Watching China in Europe - June 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.
If you would like to subscribe to this newsletter, please sign up here.
For months, when asked about looming government consultations between Germany and China, officials in Berlin have made one thing clear: The meeting would have a different feel than previous gatherings of its kind. It would be scaled down to a handful of ministers on either side, focused on the issues that are important to Berlin, and stripped of the pomp and circumstance that characterized these high-level gatherings in the Angela Merkel era. The consultations would also have a European dimension to them. After all, Germany’s ruling parties promised in their coalition agreement , sealed in late 2021, to inject a European element into talks that for years were laser-focused on German economic interests. Weeks before the meeting is due to take place, however, the noble ambitions of some German government officials appear to be crumbling in the face of Chinese pressure and the conflicting priorities of Chancellor Olaf Scholz’s advisers. “We were trying to keep it small, but the Chinese side is intent on going big,” one German official told me. “I’m not sure we will have the strength to resist.”
Premier Li Qiang will arrive in Berlin on June 18, two days before the consultations are due to begin, with over a dozen ministers in tow. The following day, sandwiched between a morning meeting with President Frank-Walter Steinmeier and a dinner with Scholz, there will be a lunch with German CEOs and a separate closed-door business forum. The formal consultations will take place on June 20 under the banner “Gemeinsam Nachhaltig Handeln” (Acting Together Sustainably), a nod to the bilateral climate and transformation dialogue that Scholz announced during his visit to Beijing last November. But while the German side is keen for Beijing to adopt a more ambitious date for peaking CO2 emissions and to commit to a larger share of renewables in its energy mix, I am told that the Chinese side would rather talk about safeguarding Huawei’s role in the German 5G network, reviving the EU-China Comprehensive Agreement on Investment (CAI) and ensuring that German technology continues to flow to China. After the consultations end, the Chinese delegation will head to Munich for more meetings with German industry.
And the European element? Scholz’s advisers have pushed back against suggestions that senior EU officials from Brussels be invited to the meetings in Berlin. At a recent preparatory meeting, I was told, Scholz’s top diplomatic adviser, Jens Plötner, scoffed at the idea of making the consultations more European, pointing out that Germany’s economic ties to China dwarfed those of other EU member states. Plötner met with China’s top diplomats Wang Yi and Qin Gang in Beijing last week. A statement issued afterward said the two sides had agreed to intensify cooperation in all areas. Is there a risk that these consultations devolve into a German version of French President Emmanuel Macron’s disastrous trip to Beijing in April? Probably not. But neither are they likely to send reassuring signals about Germany’s commitment to the de-risking agenda that European Commission President Ursula von der Leyen is pushing in Brussels.
On the same day that her team is due to publish a hotly anticipated joint communication on economic security, Chinese government officials will be descending on Bavaria to discuss closer cooperation with some of Germany’s biggest companies. De-risking, it seems, is in the eye of the beholder. The term has spread like wildfire since von der Leyen used it in her big China speech in March, embraced first by US National Security Advisor Jake Sullivan and then by G7 leaders in their Hiroshima communique. But it has also found favor in the boardrooms of German companies that are all in on China. Some see it as a carte blanche, a sign that “decoupling” is dead. It would be hugely damaging to Europe’s quest for a unified position on China if Scholz’s team had the same interpretation.
The irony is that Chinese market conditions are deteriorating rapidly. At the Stockholm China Forum (SCF), a twice-yearly gathering of leading China experts hosted by the German Marshall Fund and the Swedish foreign ministry, participants heard last week that a growing contingent of European companies, mainly small- and medium-sized firms, are picking up and leaving China. The big multinational corporations may not be pulling up roots, but their lives are not getting easier. In the first three months of 2023, German chemicals group BASF saw China revenues plunge 28.5%, while those of Volkswagen declined by 14.5%, driven by a 25.4% slump in sales of battery-powered electric vehicles. “The German car industry is fighting for its life in China,” one participant told the forum. “It will be really challenging for European politicians to defend the market if this continues.”
The souring mood is likely to be reflected in two surveys due out this month from the German and European chambers of commerce in China. The anticipated post-COVID rebound in China’s economy has not materialized. Neither has the expected rebound in foreign investor confidence. SCF attendees were told that cash-strapped local government officials in China have “fear in their eyes” these days. My colleagues at Rhodium Group explained why last week. No wonder Chinese officials are keen to put on a big show in Germany. New Rhodium figures show that direct investments from German companies in China last year amounted to 84% of total EU FDI in the country, eviscerating the previous high for German firms of 65% in 2018.
Against this backdrop, how will Germany and other big countries, such as France, react to von der Leyen’s push to define red lines for Europe’s economic and technological relationship with China? My guess is that if Dutch chip equipment maker ASML were a German or French company, we may not have had a deal with the United States and Japan to restrict exports of advanced semiconductor manufacturing equipment. One important marker to watch is how Berlin behaves with German companies that provide inputs for the ASML machines that will no longer be exported to China. Will firms such as Trumpf, Zeiss, BASF, and Merck , which make the sophisticated lasers, optical equipment and chemicals needed to produce advanced chips, also be subject to restrictions? I understand that everything is on the table in Berlin. But political resistance to imposing similar controls on German companies is high. “At the end of the day you will need a political decision on whether to go along with the Dutch,” one official said. “Is anyone in Berlin prepared to take that step?”
In Paris, as well, an internal government discussion has been launched on addressing holes in Europe’s economic security toolbox. France’s Europe Minister Laurence Boone offered some initial ideas in appearances at the Peterson Institute and Bruegel , saying Europe needed to “complete its doctrine” on which technologies it is willing to send to certain countries, and signaling an openness to a discussion on outbound investment screening. This is promising for von der Leyen’s de-risking agenda, but the outcome of the European debate remains highly uncertain. “Politically, I think we’re there. There is more than enough overlap between the member states. But everyone has their own concerns and red lines,” one EU official working on the economic security communication told me. Everyone can agree on the need to reduce critical supply chain dependencies on China, but the European discussion on restricting transfers of sensitive technologies to the country is in its infancy. That will need to change fast.