Watching China in Europe—July 2024

Sputtering Motor

Europe’s Franco-German engine hasn’t been firing on all cylinders for years. But until now, the sputtering motor could be blamed on personality differences, divergent policy ambitions, and external traumas such as the war in Ukraine, which has shifted Europe’s center of gravity eastward, away from Berlin and Paris. Following the European Parliament (EP) election and the first round of French legislative elections on Sunday, a new dynamic has taken hold. France’s Emmanuel Macron and Germany’s Olaf Scholz have emerged so weakened from the votes that their ability to steer policy at home and in Europe is in greater doubt than ever before. This frailty is likely to infect all areas of policy, including how Europe manages its increasingly strained relationship with China.

With his shock decision to call an early national vote after a drubbing for his party at the EU level, Macron has condemned France to three years of political paralysis and opened the door to the country’s first far-right government since Vichy. If it was not clear before, last Sunday’s vote confirmed that Macron’s gamble is likely to go down as one of the biggest political blunders in modern European history. Germany, for its part, is girding for a prolonged period of political inertia as Scholz’s loveless coalition limps toward the next federal election in the autumn of 2025 with little sense of direction. In Berlin these days, agreeing on a budget to fund the government counts as a massive victory.

China Compass

Germany’s summer will not be nearly as hot as France’s. But three state elections in eastern Germany in September are likely to deliver resounding victories for the far-right Alternative for Germany, raising the political temperature in Berlin by several degrees. All of this is happening at a time when another political miscalculation of epic proportions appears to be playing out in the United States. President Joe Biden’s unsteady performance in his debate with Donald Trump has sparked new questions about his decision to seek a second term and triggered calls for him to bow out of the race. The return of Trump and what promises to be a more confrontational approach to Europe, just as Germany and France are descending into political tumult, is a deeply unsettling prospect for governments across the continent.

There is, however, a silver lining in all of this. Unlike Biden, European Commission President Ursula von der Leyen, who has set the European agenda on China over the past year, is well positioned to return for a second term. And she would do so as part of a more capable and united leadership team in Brussels that includes former Portuguese Prime Minister Antonio Costa as president of the European Council and Estonian Prime Minister Kaja Kallas as the EU’s top diplomat. If von der Leyen wins the support of the European Parliament later this month, weakness in the major national capitals would be mitigated by greater stability and a clear foreign policy compass in Brussels—including on China.

Dirty Deal

The immediate challenge will be to bring the outgoing Commission’s plans to impose duties on electric vehicle (EV) imports from China to a successful conclusion in the face of what EU officials have described to me in recent weeks as intense pressure from Scholz and his entourage to do a “dirty deal” with Beijing. In the run-up to the Commission’s June 12 announcement of provisional duties, officials were confronted with an array of wild ideas from the Chancellery, including a suggestion that the Commission’s anti-subsidy case be shelved altogether in exchange for a token reduction in China’s tariff rates. “We explained to the German chancellor that lowering tariffs into China is not a solution,” one official told me. “What you would be doing is creating export opportunities for German manufacturers while maintaining the subsidization injury on EVs. It would not fly in any country but Germany.” The fact that the Commission ignored the pressure from Berlin and pressed ahead with provisional duties that came in at the higher end of the expected range is a sign of Scholz’s weakness and isolation on the issue. 

France continues to back the Commission despite threats of retaliation from China. And that position is unlikely to change even if the far-right National Rally (Rassemblement National, RN) were to win an absolute majority in the second round of French legislative elections on July 7. The party does not have a well-articulated stance on China, but its candidate for prime minister, Jordan Bardella, was unequivocal on the issue of Beijing’s subsidies during President Xi Jinping’s visit to France in May: “Today, China is supporting its companies on a massive scale,” Bardella said on French radio. “Its firms are inundating the European market with products that are heavily subsidized. I worry that we are blind and naïve in the face of unfair competition aimed at our producers, our companies and our interests.” 

First Picture

A first picture of where other EU member states stand is likely to come by mid-July, when a non-binding vote on the provisional duties is scheduled to take place via written procedure in the EU’s trade defense committee. A wild card is Italy, whose Prime Minister, Giorgia Meloni, could come under pressure to oppose the duties when she makes her first trip to China in late July. But Italy’s industry minister, a member of Meloni’s party, has already come out strongly in favor of trade measures to protect European industry from cheap imports from China. Even Germany, the most vocal opponent of duties, seems likely to abstain in the July vote given divisions within the government. Both Economy Minister Robert Habeck—who showed Scholz last month how a trip to China should be done—and Foreign Minister Annalena Baerbock have come out in support of the Commission. Scholz, therefore, would have to trample all over his coalition partners, the French government, and a German Commission president he just backed for a new term if he wanted to try to stop this. “It is impossible for me to imagine this happening,” a German diplomat told me. 

There is, of course, a chance that the EU and China, which began formal talks on the EV dispute in late June, will reach a negotiated settlement before a November 4 deadline to impose definitive duties. But the chances of that are slim if the EU sticks to its criteria for any deal: that it compensates for the injury from Chinese subsidies and is WTO-compatible. A more likely result is that we see cosmetic downward adjustments to the provisional duty levels announced on June 12, calming German nerves and giving Beijing an excuse to avoid an escalatory response that could target EU pork, brandy, and car exports. “Despite all the threats we have seen, I would not rule out the possibility that the Chinese simply swallow the tariffs,” one EU official told me. 

5G Fudge

While a dirty deal on EV duties looks unlikely, we could get one soon on the issue of Huawei’s role in the German 5G network. The current plan, I am told, is to convince the telecommunications operators (Deutsche Telekom, Vodafone, and Telefonica) to enter into a pact before the summer break under which they would agree to phase Chinese suppliers out of their networks over a leisurely five-to-seven-year timespan. The operators—which have threatened to sue the government if such a phase-out results in higher costs for them—appear to be dictating the terms of the deal. 

This fits a pattern in Berlin under which Scholz and his untethered coalition partner, the Free Democrats, are pushing back against any steps that might result in additional costs to German industry or hurt the country’s reputation as an investment destination. I am told that this resistance could doom plans, announced when the German government unveiled its China strategy a year ago, to push through a new inbound investment screening law. “Some people in the government are now questioning what kind of signal such a law would send,” one German official told me. This pushback did not prevent Habeck’s ministry from blocking the sale this week of a Volkswagen subsidiary’s gas turbine assets to a company with links to China’s military-industrial complex. 

Taiwan Test

Another important Berlin battle remains unresolved: whether the German navy frigate Baden-Württemberg will pass through the Taiwan Strait in September during its seven-month deployment to the Indo-Pacific. Defense Minister Boris Pistorius and Baerbock are supportive. But Scholz will have the final word in a decision that officials say is unlikely to be taken before August. One month ago, the Netherlands sent its own frigate, the HNLMS Tromp, through the Strait for the first time in decades, drawing a fierce rebuke from Beijing—which sent its own warship across the median line to monitor the Dutch vessel. The Dutch took the decision despite being under intense scrutiny from the Chinese government for restricting exports of chip-making equipment. Will Germany show the same guts? My bet is no. But I have been surprised before.