Watching China in Europe - May 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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Rapidly Shifting Landscape

There are times when the tectonic plates of international affairs move slowly, almost imperceptibly, over a period of many years. And then there are phases when geopolitical dynamics seem to accelerate, moving so rapidly that it becomes difficult to maintain perspective in real time. For the complex three-way relationship between the United States, Europe, and China, the past month has felt like a fast-forward moment. A succession of small tremors has tilted the landscape before our eyes.

In Europe, this started with a major speech on China from European Commission President Ursula von der Leyen in late March, followed by a trip to Beijing by French President Emmanuel Macron, with von der Leyen in tow, that bordered on the surreal (if you missed the Élysée’s video montage, replete with marching People’s Liberation Army soldiers, intimate Macron reflections, and adoring Chinese students, all to a circus-like jingle, please do have a watch). Weeks later, with the dust not yet settled, the EU is taking a new look at its China strategy. De-risking, the buzzword du jour, is now at the center of the debate. And influential figures in Brussels are pushing for an end to the EU’s holy trinity on China—the partner-competitor-systemic rival tag that has defined the bloc’s approach for the past four years.

Sullivan and Yellen

In the United States, Treasury Secretary Janet Yellen and National Security Advisor Jake Sullivan gave major speeches on the US economic relationship with China within the span of a week. They were a sign of cracks within the government over the right way forward and of concern about the current trajectory. Though differences were visible to those who looked closely, two common messages were clear. First, a hard economic decoupling from China, which was never really in the cards, is now officially out. Sullivan made clear that restrictions to economic engagement with China would remain limited (“small gardens, high fences”) and explicitly embraced von der Leyen’s more restrained “de-risking” approach. Second, Sullivan and Yellen signaled that, despite current tensions, continued diplomatic dialogue with Beijing remains a priority for the administration.

I spent several days in Washington in late April speaking with US officials. My main takeaway from these conversations is that there is rising anxiety in the administration about the complete breakdown in communication channels with Beijing since the balloon incident three months ago. The administration is trying to build a bridge to a November meeting between US President Joe Biden and his Chinese counterpart, Xi Jinping, but getting nowhere. I also sensed concern, in the wake of Macron’s trip, about transatlantic cracks on China. Hence the two speeches, reassuring both China and allies about US intentions. The end-result could be closer transatlantic cooperation. But that will depend on the ability of leaders in Washington and Brussels to sell a de-risking strategy at home. In Europe, member states are reluctant to push this too far. In the United States, the administration faces pressure to go much further.

A New Level of Vitriol

And then there is China, where a recalibration is also underway. European diplomats, who have traveled to Beijing over the past month, speak of a new level of vitriol being aimed at the United States by Chinese interlocutors. “They have taken it up several notches,” one diplomat told me. “They are now telling us that they are convinced the US is trying to trigger a war in the Taiwan Strait.” This diplomat welcomed the Yellen and Sullivan speeches but predicted that it would be difficult for the United States to dispel the notion, now deeply ingrained in Beijing, that Washington is out to stop by any means necessary, in the words of Chinese diplomats, the country’s rightful rise. Over the past weeks, the beginning of a Chinese policy response has become visible: a broadening of the government’s counter-espionage law, a raid on the Shanghai office of US management consultant Bain & Company, the forced closure of US due diligence firm Mintz Group’s Beijing operations, and a national security probe into US memory chipmaker Micron Technology.

Solar Threat

While the United States is clearly in the line of fire for now, Chinese officials have not been shy about warning their European counterparts about the consequences of closer transatlantic alignment. In conversations with EU officials in recent weeks, Chinese officials have threatened to follow through on threats to restrict exports of solar technologies if Europe were to move toward a more restrictive approach on transfers of sensitive technologies, as von der Leyen promised. “They are genuinely worried about a disruption of supply chains, about the EU imposing new export controls. This was very clear in our discussions,” an EU official told me after China’s minister of commerce, Wang Wentao, passed through Brussels last month.

Besides the warnings and pleas for Europe to return to a mutually beneficial business relationship, however, Chinese officials are offering little on issues of concern to Europe, I was told. The EU’s climate czar, Frans Timmermans, for example, has been trying for months to engage Beijing in a discussion on cutting methane emissions but has received little, if any, response. “They have revised and refreshed their messaging on Ukraine to keep us happy. But on other issues, there is a surprising and disappointing lack of content from the Chinese,” another EU official told me. “The ministries need a nod from the top to engage, and they don’t have that.”

New China Paper

In the meantime, officials from the European External Action Service (EEAS) are preparing a confidential new China paper for the so-called Gymnich meeting of EU foreign ministers on May 12 in Stockholm. Some Commission officials are toying with the idea of burying the three-pronged approach to China that the EU has employed for the past four years. “We need a sharper saw,” one told me. “We need to put an end to this multifaceted thinking where people choose, depending on the day of the week, whether China is a partner, a competitor, or a rival.” But it seems likely that the triptych will live on, with some changes in emphasis. “If our triptych were to be simplified now it would be two bits,” an EU diplomat told me. “First, the systemic rivalry is deeper than it was four years ago. And second, the need for engagement with China has grown.” A German diplomat added: “The cursor is moving away from partner toward strategic competitor. I can see this reflected in the update. But you won’t get rid of partner.”

Economic Security

As EEAS officials prepare the China paper, the Commission has begun work on what will be a joint communication on economic security, to be published a week before the next European Council meeting in late June. Of the two papers, this could end up being the more interesting one as it has major implications for the EU’s economic approach to China. There are three legislative pillars to the strategy that von der Leyen sketched out in her China speech: a strengthening of the EU’s inbound investment screening and export control regulations, and a push for a new outbound investment regime.

On inbound screening, the Commission is conducting a review of the EU mechanism that went into effect in 2020, with a report due by October. An EU-funded study produced last year by the Organization for Economic Co-operation and Development assessed the tool’s effectiveness and highlighted a number of deficits. Officials told me that a new legislative proposal to update the mechanism is likely. This could make member-state-level investment screening laws mandatory, broaden and harmonize the scope of sectors covered, and address system loopholes that allow foreign entities to use EU-based proxies to make acquisitions in the single market.

Recasting the Recast?

Momentum is also gathering for the launch of a new legislative proposal on export controls, despite the fact that the EU updated its dual-use regulation less than two years ago. That “recast” introduced a new degree of flexibility into a fragmented system dominated by member states, reliant on creaking multilateral regimes such as the Wassenaar Arrangement, and ill-equipped to tackle new challenges arising from emerging technologies such as artificial intelligence and quantum computing. But after the Netherlands, under pressure from the United States, introduced controls on exports of advanced semiconductor manufacturing equipment earlier this year, the push for a more unified EU approach has accelerated.

My own view is that the EU would be better off making full use of the flexibility in its recently updated regulation instead of kicking off a new legislative process that could take several years. The problem at the moment, as I noted in a 2020 study written for MERICS, is a reluctance by member states to adapt their approach to new geopolitical realities. If they were prepared to do so, there would be no need for new legislation. And unless they are, new legislation will not be a panacea.

Outbound Doubts

The heaviest lift will be new rules for outbound investments. In her China speech, von der Leyen urged the EU to develop a targeted instrument focused on a small set of sensitive technologies with military applications. But initial discussions with member states, including a meeting last week between Björn Seibert, the head of von der Leyen’s cabinet, and EU-27 ambassadors raised doubts about whether member states were ready to support such a measure. As a result, it seems unlikely that a legislative proposal on outbound investments will come this year. “I’m not sure if it will fly, and if it does it will have to be very narrowly circumscribed,” a senior German diplomat told me. An EU official predicted a drawn-out process: “Those member states that hate protectionism will need time to understand that there will have to be exceptions, and that by introducing a narrow set of restrictions, we are not throwing the baby out with the bathwater.” The Commission can nudge, cajole, and push. But ultimately, the member states, Germany and France above all, will need to show a willingness to adapt their approaches.

Helicopters for China

I have not delved into European reactions to Macron’s trip to Beijing since so much has already been written on this subject. Suffice to say, I have spoken with officials in southern, eastern, and northern European capitals and have yet to find anyone with something complimentary to say about the French president’s handling of the visit. But I do want to highlight one of the business deals clinched during the trip, which went largely unnoticed, in part perhaps because it was announced separately, when Macron was already on his way back to Paris. It was an order for 50 H160 Airbus helicopters by the Chinese firm GDAT, the largest single order for the product in its eight-year history. The H160 is an aircraft designed for civil purposes, and the Airbus press release on the deal says it will be used primarily for energy, medical, and public service missions.

But helicopters are inherently dual-use, and some senior European security officials are of the view that this deal should not have gone through given tensions over Taiwan and the unfortunate history of France’s cooperation with China in helicopters. China’s modern-day attack helicopter is a derivative of the AS365 Dauphin, a civil helicopter that France’s Aérospatiale allowed China to produce under license starting in the 1980s. “This sale is definitely problematic,” one EU official with expertise in security matters told me. “We saw what happened with the Dauphin. It would be tragic if France repeated the same mistake.” Another European official with experience in Indo-Pacific defense matters said of the deal: “When you sell something to China that is designed for civilian use but could have military applications, then it invariably ends up being used by the military.” An Airbus press release from October 2022 says the civil version of the H160 “can also be used by military and public operators for search and rescue (SAR) and surveillance missions”. De-risking this is not.