Watching China in Europe—March 2024

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Scholz vs. Macron

Five years ago, French President Emmanuel Macron took the unusual step of asking German Chancellor Angela Merkel and European Commission President Jean-Claude Juncker to join him in Paris for a meeting with visiting Chinese President Xi Jinping. The gathering of European leaders at the Élysée Palace, two weeks after the European Commission unveiled a new strategy paper describing China as a “systemic rival”, was meant to send a signal of European unity toward Beijing, which for years had used carrots and sticks to play EU member states off against each other. These days, the image that Europe’s biggest countries are sending is one of division and disharmony. Last week, Merkel’s successor, Olaf Scholz, and Macron sparred publicly over support for Ukraine. And next month, they will meet Xi separately, with Scholz traveling to Beijing in mid-April and Macron hosting the Chinese leader weeks later in Paris. “One could get the impression that the Germans and French are competing rather than coordinating on China,” an EU official said.

The last time the leaders of Germany and France spoke with Xi together was two years ago, shortly after Russia launched its full-scale invasion of Ukraine. Since then, Scholz appears to have given up on the idea of working with Macron (or other European leaders for that matter) on China, rebuffing him in late 2022 when the French president suggested they travel to Beijing together and ignoring a pledge in his own coalition agreement to give bilateral consultations between Berlin and Beijing a more European flavor. “There is no point in beating a dead horse,” one senior French official told me when asked about efforts to coordinate with Germany on China.

This doesn’t have to end in tears if Scholz and Macron are aligned on the messages they deliver to Xi next month. Above all, they will need to deliver a forceful defense of the European Commission and the array of measures it has unveiled in recent months to respond to distortive Chinese economic policies.

The Full Toolbox

Following the announcement in October that it was considering imposing duties on imports of electric vehicles from China, the Commission, in the span of just a few weeks, has taken aim at Chinese rolling stock giant CRRC for using subsidies to undercut rivals in a public procurement tender, put three Chinese entities on a blacklist for circumventing Russia sanctions, and launched an investigation against TikTok for violating online content rules. As I have written in these pages before, the Commission is preparing to launch a probe into discriminatory Chinese procurement practices in the medical device sector. And more foreign subsidies cases are expected in the spring. “We’re at a point in time where we need to use the full toolbox of instruments,” one Commission official told me. “And even then, it’s unclear whether we will succeed.”

So far, China’s response has been measured. On a swing through Europe last month, the country’s foreign minister, Wang Yi, was conciliatory, agreeing to lift a ban on imports of Spanish beef weeks after offering the Irish and Belgians similar gifts. EU officials say they have been surprised by the relatively mild response from Beijing to their decision to add Chinese companies to their sanctions list. But neither has China budged on any of the most important issues of concern that were raised by EU officials at their bilateral summit in December. The EU is still waiting, for example, for China to deliver on promises made last September to ease draconian rules on cross-border data flows that had spooked foreign businesses. There has also been no movement on medical devices, and little has been done to assuage concerns about a wave of cheap Chinese green-technology exports flooding into the European market. “China is focused on stabilization for now,” an EU diplomat said. “But no one is expecting Beijing to make moves that address our fundamental concerns about overcapacity.”

The Main Course

There is a clear understanding in Paris of what is at stake. “If we submit to China, it will be the end of the European car industry,” the senior French official told me. “Europe can’t shy away from taking action out of fear of Chinese retaliation.” But there still appears to be a disconnect between the Commission and Germany, whose carmakers fear that China’s anti-dumping investigation into French brandy is just an aperitif before they are served up as the main course. Scholz must avoid during his April 15-16 trip to Beijing the trap that Merkel fell into over a decade ago, when she torpedoed a Commission trade case against China on solar panels during a visit by Chinese Premier Li Keqiang to Berlin.

Back then, pushback from the Free Democrats (FDP), Merkel’s coalition partner at the time, played a role in undermining the Commission’s case. The same dynamic could play out this time, as the FDP pursues a wag-the-dog campaign to thwart any and all EU measures that displease German industry. Scholz should view the trip as an opportunity to strengthen Europe’s leverage with Beijing by making clear to his Chinese counterparts that his government, while concerned with EU-China trade tensions, stands fully behind the Commission’s push to level the economic playing field. “The Chinese side will put enormous pressure on Scholz to repudiate the EU measures,” said a German industry official who supports the Commission’s trade moves. “It would be an absolute disaster if he bowed to the pressure.”

New Thinking

As my colleague Gregor Sebastian and I spelled out in a Rhodium Group note last month, Germany is entering a period of intense industrial competition with China that will require new thinking in Berlin. Complicating the challenge are new US regulations that—National Security Advisor Jake Sullivan’s assurances aside—expand the size of the American yard and the height of its fence. It is not hard to imagine a world in the not-too-distant future in which connected vehicles that are made in China or contain Chinese technology are excluded from the US market. That will have important implications for European car manufacturers, most notably Volkswagen, whose supply chains have become increasingly intertwined with China in recent years.

The need for new thinking is not just about Germany. The growing nexus of trade, technology, and security will require change in Europe on at least two fronts. First, the conversation between governments and industry will need to become far more developed. In recent years, this relationship has become increasingly antagonistic, with companies complaining loudly about overregulation, and governments struggling to convince corporates to take their national security concerns seriously and to enter into a dialogue on dependencies that is vital for good policymaking. Second, the conversation between EU member states and the European Commission on economic security-related challenges will need to take a big leap forward.

A change of Commission following European parliamentary elections provides an opportunity to introduce new structures to address both needs. An economic security council that regularly brings together senior national and EU officials with industry representatives seems like a no-brainer. So does a centralized, well-resourced analytical function within the Commission that serves as a one-stop shop for member states seeking support on the array of challenges related to de-risking. Will member states play ball? It should be clear to them by now that going it alone would be a disastrous mistake.