Watching China in Europe - February 2021

Welcome to Watching China in Europe, a new 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 veteran journalist, managing editor at Rhodium Group and a senior visiting fellow at GMF—will provide his personal observations and analysis on the most pressing China-related developments and activities throughout Europe. Click here to subscribe.

CAI Camps

More than a month has passed since the EU clinched its Comprehensive Agreement on Investment (CAI) with China—and with the dust beginning to settle, the European CAI camps are becoming evident. I would break them down into four.

In the first camp are those that are convinced that this was the right deal at the right time. This is not a large group—very few European politicians have spoken out in favor of the CAI in recent weeks. A big exception of course is German Chancellor Angela Merkel, who offered her first real public defense of the agreement last week during a virtual intervention at the World Economic Forum, saying she was “very happy” with the deal because it promised to raise bilateral investment between the EU and China to a new level. My conversations with European officials in recent weeks have underscored just how much the push to conclude the deal was driven by Merkel and her close advisers. Several have indicated that the Chancellery’s refusal to embed language in Germany’s new IT Security legislation that would have explicitly restricted the role of Huawei in its 5G network was driven in part by a desire to avert a clash with Beijing that might have endangered the CAI. Some believe it also explains Berlin’s continued blocking of the International Procurement Instrument (IPI), an EU mechanism designed to level the public procurement playing field with countries like China. In its April 2019 strategic outlook paper on China, the Commission set a goal to approve the IPI by the end of that year. We are now in 2021 and Berlin is still refusing to play ball. It will be interesting to watch whether that changes now that Merkel has her investment deal.

At the other extreme is a camp that sees the deal itself as fundamentally flawed. Reinhard Bütikofer, a member of the European Parliament for the Greens party, published an assessment of the CAI at the end of last week which criticized the market access pledges the EU won from China as “recycled,” the level playing field provisions as difficult to enforce, and the labor protection language as “unacceptably weak.” EU trade negotiators said for months that they would not do a Trump-style “phase one” deal. Some people are now questioning whether they really delivered on that promise, given the difficulties the EU is likely to encounter in holding China to its promises on state-owned enterprises, subsidies, and forced labor. “This is not the deal we wanted. It simply isn’t,” a senior German industry official told me.

In between these poles are two other camps. The first includes people whose reservations about the deal center on how it was concluded and communicated in the final days of 2020.

“Communication after the deal was a complete disaster,” one EU official told me. “We did not take the geopolitical context into account. There was little transparency. We should have been sending a forward-looking message about how this fit into our transatlantic agenda.” A senior German official echoed that view, saying the CAI was really about minimizing damage in the economic relationship with China as Europe pivots to a more realistic approach to the relationship. “We’re living in an old house, the roof is leaking and we need to repair it before we move into this new house that we’re building. Until that new house is ready, we just need to plug the holes. That is what this deal is really about.” A second German official pointed to China’s actions in the weeks after the CAI was concluded—the arrest of 53 prominent Hong Kong democracy activists and an invitation to eastern and southern European countries to attend a virtual 17+1 summit—as evidence of what the deal wasn’t: a sign that Europe and Beijing are any closer now. “No one in Beijing came to the idea that we had just crossed the finish line, that the Europeans had leaned out the window to get this done, and that perhaps it would be a good idea to give us a little more time, to ensure stuff like this was not part of the same news cycle,” that official said. “This idea that China will give us something if we give them something—it is embedded in the political thinking in Europe. But it’s a misunderstanding of how China operates.”

In the fourth camp are those whose concerns about the deal are apparent from their silence. While Merkel was lauding the CAI in her Davos appearance, European Commission President Ursula von der Leyen made no mention of it in hers. Since tweeting about the agreement on December 30th, the day she participated in a videoconference with Chinese President Xi Jinping, Von der Leyen has remained silent on it. Her public comments over the past year—including her blunt accusation in June that China was launching cyberattacks on European hospitals in the midst of the pandemic—show that she is no fan of China. People close to her say she has been stung by the outpouring of criticism around the CAI, which has undermined her message of transatlantic renewal. Her public comments since the agreement suggest Von der Leyen is doing her best to row back (see more on this below). In her Davos appearance, she went on at length about the need for closer ties with the new U.S. administration. And a week before that, in a speech to the European Parliament on the day of Biden’s inauguration, she said: “This new dawn in America is the moment we have been waiting for, so long. Europe is ready for a new start with our oldest and most trusted partner.”

The Indo-Pacific and Connectivity

Von der Leyen may hold the keys to a European position on China that, rather than being defined by the CAI, uses frustration with the deal as a springboard for a more strategic approach towards Beijing. My GMF colleague Andrew Small has described the agreement as a “final bid to lock in a model for the EU-China relationship that no longer commands any real depth of support.” Once Merkel leaves the political stage later this year, we will see how deep that support really is. In the meantime, there are signs that Von der Leyen may be prepared to embrace a more “geopolitical” line that could pave the way for closer cooperation with Washington on China. In mid-January, she signaled at a lunch with EU-27 ambassadors that she was ready to cut through the institutional inertia in Brussels and embrace a bolder EU approach to the Indo-Pacific and to connectivity. Last month, her office also gave a green light, after months of resistance from certain corners of the Commission, for the EU to seal a connectivity partnership with India—perhaps in time for a May summit between Prime Minister Narendra Modi and EU leaders. “She appears ready to go for it,” a European diplomat told me. “If she doesn’t make this her personal issue it simply won’t happen.”

I wrote about the EU’s turf war over connectivity in my November newsletter. Since then, a similar tug-of-war has emerged over the push for an EU strategy for the Indo-Pacific. Both debates go to the very heart of the EU’s approach to China—and whether it is willing and able to adopt a more strategic line. In October, Germany, France, the Netherlands, and seven other states voiced their support for a more ambitious EU approach to the Indo-Pacific, writing that the region was becoming a stage for “great power rivalry” and urging the EU to “step up its strategic commitment based on its own agenda with a view to better serving its interests.” This sounded promising. The December response from the European External Action Service (EEAS), however, showed just how averse some officials in Brussels are to an agenda that is designed to counter Chinese influence. “The EU’s approach towards the region has been studiously cooperative and geopolitically neutral,” the bloc’s diplomatic service wrote in its response, adding: “This should remain unchanged.” The EEAS went on to caution the EU against being “drawn into geopolitical rivalries” and rejected the idea of a joint communication on the Indo-Pacific, which the ten countries had called for in their October paper. Since the departure of former Secretary-General Helga Schmid to a new post leading the OSCE, the future of connectivity as a priority issue within the EEAS is unclear. Only Von der Leyen can put it at the center of the EU’s strategy.

“We did the CAI but now we really need to show that we are working with others,” a French diplomat told me, pointing to plans by President Emmanuel Macron to host a major event on the Indo-Pacific when France holds the rotating EU presidency in the first half of 2022. The aim of the summit will be to highlight the relationship between the EU and key partners in the region, including India, Australia and Japan. “Connectivity is a key part of this,” the diplomat said. “But we see everything as interlinked. We need to address the economic, technology and security dimensions.”

Kurt Campbell and Europe

If Europe can get its act together, it would be music to the ears of the new Biden team. In their recent article in Foreign Affairs, Kurt Campbell and Rush Doshi made clear that the new administration sees European engagement in the Indo-Pacific region as one of its top transatlantic priorities. “Distant European leaders are inevitably less concerned about China’s assertiveness than the Indo-Pacific states next door. Accordingly, the principal challenge facing the United States is to bridge European and regional approaches to Chinese challenges,” Campbell and Doshi wrote, highlighting the need for diverse coalitions on a range of issues, including infrastructure investment. In her confirmation hearing, Treasury Secretary Janet Yellen echoed that message, stressing the importance of competing with China in economic statecraft. “We will distinguish ourselves from China’s approach to development, including the Belt and Road Initiative, by ensuring that social and economic safeguards are built into the projects we support. We will focus on partnerships and on strengthening local capacity. In addition, we will work with allies and partners to advocate for the highest environmental, social, and labor standards to promote development investments that are both beneficial and sustainable over the long term,” Yellen said. This message dovetails perfectly with the Commission’s core objectives. Following the uproar over the CAI, how determined will Von der Leyen be to show a different face? It is one to watch in the months ahead.