Watching China in Europe - October 2022

Berlin, We Have a Problem

It has been nearly a year since the three parties in the German government unveiled a coalition agreement that promised a new approach to China. In their governing blueprint, the parties condemned human rights abuses in Xinjiang, voiced concerns about Beijing’s security crackdown in Hong Kong, and warned against changes to the status quo in the Taiwan Strait. They also vowed to forge a more united European approach toward Beijing and to work with like-minded partners to reduce strategic dependencies on China. In the future, they declared, German foreign policy would be more coherent and consistent, with ministries working closely together to develop common strategies. The reality, unfortunately, has been quite different.

I will not go into the well-documented differences in Berlin over how to respond to Russia’s war on Ukraine. But I would like to delve into the government’s struggles to send a clear message on China policy. One German official I spoke to recently summed it up this way: “The one area where the US and China seem to agree is that both are thoroughly fed up with the conflicting messages coming out of Berlin.” For nearly a year, Foreign Minister Annalena Baerbock and Economy Minister Robert Habeck, both from The Greens, have been trying to turn the language in the coalition agreement into concrete action—and for nearly a year, Chancellor Olaf Scholz and his advisers have been resisting. At first, the differences were obscured because all eyes were trained on Ukraine. And, after all, we did have the occasional hint from Scholz that he found China’s actions in Xinjiang problematic and the dependence of some German firms on the Chinese market worrisome.

Do Not Rock the Boat

Now the differences are becoming too stark to paper over. Scholz’s Chancellery has pushed back against plans by his top ministers—first reported in this newsletter—to veto the Chinese shipping firm COSCO’s bid for a stake in the Hamburg port. The people around Scholz have also signaled internally that they are uneasy with plans by Habeck and Baerbock to rein in government support for firms investing in China. Some officials had expected the coalition to finalize in late August plans to put a ceiling on the level of government guarantees that German firms could receive for investments in any single country—not exactly a major change of policy, nor one that would have singled out China. But even this modest proposal has encountered pushback. Scholz, meanwhile, has been making plans to head to Beijing, without a proper discussion about how such a trip fits with the promises made in the coalition agreement and with the China strategy that Baerbock’s Foreign Ministry is working on. “Decision-making has migrated to the Chancellery, and the Chancellery is dictating, not consulting,” one government official in Berlin told me. “The ministers are on a very short leash and they are not always in the loop.”

When it comes to the China strategy, I was told, the internal diktat from the Chancellery is that the public document that emerges next spring must not damage relations with Beijing. One G20 diplomat who has spoken with members of Scholz’s team in recent months put it this way: “They want to avoid rocking the boat with China, especially in the current economic climate. It’s about maintaining the status quo for as long as possible. If you have to pull out from China at some point in the future, you pull out. But until then, you make as much money as you can”.

China Trip Delayed

The Chancellery was angered, I am told, with the statement issued by G7 foreign ministers in August following China’s military exercises around Taiwan. Backed by Baerbock, the statement noted that there were no changes to the “one China” policies of G7 members “where applicable”—a line that drew a furious reaction from Chinese diplomats. A lack of trust between the Chancellery and the top ministries may be one reason why Scholz’s team has been murky about his plans to travel to China. After informing some members of the government that he would fly to Beijing on November 4, the Chancellery reversed course last week and quietly told people that the trip was being pushed back for unspecified reasons. Some European diplomats are breathing a sigh of relief: “Honestly, I am glad that Scholz has not gone to China yet, because I’m very worried about what he will and won’t say when he does go there,” one told me. German officials say Scholz remains determined to head to Beijing before the end of the year, in part to prepare bilateral government consultations that are tentatively scheduled to take place in Germany in January. It will be interesting to see how much facetime he gets with President Xi Jinping at the G20 summit in Bali in mid-November.

In the meantime, Chinese diplomats are sending warnings to the government about its pursuit of a harder line. Shi Mingde, a well-connected former Chinese ambassador to Germany, spent several days in Berlin in September meeting with a wide range of government officials—including Scholz’s chief of staff, Wolfgang Schmidt—think tankers and industry representatives. A fluent German speaker, Shi is usually in charm-offensive mode when he passes through Berlin. But this time was different, according to several people who participated in his meetings. One summed up Shi’s message this way: “If you continue down this path with China, then you’ll be sorry.” Another said Shi noted that Beijing was in the process of finalizing concrete deliverables with Paris ahead of a looming visit by President Emmanuel Macron. “He made clear that Germany needed to get its act together or we would be left behind,” the second person said. In March 2019, Macron, declaring an end to Europe’s era of naivety with China, invited Chancellor Angela Merkel and European Commission President Jean-Claude Juncker to Paris to meet with Xi. The aim was to send a signal to the Chinese leader that Europe stood united. Three-and-a-half years later, it would be a damning indictment of European China policy if Scholz and Macron went along with Beijing’s attempts to play them off against each other.

Shi’s message to the government is not so different than the one being sent by the German firms that see the Chinese market as vital to their future. At a meeting between Habeck and leading German companies in late September, the message from a top CEO, in the words of one person briefed on the exchange, was: “Why the hell do we need a China strategy? Wandel durch Handel [change through trade] has served us well.” A letter sent to Habeck by the German Chambers of Commerce and Industry days later echoed a message from Shi, warning that a veto of the COSCO deal would do serious damage to Germany’s image as a business location and hurt relations with China. A new China paper being finalized by the Asia Pacific Committee of German Business ahead of its annual event in Singapore in November is also expected to echo Chinese warnings about any steps to reduce German government support for investments in China. It is tentatively titled Open Up Opportunities, Reduce Risks– a nod to those firms that want to put the primary focus on the allure of the Chinese market.

TTC Trouble

As Berlin agonizes over its approach, officials in Washington are watching with growing concern. As my Rhodium Group colleague Reva Goujon underlined last week, the Biden administration is preparing to ratchet up technology controls in a way that is likely to make life uncomfortable for its allies in Europe. A delegation from Washington is due to travel to Berlin in the coming weeks to discuss, among other issues, closer cooperation on export controls, outbound investment screening, and supply chains. The visit comes amid growing frustration in Washington with the signals coming out of Berlin and Paris on China.  Francois Godement of the Institut Montaigne in Paris summed it up well on Twitter: “If the discourse on strategic autonomy boils down to our right to talk and trade with strategic rivals—and enemies—while we dither on other issues, we will be marginalised as Europe”. Let us hope someone is listening in the Élysée.

Europeans, for their part, are not thrilled by what they see as growing US protectionism and disdain for multilateral solutions. Reinhard Bütikofer, a strong supporter of transatlantic cooperation in the European Parliament, warned last week that US-EU trade relations risked descending into crisis because of a long list of US policies, including protectionist measures in the Biden administration’s Inflation Reduction Act and its pursuit of plurilateral agreements like the Indo-Pacific-Economic Framework and Chip 4 Alliance. An EU official expressed concern to me last month that the EU-US Trade and Technology Council (TTC) may be close to a “breaking point.” For now, there is little optimism that the third TTC summit, due to be held by the end of this year, will produce the big deliverables some believe are necessary to justify the time and resources being thrown at it. EU Trade Commissioner Valdis Dombrovskis will be in Washington next week for meetings aimed at easing trade tensions and injecting some momentum into the TTC.

Taiwan Talks

Against this backdrop, Brussels is gearing up for intense discussions on China, with EU foreign ministers, leaders, and national Asia-Pacific directors due to meet separately to discuss relations with Beijing—all in the second half of this month. Taiwan is expected to be a key focus of the discussions, amid US pressure on Europe to develop a framework for sanctioning China before a possible conflict in the Taiwan Strait erupts. Expect Taiwan to be a growing focus within the G7 too, as Japan prepares to assume the presidency of the group of rich nations and new governments in Italy and the United Kingdom tilt the G7 balance in a more hawkish direction. It was interesting to see Germany’s ambassador to the United States, Emily Haber, last week publicize the fact that she had hosted a meeting on Taiwan with US lawmakers and diplomats. I read this as a signal to the White House that Germany is ready for this sensitive discussion, and a signal to the Chancellery in Berlin that avoiding it is not an option. We will see how these dual messages are received.

China’s relationship with Russia is also likely to be a discussion point in Brussels this month. In recent conversations with their Chinese counterparts, EU officials say they have detected cracks in Beijing’s support for Russia. Chinese diplomats have removed their talking points blaming NATO for the conflict in Ukraine and made clear that the use of nuclear weapons by Russia would be viewed as totally unacceptable in Beijing. But the Chinese side is also probing for signs of European weakness. “They let us know that our position on Russia comes with a high cost,” one EU official told me. “They point out that the winter could be very cold. They are trying to figure out how serious we are about our policies. This is a test of the resolve of Western democracies.”