Watching China in Europe - September 2022

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, 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. 

If you would like to subscribe to this newsletter, please sign up here.

After Pelosi

The reaction in Europe to Nancy Pelosi’s Taiwan trip would have been a different one had it taken place a few years ago. There would have been a great deal of hand-wringing over the United States provoking China. And diplomatic energy would have been channeled toward reassuring Beijing that nothing had changed in Europe’s approach to Taiwan. Instead, in the conversations I have had with European diplomats over the past weeks, I have sensed a mix of anger over Beijing’s response to the Pelosi visit and a determination to resist mounting Chinese pressure to curtail engagement with Taipei. That does not mean that European capitals were thrilled with the visit, which was widely seen as driven by domestic politics. But the ferocity of the Chinese response has overshadowed all else. “They are trying to impose a new world where there are no official contacts at all and no visits from parliamentarians,” a German official told me. “There is broad agreement that we can’t allow this to happen.” Over the coming months we will see whether the actions in Berlin and other European capitals match this rhetoric.

In the weeks after Pelosi’s visit, Berlin chose to put off a planned trip to Taipei by Franziska Brantner, a state secretary in the economy ministry, that was due to take place in late August. Instead, Brantner participated virtually in an exchange on German-Taiwanese business ties. A reluctance to add fuel to the fire appears to have been a factor in this decision. Failure to reschedule Brantner’s trip or to send another government official at her level before the end of the year would send a signal that Germany is reducing contacts in response to pressure from China. It has been three years since a state secretary last visited Taipei. Two Bundestag delegations slated are due to go ahead as planned in October, however, including a trip by six members of the Berlin-Taipei friendship group in the German parliament. Klaus-Peter Willsch, who heads the group and will lead the delegation, told me the trip would include a visit to a private firm that is holding military training courses for Taiwanese citizens worried about an invasion. “The focus of our visit will be on the growing threat from China,” said Willsch.

In Brussels, the message on Taiwan is similarly defiant. “We will push back against any attempts by China to box us in,” one EU official told me. “It will probably mean gritting our teeth. We can expect a lot of pushback. But we need to ensure that talks with Taiwan remain at least as robust as they have been.” European ambassadors in Beijing met last month to coordinate their approach on the Taiwan question. And a discussion on Taiwan is expected among EU member-state ambassadors in Brussels this month, ahead of what could be a broader exchange on China policy at a meeting of EU foreign ministers in early November. The pressure on reluctant European capitals to engage in a more structured discussion on Taiwan scenarios will only grow in months ahead as Japan’s G7 presidency nears and a new prime minister takes over in the United Kingdom who could prove to be far more hawkish on China than the previous one.

COSCO Decision Delayed

I wrote in early July about opposition within Germany’s government to Chinese firm COSCO’S bid for a 35 percent stake in one of the main terminals in the port of Hamburg. A decision from Berlin on whether to approve the deal or not had been expected by the end of August. But it now looks like the government has pushed back the deadline by two months following a request by the companies for more time. I understand that the European Commission issued an opinion on the deal that, in the words of one German official, made clear that it would pose “real risks to our critical infrastructure.” Another official said the European Commission had underlined that “substantial mitigating measures” would be needed to address these risks. I was told that some people in the Chancellery would like to find a compromise that allows the deal to go ahead, perhaps under different conditions. Whether they get their way is another question. “It will be very difficult for Scholz to resist the tide,” the German official said, describing the decision as a “hugely important” signal of where the nine-month old government stands on China.

Regardless of where Germany’s government lands on the COSCO deal, it will not resolve the broader dilemma faced by Europe when it comes to Chinese investment in its ports. Chinese firms already own stakes in terminals of Hamburg’s main European rivals: Antwerp and Rotterdam. The message from companies like COSCO has been “Give us a stake and you will get our traffic.” These ports compete with each other, depend on trade with China, and have become wrapped up in this game of economic arbitrage. A broader political response from the EU is needed to counter this. Blocking the COSCO deal with Hamburg would be a first step, but only a first step.

China Strategy

In the meantime, nervousness in parts of German industry over the government’s toughening line on China is growing. Although the key planks of Berlin’s new strategy are still being negotiated, expectations are rising that the government will restrict investment guarantees and export credits for companies doing business in China, while offering more generous support for companies investing in like-minded other countries in Asia. Generous credit lines offered by state bank KfW for China business – a legacy of outdated development policies – are also under the microscope. “The message is: continue to invest in China if you want, but don’t expect German taxpayers to be there to save you if it all blows up,” one official in Berlin told me. Officials say that some of these measures could be introduced in the coming months, before the government’s new China strategy is completed in early 2023. It now looks like the strategy will be a public document – a disappointment to some in Berlin who have been pushing for a confidential strategy on the grounds that it could then be more honest and robust.

German companies that are heavily invested in China are scrambling to swing the debate back in their favor. Over the summer, I was told, a series of meetings took place among CEOs who have been spooked by the emerging line in Berlin. In the coming weeks, we are likely to see more concerted pushback, with leaders of German industry launching a more forward-leaning public campaign in favor of close China ties. The aim is to highlight the importance of China to the German economy at a time when the knock-on effects of Russia’s war in Ukraine are pushing the country into recession. Perhaps the most prominent defender of this position in German industry, Herbert Diess, has now lost his job as CEO of Volkswagen. But other executives are ready to step into the breach. “They are under the illusion that the China debate can still be swung in their direction,” one industry official told me. I was told that at least one large German company plans to announce substantial new investments in China in the coming months. “Instead of mitigating the risks of their China exposure, they are reducing the exposure of their China business to the rest of the world. It’s a China First strategy,” one German official said dismissively.

Macron over Scholz

Some companies see Olaf Scholz as their last hope. But the political space for the cautious chancellor to stand in the way of other members of his government who support a tougher line on China has shrunk. And he has been striking a more critical tone lately. In his big speech in Prague this week, he lumped China together with Russia and Belarus as countries that are seeking to divide Europe. His new tone has not gone unnoticed in Beijing, which has been giving Germany the cold shoulder for months. “They are talking less with Scholz and more with Macron,” a veteran European diplomat said. “Macron is seen as the one leader who understands China and is taking a balanced approach.”

China’s Foreign Minister Wang Yi, who was expected to pass through Europe in September but may now skip the trip because of the Communist Party Congress starting on October 16th, has spoken with Macron’s diplomatic adviser Emmanuel Bonne three times over the past five months, according to Chinese government readouts. Over the same period, only one similar conversation appears to have taken place with Bonne’s German counterpart, Jens Plötner—a video meeting in May with Wang’s colleague Yang Jiechi. China specified in its readout that this meeting took place at Plötner’s request. It is still unclear whether German-Chinese government consultations will take place in January, as proposed by Berlin. Neither do we know when Scholz, who is keen to make his first trip to China as chancellor, might be received.