Watching China in Europe - November 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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Pre-Summit Surprise

The last time the EU and China held a summit, the back-and-forth over Russia’s invasion of Ukraine, just five weeks old at the time, was so fraught that the bloc’s top diplomat, Josep Borrell, described it as a “dialogue of the deaf”. One-and-a-half years on, with the war still raging and an incendiary new conflict unfolding in the Middle East, EU leaders will travel to Beijing in early December for what is shaping up to be another tense sparring session with Chinese President Xi Jinping. Since her last summit meeting with Xi, European Commission President Ursula von der Leyen has presented plans to restrict the flow of sensitive technologies to China and launched an anti-subsidy probe into electric vehicle (EV) imports from the EU’s top trading partner. And there is a possibility, several officials in Brussels and other capitals told me, that the Commission will deliver another blow in the weeks leading up to the summit by imposing export curbs on a handful of Chinese entities that are sending dual-use items to Russia. This would be part of the EU’s 12th sanctions package.

“I would be surprised if there was no action given the increase in dual-use items making their way from China into Russia,” one diplomat from a large EU member state said, describing China as an emerging “hub” for the export and re-export of equipment found on the battlefield in Ukraine. “It is not just backfilling. It is circumvention. And despite ongoing talks with Beijing, there is no campaign to rein this in.” Although the timing of the sanctions package is uncertain, several officials told me that it was likely to become a flashpoint before the summit. Another said: “If Beijing takes care of the issue, then there is no issue anymore. Many third countries have taken action. But others are refusing to engage. And China is a particular challenge for us.”

Turning the Screws

Back in June, when the EU presented its 11th sanctions package aimed at Russia, it introduced curbs on China-based entities for the first time. But Brussels ended up reducing the number it targeted to three from eight following howls of protest from Beijing and its promises to work with the EU to rein in sanctions-busting shipments. Since then, however, European concerns about Chinese support for Russia have only grown. In late September, EU sanctions envoy David O’Sullivan went public with an estimate that up to 70% of sensitive high-tech equipment imports being used to kill Ukrainians on the battlefield were reaching Russia via China. Weeks later, Russia’s finance minister let slip at a Duma budget committee hearing in Moscow that China was supplying his country’s entire drone arsenal. One EU official told me that Chinese sanctions circumvention would have been a “bomb” in discussions that EU Trade Commissioner Valdis Dombrovskis held with Chinese counterparts during his visit to Beijing in late September if the EV investigation had not been announced shortly before the trip, overshadowing the sanctions issue.

Now sanctions circumvention risks turning into a major theme in the run-up to the EU-China summit, for which expectations were already rock bottom. EU officials have come away frustrated from a series of high-level visits to Beijing in recent months that were meant to prepare the ground for the summit. People who took part in these discussions said their Chinese interlocutors were stuck on old talking points, lashing out at the United States and complaining about the EU’s four-year-old description of China as a systemic rival while dismissing European concerns about overcapacity in a wide range of Chinese industrial sectors that Brussels views as a growing threat. “We had these dialogues. We wanted meaningful outcomes, but we haven’t had them. It’s that simple,” an EU official involved in the summit preparations said. “The Chinese system seems incapable of acknowledging our concerns, let alone addressing them. So we will simply turn the screws one more time.”

Carrots and Sticks

What has been encouraging about European policy responses to China this year is that they haven’t been shaped, as was often the case in past years, by fears of retaliation from Beijing. In Brussels, Paris, The Hague, and other capitals, there is an appetite to wield Europe’s economic leverage with China, even when there is a risk that Beijing could strike back. The EU is concerned about Chinese export controls on germanium, gallium, and graphite, for example, but isn’t slow-rolling its own measures or refusing to use the defensive tools it spent years developing. While von der Leyen’s de-risking agenda may be struggling to get off the ground, with member states resisting her push for closer coordination on export controls (more on this below) and outbound investment restrictions, Europe’s appetite for risk with China has risen. Adding Chinese entities to an EU sanctions package just before an EU-China summit is an example of this more mature approach to geopolitics. As with the sticks, Chinese carrots are also losing their effectiveness. China has failed to soften up Europe by offering targeted gifts to select member states. And Brussels no longer celebrates Beijing’s procedural concessions as wins. “The capacity for the Chinese to dangle candy is not there,” a Commission official said.

Over the past decade, it was Germany that was most susceptible to sticks and carrots from Beijing. And even today, Olaf Scholz’s chancellery can be guided by a misplaced fear that firmness with China will backfire. Hence Scholz’s decision a year ago to overrule cabinet colleagues and push through Chinese shipping giant COSCO’s purchase of a stake in a Hamburg port terminal. Hence his insistence that the publication of Berlin’s China strategy be delayed until after government consultations with Beijing. And hence his refusal to push back when Chinese Premier Li Qiang’s delegation insisted, at those consultations in Berlin, that journalists be barred from asking questions at a joint news conference. But the more immediate test of whether Scholz has learned from these past mistakes and accepts the core tenets of his coalition’s new China strategy will come with a looming decision on whether and how to reduce the outsized role of Chinese suppliers Huawei and ZTE in the German 5G network.

Dissing Wissing

On a visit to Washington, DC late last month, Germany’s transport and digital minister, Volker Wissing, was confronted with tough questions from Biden administration officials about Berlin’s 5G plans. Wissing, according to officials briefed on the exchanges, responded by playing down the threat from Chinese suppliers and highlighting the risks of retaliation from Beijing should they be excluded from the German network. As I have written here before, many of Wissing’s cabinet colleagues do not share his view. The foreign, economic, and interior ministries—as well as Germany’s intelligence services—are all pushing for a phase-out of some kind. And so it will come down to the chancellery to decide where Germany lands, an outcome Scholz had hoped to avoid. Several German officials with whom I’ve spoken expressed concern that the chancellor and his close advisers seemed to view the 5G decision primarily through a domestic political lens. These officials fear that the priority will not be safeguarding Germany’s national security but avoiding a result that leads to political blowback for the chancellor and his struggling Social Democrats.

But one thing should be clear to everyone involved: A failure to lay out a convincing roadmap for the phase-out of Chinese suppliers would mean that all the talk in Berlin about bolstering resilience and reducing dependencies is, in the end, just that—talk. There is no way to reconcile the messages in Germany’s China strategy and National Security Strategy, not to mention the core lessons of Scholz’s Zeitenwende, with a continued role for Huawei and ZTE. Consider this line from the National Security Strategy: “We paid for every cubic metre of Russian gas twofold and threefold with our national security. In future, we will focus more on security when it comes to decisions on economic policy. This holds true for the question as to where we buy medication, raw materials and energy. But also when it comes to deciding what actors are allowed to invest in our critical infrastructure.” Wissing may not have read this. We must hope that Scholz has.

Playing Hardball

A final word on the transatlantic relationship, which is heading into a big election year in Europe and the United States on less-than-solid footing. Following a disappointing US-EU summit last month, at which the partners were unable to reconcile differences in their approaches to climate, trade, and China policy, Brussels and Washington head into the final months of 2023 with the threat of a return of Trump-era steel and aluminum tariffs still hanging over them. My sense from conversations with officials on both sides is that the best we can hope for now may be a further kicking of the can—or extension of the two-year-old transatlantic tariff truce that is due to expire at the end of this year. The signal from such an outcome would not be a good one. The United States and the EU would be agreeing not to fight but admitting that they can agree on little else. “We are in damage control mode now,” an EU official told me. “The main focus is on avoiding an accident by the end of the year which in the current geopolitical context no one wants.”

In the days before the US-EU summit, the Europeans received another surprise in the form of updated US export controls on advanced semiconductors and chip-making equipment. As my Rhodium Group colleague Reva Goujon and Jan-Peter Kleinhans of the Berlin-based Stiftung Neue Verantwortung think tank explain in a new note, the updated controls have major implications for US allies, including the Netherlands, which has moved with the United States and Japan to restrict the sale of its most advanced chip-making machines to China. One of the most striking elements of the new controls is the introduction of a zero-percent de minimis rule that would allow Washington to assert jurisdiction over foreign-made lithography equipment, such as that of Dutch firm ASML, whether or not it includes US content. One EU trade official described the move as an “unprecedented expansion of the territorial reach of US controls”.

What are the implications of the new US controls and the disappointing US-EU summit outcome? First, amid all the talk about transatlantic unity, the Biden administration will continue to play hardball with its European allies as it hones its China toolbox. Second, a fragmented Europe in which member states jealously guard their powers over tools such as export controls will be increasingly vulnerable as geostrategic competition accelerates. And third, to address this vulnerability, big European capitals such as Berlin and Paris will need to engage in the economic security debate that von der Leyen launched before the summer. I will be watching closely what the annual plenary meeting of the Wassenaar Arrangement in early December produces. If the ailing multilateral regime, which counts Russia as a member, struggles once again to deliver, then reluctant European capitals may have no choice but to rethink their approach to export controls.