Watching China in Europe - July 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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Toward the end of a news conference last Friday, at the conclusion of a meeting of EU leaders in Brussels, Olaf Scholz was asked to provide his definition of “de-risking”. His response was not altogether surprising to anyone who had been listening closely to the German chancellor in recent weeks. But it was extraordinary nonetheless because it echoed, almost word for word, the message that Chinese Premier Li Qiang had delivered in Berlin just days before to an audience of German CEOs. De-risking, Scholz and Li both said, was better left to companies. It was not the role of the state to tell firms where or where not to invest.
Leaving aside the fact that telling firms where to invest is precisely what the Chinese state has been doing for years, it is not difficult to understand why Li made this argument in Germany. Entrusted by China’s President Xi Jinping with getting China’s struggling economy back on track, Li is worried that European governments could move in tandem with their partners in the G7 in placing new restrictions on trade and investment with China. The main aim of his first trip abroad as China’s premier was to convince European leaders including Scholz and Emmanuel Macron to reject de-risking and prioritize economic cooperation.
A GARDEN WITHOUT A FENCE
Scholz’s response to the question in Brussels is more perplexing. If there is a lesson that Germany should have learned from Russia’s invasion of Ukraine, it is that a state’s failure to think strategically about its economic relationships, and to set basic boundaries for business, can have devastating consequences. This lesson seems to have been lost on Scholz. When asked at a German industry conference, hours before he met with Li, about restricting trade in sensitive goods to China, he fell back on one of his favorite strawman arguments, replying that Germany could never subject its entire export business to state control. Scholz now talks about a “smart diversification” and “targeted de-risking” from China, as if these terms need softening qualifiers.
We have seen over the past years what happens when Germany outsources its national security decisions. We get Nord Stream 2 and a 5G network chock full of Huawei. When speaking about restrictions on economic engagement with China, US National Security Advisor Jake Sullivan has used the analogy of small gardens with high fences. Scholz, it seems, does not care about the size of the garden, as long as there is no fence. What are the implications of this stance? First, there is a risk that European Commission President Ursula von der Leyen’s attempt to jolt EU member states out of their lethargy on economic security will stall before it has even begun.
Von der Leyen’s argument rests on the idea that European governments must get serious about setting red lines in their economic and technological relationship with China. Scholz has made clear he sees a very limited role for governments in drawing these red lines. As one Brussels-based diplomat put it to me: “Scholz is killing the economic security strategy before our eyes.” A senior EU official added: “Some member states are looking for an excuse not to do anything. They think a passing reference to de-risking in the G7 communique was enough.”
It will be interesting to watch the transatlantic dynamic over the coming months. After embracing the European term de-risking, the Biden administration has had to watch as European leaders such as Scholz render it meaningless. This could aggravate tensions at a time when the EU and United States are scrambling to clinch a complex package deal that would end a Trump-era trade dispute over steel and aluminum, ease US concerns about the EU’s Carbon Border Adjustment Mechanism (CBAM), and take aim at China’s environmental policies.
A transatlantic truce that was sealed in October 2021 will expire at the end of this year, meaning time is getting short. EU Trade Commissioner Valdis Dombrovskis will spend a good part of this week in Washington trying to inject momentum into the steel and aluminum talks. An EU-US summit, scheduled to take place in Washington in October, may hinge on whether the Biden administration and Brussels can reach a deal. “It’s a very complicated negotiation. We are trying to kill two big birds with one stone: decarbonization and overcapacity,” one European Commission official told me.
In parallel, the EU is re-engaging with China. After positive COVID-19 tests prevented them from traveling to Beijing this spring, the EU’s climate chief Frans Timmermans and top EU diplomat Josep Borrell are making separate trips to China over the coming week. Dombrovskis is due to travel there in the second half of September for a high-level economic dialogue. If all goes smoothly, European Council President Charles Michel and von der Leyen will head to Beijing before the end of the year for the first in-person EU-China summit since 2019.
Juggling relations with the United States and China will be challenging. Europe must reconcile a deal with the United States that penalizes China for producing steel with high carbon emissions at a time when member states such as Germany are doubling down on green technology cooperation with Beijing. A loose agreement between Berlin and Beijing to work together on climate change and the green transition was one of the few deliverables from German-Chinese government consultations held in Berlin last month. It was hailed by Scholz and his team as a success, but some members of his government viewed the consultations as a step backwards. “We were the hosts, but it looked like we were the guests,” one official said. “The Chinese premier explained to the German government how it should see the world. And Scholz didn’t put up much resistance.”
Buckling to pressure from the Chinese delegation, German CEOs were lined up at the consultations to sign empty MOUs with officials from China’s National Development and Reform Commission. A day earlier, visiting Chinese officials had organized a meeting between Li and German CEOs at the Ritz-Carlton hotel in Berlin without informing the German government. The meeting was initially scheduled to take place at the same time as Scholz was supposed to be addressing the same CEOs at the German industry conference. After the consultations, Li’s delegation descended on Munich, where Bavarian premier Markus Söder again rolled out the red carpet, hosting a massive banquet in the ornate Kaisersaal of the Munich Residence palace. “Beijing’s goal was to portray the Americans as outliers, to send a message that Germany and China are partners who are committed to cooperating. In this they were largely successful,” another German official said.
Against this backdrop, the government is putting the finishing touches on its China strategy, which could be published on July 12th but seems more likely to be pushed back until after the summer, when the Bundestag is in session. I was told that wording on the most contentious issues—including stress tests and greater transparency requirements for companies that are heavily exposed to China—remains unresolved. The document has shrunk from the 60-page draft that was leaked last November and many of the hard edges filed smooth. “It has been put into the washing machine with quite a bit of fabric softener,” one official said.
Never fear, Scholz reassures us: A bipolar world shaped by China and the United States is a mirage. Countries such as Thailand, Malaysia, and the Philippines are on the rise and will wield more influence in the years ahead, he told reporters at the end of the EU summit (I am not making this up). “Anyone who doesn’t see that the world is becoming more multipolar probably doesn’t have a realistic vision of the world we live in,” Scholz said. Count me among the idiots.