Watching China in Europe - September 2023

Welcome to Watching China in Europe, a monthly update from GMF’s Indo-Pacific Program. Now more than ever, the transatlantic partners need clarity and cohesion when it comes to China policy. In this monthly newsletter, Noah Barkin—a senior visiting fellow at GMF and managing editor at Rhodium Group—provides his personal observations and analysis on the most pressing China-related developments and activities throughout Europe. We hope you find it useful, but if you would like to opt out at any time, please do so via the unsubscribe button below.

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Closing Window

After a flurry of activity on the Europe-China file in June and July, highlighted by the publication of a European Commission action plan on economic security and the German government’s new China strategy, Europe stopped to catch its breath, as it always does, over the summer. But now it’s back to business. European officials are girding for an unusually intense and consequential period of diplomacy over the coming months, and it will tell us a lot about where Europe stands on China and whether the new transatlantic consensus on “de-risking” is real or a mere mirage. Policymakers on both sides of the Atlantic know that the window for getting things done will close quickly once the calendar ticks over into 2024, a year that will be swallowed up by elections, including presidential votes in Taiwan and the United States, and EU-wide elections to the European Parliament sandwiched in between.

In Europe, the policy challenge is likely to be complicated by the early departures of two of European Commission President Ursula von der Leyen’s most capable allies. Frans Timmermans, the EU’s climate czar of the past four years, has returned to the Netherlands in the run-up to a Dutch election in November. And competition chief Margrethe Vestager may soon bolt for the European Investment Bank. Of the three executive vice presidents who have shaped the work of this Commission since 2019, that would leave only Trade Commissioner Valdis Dombrovskis, whose agenda over the coming months looks incredibly full. The Latvian will make his first trip to China as the EU’s trade chief in late September, a high-stakes visit whose success (or failure) could determine whether the bloc holds a summit with China later this year.

European Leverage

The centerpiece of the trip will be a high-level economic dialogue with Chinese counterparts. But Dombrovskis is planning to spend several days in Beijing, holding a series of other bilateral meetings and giving speeches to the European Chamber of Commerce in China and to an audience at Tsinghua University. The EU-China trade and investment conversation has been close to nonexistent since the collapse of the Comprehensive Agreement on Investment (CAI) following a flurry of sanctions 2½ years ago, and the way forward remains unclear. But there is a new twist: China’s deepening economic slowdown has officials in Beijing scrambling to woo disaffected foreign investors. This gives Europe a degree of leverage that it did not have only a few months ago.

Officials in Brussels are keen to make the most of it. “As much as we value the engagement with China, this time around we are insisting on market access deliverables,” one told me. Expect Dombrovskis to couple a stark message about the deteriorating environment for European firms in China with warnings to Beijing about its deepening relationship with Russia and a robust defense of European de-risking policies based on national security concerns. US Commerce Secretary Gina Raimondo offered a blueprint for engagement with Beijing on her recent trip to China, demonstrating that one can combine an uncompromising message on values and policy positions with an offer of dialogue. The top of the European Commission has understood this. Europe’s biggest member states still have a ways to go.

Put Up or Shut Up

Arguably the bigger trade challenge for Dombrovskis and the EU will come a month later when the EU and the United States are expected to sit down for a summit in Washington—no date has been fixed yet—that feels increasingly like a put-up or shut-up moment for the transatlantic relationship. After years of putting Band-Aids on Trump-era trade disputes and devoting massive time and resources to new dialogue formats such as the US-EU Trade and Technology Council, time is running out for both sides to show they can produce substantive results. EU officials with whom I spoke over the past week are deeply concerned about the state of discussions with Washington on a green steel and aluminum deal. Securing an agreement on critical raw materials in time for the October summit is also looking challenging, they say. “Our sober assessment is that the political instincts in Washington haven’t really changed very much since Trump,” one EU official told me. “The protectionist tinge is still there. It is very strong in the current administration.”

After the latest in a series of meetings between Dombrovskis and US Trade Representative Katherine Tai in Jaipur, India, last month, they promised to intensify the pace of negotiations. There is no appetite on either side for reactivating the US steel tariffs and EU countermeasures that would kick in at the start of 2024 if a deal is not struck. But if we end up with a prolongation of the truce that has been in place since October 2021, instead of an agreement, it would send a terrible signal that would permeate discussions on other transatlantic issues, including cooperation on China. With her fin-de-règne push for the EU to develop an economic security strategy, von der Leyen leaned quite far out of her 13th-floor window in the Berlaymont. Is US President Joe Biden prepared to provide her with a safety net? We will know in a matter of weeks.

Proof in the Pudding

The United States is also talking with other capitals. On September 27, Washington and Berlin will hold an economic dialogue of their own, a format launched by Biden and former Chancellor Angela Merkel two years ago during her final visit to Washington. A US delegation led by Deputy Treasury Secretary Wally Adeyemo and Deputy National Security Adviser Mike Pyle is due to hold talks with German counterparts, led by current Chancellor Olaf Scholz’s top economic adviser, Jörg Kukies. China will be a theme that runs through virtually every aspect of the talks, I was told. The US side is expected to seek clarity from Berlin on the fate of Huawei in the German 5G network and spread the gospel on outbound investment screening, following a long-awaited White House executive order issued in August.

The dust is still settling on the German government’s new China strategy, but there are already signs, as I sketched out in last month’s newsletter, that some figures in the ruling coalition are ready to pursue new hardline policies. Economy Minister Robert Habeck will be giving a series of speeches over the coming weeks that are likely to break new ground on his China policy priorities. Habeck surprised members of his own ministry back in May when he came out in favor of restricting certain investments by German companies in China. In recent weeks, he oversaw the creation of a new “economic security” section within his ministry that is expected to take this agenda forward. Across town in the foreign ministry, the focus over the coming months will be on organizing a robust inter-ministerial coordination mechanism on China policy. As Janka Oertel spells out eloquently in her new book, Ende der China Illusion (The End of the China Illusion), it is high time for Berlin to get past the China it would like to see and adapt its policies to the China that exists today. “The proof will be in the pudding,” one German official conceded to me. “The strategy is out. Now we have to deliver.”