Watching China in Europe - August 2021

Welcome to Watching China in Europe, a monthly update from GMF’s Asia Program. Now more than ever, the transatlantic partners need clarity and cohesion when it comes to China policy. In this monthly newsletter and the WCIE podcast series, Noah Barkin—a veteran journalist, managing editor at Rhodium Group and a senior visiting fellow at GMF—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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Rules, Regulations & Working Groups

In Europe’s meandering quest for a China policy, there are some reasons for optimism as we head into the languid depths of summer. After months of internal wrangling, the EU has agreed to give its connectivity strategy some “geostrategic” muscle. It is ploughing ahead with its Indo-Pacific strategy, ramping up outreach to allies like Japan, Australia, India, and South Korea. And it has a dizzying array of arrows in its regulatory quiver that will soon be firing off in China’s direction. These include measures to address foreign subsidies, level the public procurement playing field, and force companies to vet their supply chains for human-rights abuses, as well as new tools for responding to economic coercion. At the end of July, EU officials began holding a series of virtual meetings with their U.S. counterparts, breathing early life into the 10 working groups that make up the Trade and Technology Council announced during President Joe Biden’s visit in June. “When you add up all the mechanisms we have in the pipeline, it is going to become clear to China pretty quickly what we mean when we call them a systemic rival,” one EU official assured me.

But No Political Consensus

But probe beneath the surface of the rules, regulations, and new international coordination structures and it is clear that all is not well on the China front as we head into an uncertain transition phase in Europe, with elections looming in Germany and France. In Brussels (and many other European capitals) these days, there is growing resentment over what is seen as an attempt by Chancellor Angela Merkel and President Emmanuel Macron to turn the diplomatic relationship with China into a 2+1 affair. The latest in a series of videoconferences between Merkel, Macron, and President Xi Jinping in early July had several zingers in it which perplexed EU officials, including—according to the Chinese readout—a call by Merkel for the EU and China to conclude their frozen investment agreement “as soon as possible” and a suggestion that Germany and France could soon join a development partnership between China and African countries. “Our concern is that China gets the impression that Germany and France are the EU,” the EU official said. “Merkel will soon be gone and Macron will be in election mode. In the long-term it really isn’t healthy.”

At the root of these intra-European tensions is a political divide over how to move forward with China that remains as wide as ever, more than two years after the EU came together to label it a partner, competitor, and rival. This means that European capitals head into the summer with no clear idea about how they will be engaging with China in the second half of 2021. There was unanimous support on the Merkel-Macron-Xi call for an EU-China summit to be held at an “early date.” But as of early August, no one in Brussels could say when that might be. The only sure thing is that it will not be an in-person 27+1 meeting with Xi , as promised last year by European Council President Charles Michel. As one German official put it to me, “It is one thing for Xi to say yes to a 27+1 summit hosted by Angela Merkel in Leipzig. It is quite another for Xi to come to an EU summit after the German election, when Merkel is no longer in control, and where other countries may be banging on the table about Xinjiang and Hong Kong.”

The CAI is Dead, Long Live the CAI

With the dust settling on Biden’s Europe trip, I have detected some remorse in Berlin about the contents of the G7 and NATO statements of June, which were described to me as going “two to three turns too far” for Germany in terms of their criticism of China. Some officials are even questioning whether the term “systemic rival” should be quietly dropped, deeming it an unhelpful hindrance to constructive relations with Beijing. Others are still holding out hope that the EU-China Comprehensive Agreement on Investment (CAI) can be revived. If China was open to sending a signal that it is not serious about enforcing its retaliatory sanctions, I was told, perhaps the deal could be saved. One way to do this, the German official said, would be to invite members of sanctioned Berlin think tank MERICS to a conference in China. In Brussels, officials shake their heads at these musings, saying they do not believe the agreement will be back on the agenda for years—if ever.

So on some of the most important issues surrounding the China relationship, there is nothing resembling a consensus in Europe as we head into the traditional August lull. And the fear—despite suggestions from High Representative for Foreign Affairs and Security Policy Josep Borrell that the EU could take a new look at its China strategy after the summer—is that no resolution will be possible until mid-2022 at the earliest, when the dust has settled on the German and French elections. In the meantime, the technocrats will remain busy, rolling out new regulations and convening transatlantic working groups—in the hopes that a clear political direction from the member states will eventually materialize.

Consumer of Attention

In Washington, officials are keenly aware of the risks of engaging with a Europe where this direction is lacking—and is unlikely to ever fully materialize. As one well-connected former National Security Council official told me, the Biden team has been going out of its way in recent months to engage with Europe on China—but at some point soon, it will want to focus its attention on other priorities. If transatlantic working groups are sucking up bureaucratic bandwidth, but not delivering results—because of a lack of political support or lingering divisions among the EU members—then transatlantic friction may be inevitable. “Europe is a massive consumer of diplomatic attention when it should be a net contributor,” the former official said.

Already, some of the signals coming out of Europe since the Biden tour are raising eyebrows in Washington. It did not go unnoticed, for example, that Josep Borrell promised to align the EU’s connectivity strategy with China’s Belt and Road initiative during a meeting with his Chinese counterpart Wang Yi in Uzbekistan in late July. There are also concerns about what a potential German government led by Armin Laschet would mean for transatlantic cooperation on China—despite murmurings from some members of his team that a shift from Merkel’s engagement-first approach is inevitable. “People are whispering in our ears that we’re going to see an interesting shift, especially if the Greens are in the coalition, but if you look at what Laschet is saying then it tells a different story,” a senior administration official told me. U.S. officials have not engaged with Laschet directly (a request by the German frontrunner to meet with Secretary of State Antony Blinken on a recent visit to Berlin was politely declined, I was told). But there have been a flurry of visits to Washington over the past month—including from the head of the Asia division in the German foreign ministry—to reassure U.S. officials that Germany will be a reliable partner on China. Merkel’s own visit in July provided little of substance on that front.

German Industry

In the meantime, German companies that invested heavily in China over the past decade are struggling to strike the right balance. The Federation of German Industries (BDI) put out a discussion paper last month that urged companies to establish their own “red lines” when dealing with China and other authoritarian states. Privately, BDI officials describe a shift in the way that some of the biggest German investors in China view the market. “They would never do so openly, but the big companies are now saying that there is no alternative but to reduce their China exposure,” one senior official told me. “They say they just need time. But there is a recognition that a strategic shift is necessary. China is increasingly seen as a risk.”

A couple of new trends are evident. First, some big German companies have begun to explore the idea of splitting their operations into two spheres with different standards to cope with geopolitical tensions that are threatening their supply chains. Second, German executives say that their China operations are becoming more Chinese—with far fewer expatriates in positions of authority and what some executives describe as a growing cultural divide between these operations and headquarters back home. These dynamics—fueled by pandemic-related travel restrictions, growing nationalism in China, and Xi Jinping’s accelerating push for technological self-reliance—have major implications for how future German governments think about the economic relationship with China and questions of dependence. “We will have to position ourselves differently,” the senior industry official said. “We may not be hearing this in the German election campaign, but by the middle of next year, once the French election is out of the way, we will need to have the broader discussion about the economic relationship that the politicians have been dodging.”