to limit European dependence on Chinese industrial power.
Relations in the Xi Era
While US policy debates have had some influence over Europe, a similar logic of divergence having defined US-China relations in recent years, the more critical factor behind the European change of mood has been the leadership of Xi Jinping, and not the actions of the Trump administration.
Since Xi Jinping came to power in late 2012, an increasingly authoritarian system has utilized the revolution in digital technology to build a surveillance state, in direct opposition to the liberal values Europe had hoped China might increasingly embrace. But Europe’s mood change has also resulted from trends specific to EU-China relations, including China’s inflexibility on trade and investment issues; the difficulty in addressing technology transfers in a new environment in which China has become a technology competitor; and an elusive international cooperation agenda. Indeed, despite peace and security having been defined as a “pillar” in the EU-China 2020 agenda for strategic cooperation, adopted in 2013, the record of cooperation is far below the initial expectations.
But questions at the structural level also play a role. In its National Security Strategy, the Trump administration has qualified China as a strategic rival that, together with Russia, challenges “American power, influence and interests, attempting to erode American security and prosperity.” Against the backdrop of this return of bipolarity in world politics, the EU faces the question of how to position itself strategically between the United States and China.
As part of a series discussing European strategies toward China, this article highlights the differences of priorities, goals and perceptions in China and Europe regarding the relationship, and analyses the European response, including the middle-of-the-ground defensive approach that currently characterizes the EU’s China policy. Is it a sustainable approach in an increasingly bipolar international system? Is a rebalance of the EU-China relationship possible? And if so, how?
Mismatched Narratives, Incompatible Goals
The current diplomatic narratives in Europe and in China to describe the EU-China relationship reveal partly incompatible strategic goals and divergent priorities. Europe’s priority goal is to reach a rebalance in the relationship in terms of trade, investment and technology transfers. Because China has remained largely inflexible, the EU has turned its focus inward. In practice, this means the construction of a defensive net to recalibrate engagement with China and immunize Europe from the negative effects of China’s expanding global footprint – including inside Europe.
The “systemic rival” strategy paper last year represented a dramatic departure from the cooperative language of the Comprehensive Strategic Partnership. The term “systemic rival” suggests confrontation, but it neither summarizes nor fully encapsulates the EU’s China policy. That policy, instead, is subtler and less clear-cut.
The strategy paper describes China as being “simultaneously, in different policy areas, a cooperation partner with whom the EU has closely aligned objectives, a negotiating partner with whom the EU needs to find a balance of interests, an economic competitor in the pursuit of technological leadership, and a systemic rival promoting alternative models of governance.” This language makes clear that engagement remains the central paradigm underpinning the EU-China relationship, and it introduces the key notions of balance of interests and technological competition, two issues that are to be addressed through diplomacy and internal measures in Europe.
The strategic paper lists three priorities in EU-China relations:
- Deepening engagement to promote common interests at the global level
- More balanced and reciprocal conditions governing the economic relationship
- Adapting domestically to maintain European prosperity, values and social models
This trio represents a contraction of the number of goals previously pursued by the EU. But beyond the diplomatic language, the first goal is no longer generally seen as realistic one. The second one is Europe’s real priority. The third, meanwhile, is not a foreign policy issue, but essentially an intra-European issue, a major change of focus for Europe that François Godement has described as a “Copernican revolution,” meaning that Europe, rather than place hope in China for changes to its behavior, should focus instead on its own defensive policies.
When conducting its EU policy, China now has to work against a set of constraints – including an increasingly restrictive environment when it comes to access to European technology, attempts to constrain Huawei’s market share in Europe’s telecommunication infrastructure, and a deteriorating image in Europe. China has failed over the past two decades to reach two of its main goals in relations with Europe: the lifting of the arms embargo, discussed in 2004-2005 but never achieved, and the designation of China as having market economy status (MES), an issue visited in 2016. Today, given the turn of the policy debate in Europe and the ongoing securitization of parts of the economic relationship with China, it would be unrealistic for China to define positive goals in Europe. More within reach, it would seem, is to avoid the worst outcomes.
China’s goals must now be defined in more defensive and negative terms. Realistically, China’s best outcome is European fragmentation. Indeed, China has a stake in preserving the status quo in the trade and investment relationship and an easy access to European technology. China also has a strong interest to avoid European unity and full transatlantic convergence on a variety of issues where strong divergences exist, such as China’s human rights record in Xinjiang, technology transfers and Huawei’s presence in European critical infrastructure.
China’s goals must now be defined in more defensive and negative terms. Realistically, China’s best outcome is European fragmentation.
This is not, however, how China’s EU policy is currently framed. Wang Yi, China’s state councilor and foreign minister, maintains a very upbeat description of the state of EU-China relations, and an optimistic tone regarding China’s prospects for progress. In a talk given in Brussels in December 2019, he described EU-China relations as standing at a “new historical starting point.” Wang repeated the usual Chinese line that, for China, supporting European unity and prosperity is a “strategic choice” given the absence of “geopolitical contradictions” and “conflicts of interest.” Further to these declarations, in his annual press conference at the National People’s Congress, Wang Yi repeated that “the relationship between China and the EU continues to be defined by cooperation and demonstrate great potential” despite the context of COVID-19. He also called the two sides to “remain each other's comprehensive strategic partners and not become systemic rivals.”
But this upbeat and positive statement stands in stark contrast with the list of problems enunciated by China’s ambassador to the EU, Zhang Ming, also in December 2019. Ambassador Zhang concentrated his criticism of Europe on two main issues. First, he argued that investment screening and Europe’s discussions regarding the participation of Huawei in the construction of the continent’s 5G network were leading to a climate of “suspicion” among Chinese entrepreneurs, risking what he characterized as “disastrous” consequences for Europe. Second, he attacked Europe’s “unjust and dishonest rhetoric and behavior” with regards to China’s human rights record. This shortly followed the European Parliament’s awarding of the Sakharov Price to Ilham Tohti, a Uighur public intellectual and defender of Xinjiang autonomy who is now serving a life sentence in China.
At the time of writing, the COVID-19 crisis has accelerated EU-China divergences and brought to a new light the issue of offense versus defense in China’s policy towards the EU. China is conducting an offensive battle of narratives through some of its embassies to combat the notion that its initial mismanagement of the disease outbreak in Wuhan at the end of 2019 is one of the root causes of the global pandemic. It also seeks to capitalize on the successful containment of the spread of the disease domestically, by promoting more actively its narrative of superiority of the Chinese governance system over liberal democracies and placing more resources on suppressing the attention that the Taiwanese democracy has in fact been more successful than China against the epidemic.
The COVID-19 crisis has thus led to an escalation of the problem of mismatched narratives to a specific battle of narratives, that intersects with the issues of competition between governance models and the question of how to neutralize disinformation campaigns from authoritarian states. The EU’s May 2020 disinformation report mentions “the efforts of state actors like China to deflect blame, to use the pandemic to promote their own governmental system and enhance their image abroad,” but also to spread disinformation regarding for example “clandestine US biological laboratories.” The controversy around the publication of the report – that the Chinese mission to the EU worked to water down the conclusions by influencing the EEAS – also suggests that the issue of disinformation and influence operations is moving cognitive divergences up to the level of open conflictuality.
Raising Europe’s Defenses
In line with the “Copernican revolution” to which Godement referred, a process of “securitization” of Europe’s trade and investment relations with China is in motion. This is Europe’s attempt to reach a less disadvantageous balance by acting at home given the extreme difficulty of negotiating Chinese concessions. At the EU level, this has materialized in three main actions: 1) the adoption of trade defense measures; 2) an investment screening mechanism; and 3) a toolbox of 5G security measures to manage “high-risk vendors” (read Huawei).
In the era before Xi Jinping, the structuring debate for EU-China relations was the European complaint that the EU-China strategic partnership was strategic in name only given the lack of substance in bilateral cooperation. To this, Premier Wen Jiabao was known to respond in the 2000s that the relationship was strategic because of trade only. At 1.7 billion USD per day in 2018, trade is indeed a major interest for both sides. But Europe’s 185 billion USD trade deficit reflects the market distortions induced by China’s state capitalism.
This is the wider context to the EU’s decision to reform its trade defense instruments. The reform results of the EU’s decision not to grant market economy status to China, but also going around the problem. The EU’s trade defense instruments circumvent the WTO distinction between market and non-market economies in order to maintain the capacity to impose anti-dumping and anti-subsidies tariffs on violators on the basis of a new methodology that at least matches the WTO provisions. To elaborate on this new policy, the Commission released an in-depth study running to 450 pages detailing the various violations of market principles by China, starting from the notion of a “socialist market economy” as enshrined in the PRC Constitution, and outlining the characteristics of state-owned enterprises and the public procurement market in China in specific sectors, including steel, aluminum and energy.
The adoption of an investment screening mechanism by the European Union reflects the changed politics of China policy in Europe. The surge of Chinese investment in the EU has raised highly political questions regarding intangible technology transfers and the risks of excessive leverage because they concentrate on critical infrastructure and access to technology in support of Chinese industrial policies. The problem is less about the quantity, therefore, than about the quality. Chinese foreign direct investment in the European Union was worth EUR 17.3 billion of completed transactions in 2018, after having peaked at EUR 37 billion in 2016. This decline continued in 2019.
But the source of Europe’s defensive reaction lies not in the volume of transactions but rather in the nature of the targets of Chinese investment. These have included technology companies such as Kuka, the German robotics firm, and semiconductor companies in the Netherlands, Sweden and France. Critical transportation infrastructure, such as the Piraeus Port Authority in Greece, has been another target. In fact, a sizable share of Chinese FDI in Europe is real estate property in the UK. Such investment generally does not pose a severe national security threat – though the US now screens real estate investment to avoid the purchase of property close to sensitive military sites.
The EU formally adopted the investment screening regulation in March 2019. The regulation, which creates an information-sharing mechanism for the Commission and member states on incoming foreign investment in Europe, is scheduled to be operational in October this year. The communication system currently being built by the Commission and the member states should be seen as a welcome development, creating the conditions to exert oversight over potentially problematic transactions that risk weakening Europe. Such transactions involve particularly sensitive information, and therefore the sharing mechanism comes with a strong guarantee of confidentiality (article 3.4 of the regulation). Once in effect, the investment screening regulation will face the complicated challenge of due diligence, as Member States where there is currently little oversight will have to increase their monitoring of incoming foreign investment. Due diligence in Europe is complicated by the fact that European subsidiaries of a non-European companies can invest freely in other EU member states.
The EU Commission is not an executive branch for Europe. Rather, it creates consensus and promotes convergence among member states on best practices. By embedding all member states in a policy-making discursive process, it changes public policies at the national level. As a result of the investment screening discussions in Brussels, the number of member states with an investment screening system in place increased from 12 to 15, with Hungary, Lithuania and Latvia most recently adopting screening systems. One of the changing dynamics of China policy in Europe, it is particularly revealing that Northern European countries, those initially having a negative view of investment screening based on their commitment to liberal economics, have now embraced screening out of their new appreciation of the China challenge. One clear example of this is the case of the Netherlands.
In practice, the Commission or any member state can raise concerns about a particular transaction. However, the final decision power as to whether to block the transaction or impose remedies stays with the member states. Under the regulation, the Commission can “issue opinions when an investment threatens the security or public order of more than one Member State, or when an investment could undermine a strategic project or program of interest to the whole EU, such as Horizon 2020 or Galileo.” In practice, a controversial transaction in critical infrastructure or in the area of high technology would arise an intra-European debate, and politics would determine the outcome. But overall, the regulation creates a more constrained environment for Chinese companies to conduct sensitive business in Europe.
Overall, the regulation creates a more constrained environment for Chinese companies to conduct sensitive business in Europe.
It is important to bear in mind that the mechanism was built with national security and public order in mind, and with firm resolve that the mechanism would not become a bureaucratic tool of industrial policy serving Europe’s competitiveness. EU officials insist that Europe remains open for business and that investment screening will be conducted in a restrictive appreciation of risks – national security, and not economic interests. And screening investment is a work in progress, given how new it is for the EU. At his hearing at the EU Parliament, the new trade commissioner Phil Hogan made clear that it was his intention to “beef up” the screening mechanism to “protect our critical technologies and our critical infrastructure,” and that this would take a more “harmonized approach” for all member states of the EU. The COVID-19 crisis has so far accelerated the defensive trend in Europe with regards to foreign investment, with several national leaders and Commission President Von Der Leyen calling for vigilance to avoid that foreign actors acquire cheap European critical assets during these times of economic weakening in Europe – guidance was issued by the European Commission, with specific emphasis on health, medical research, biotechnology and critical infrastructure.