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Watching China in Europe - December 2022

December 01, 2022

Transatlantic Trouble

This should be the moment when transatlantic cooperation on China shifts up a gear. Russia’s war in Ukraine has pushed Europe and the United States closer together, reminding both of the importance of collective action in responding to geopolitical threats. US voters passed a democracy test in the midterm elections, signaling that they are fed up with the lies and divisiveness of Donald Trump, and strengthening the most Europe-friendly US administration in years. And over the coming week, senior European Union  officials will travel to Washington for two meetings that highlight growing transatlantic coordination on the challenges posed by Beijing: the EU-US dialogue on China and the Trade and Technology Council. Instead of building momentum, however, relations between Europe and the United States are veering off track at the midpoint of President Joe Biden’s term. China’s President Xi Jinping has his own problems, as the zero-COVID protests of the past week have shown. But a united transatlantic front does not appear to be one of them.

In Washington, officials are watching nervously as European leaders stumble over each other to get facetime with Xi, who is suddenly available for handshakes, smiles, and dusted-off promises of win-win cooperation. Yes, Europe’s approach to China has toughened up. That is clear to anyone who has read through the first draft of the German government’s China strategy or seen the agenda of the China dialogue meeting in Washington, in which Taiwan is front and center. But Washington is right to be worried about the latest twists in Europe’s relations with China. With his recent trip to Beijing, Germany’s Chancellor Olaf Scholz fired the opening shot of what risks turning into, in the words of one worried European diplomat, a new “lovefest” with China. The latest sign: a blitz trip to Beijing by European Council President Charles Michel, which took many of the EU member states he is supposed to represent by surprise.

At the same time, frustration with the United States is building up in Europe. The big capitals fear that “Made in America” tax credits embedded in the US Inflation Reduction Act (IRA) will hit a struggling European economy at the worst possible moment, when companies are facing existential pressure from high energy prices and threatening to bolt for greener pastures. All of this is happening at a time when Europe is buying up liquefied natural gas and F-35 fighter jets from the United States to fill (self-made) holes in its energy and security infrastructure. Add mounting US pressure on European capitals to rein in sales of semiconductor equipment to China and the pique is understandable.

But neither side can afford to let the latest transatlantic flare-up--after those over the US withdrawal from Afghanistan and the AUKUS security pact between the United States, Australia, and Britain—distract them from the bigger picture. A new wave of protectionism and a race to the bottom on subsidies is the last thing Europe and the United States need right now. “Will we be consumed by spats, or can we use this to take the relationship to a new level?” asked a senior US diplomat. France’s President Emmanuel Macron’s trip to Washington this week will go a long way toward revealing the direction of travel.

Olaf in Wonderland

Against this backdrop, some European diplomats are worried about a new wave of Realpolitik washing over Brussels, which can be summed up like this: Russia, not China, is Enemy Number One; the United States is profiting from the war in Ukraine at Europe’s expense; and closer engagement with Beijing makes sense, as a cushion against the forceful economic headwinds unleashed by the conflict and because Europe must do all it can to try to pry Beijing away from Moscow. “Some people have drawn the conclusion from Ukraine that we are overly dependent on the United States, rather than taking the view that this relationship is absolutely essential,” one European diplomat told me. “I am worried about a message that says: Europe needs partners right now, regardless of who they are. Whenever the EU decides to put its values aside, it comes back to bite us.”

If one looks at the rhetoric coming out of European capitals these days, there is reason for concern. In April, the EU’s top diplomat, Josep Borrell, described the conversation between the EU and China as a “dialogue of the deaf.” Half a year later, he used an intervention on EU-China relations in the European Parliament to highlight common ground with Beijing and Europe’s differences with the United States, drawing a fiery response from parliamentarians. France’s Finance Minister Bruno Le Maire recently accused the United States of pursuing Chinese-style industrial policies—a dangerous distortion of reality, regardless of what one thinks about the IRA. And then there are the confusing signals coming from Scholz, who, weeks after bringing the German companies that are most dependent on China along on his trip to Beijing, complained that these same firms had put too many eggs in the China basket. “I am surprised how dependent some companies have made themselves on specific markets, thoroughly ignoring the risks,” he said. Speaking in the Bundestag last week, Scholz accused conservative opposition leader Friedrich Merz of living in an fantasy world akin to Alice’s Adventures in Wonderland. On China, the same might be said of him.

Reality Gap

By contrast, the messages in German Foreign Minister Annalena Baerbock’s China strategy draft, which was leaked to Der Spiegel in mid-November, are crystal clear. These include a recognition that systemic rivalry and competition have become the defining features of the relationship, that Germany’s economic dependence on China has created vulnerabilities that must be addressed urgently, and that Berlin must not make the same disastrous mistakes with China that it made with Russia. But even if large parts of the draft strategy survive the red pen of Scholz’s Chancellery, it seems unlikely that the most forward-leaning proposals—“stress tests” for German companies that are overly dependent on China, the exploration of an outbound investment screening regime, and of an investment treaty with Taiwan—will ever be implemented.

Indeed, we may be approaching a moment where the gap between Germany’s rhetoric on China and its actions risks being stretched beyond the bounds of the credible. This is not due to a lack of will in certain parts of the government, above all Baerbock’s ministry. It is a function of the dangerous divide in Berlin, which has begun to infect the European and transatlantic debates on China. I met with visiting officials from an important like-minded Asian partner of Germany last week, who told me that they saw no difference between the approach of the Scholz government and that of Angela Merkel’s before it. “Our partners look at Berlin, they see that we are sending different signals, and they ask themselves who will come out on top?” a German diplomat told me. “Scholz needs to keep the house together. The economy is suffering. We have the war in Ukraine.”

The most glaring example of the current gap between rhetoric and action is on critical infrastructure. The China strategy draft warns repeatedly about the risks associated with Chinese investments in European ports. But if one considers that Scholz just pushed through Chinese shipping giant COSCO’s bid for a stake in the Hamburg port over the objections of his top cabinet members, then it is worth asking what these warnings are worth. Even bigger questions surround Huawei’s role in the German 5G network. Chancellor Angela Merkel refused, over several years, to come down one way or another on this issue. This created a dangerous policy void that allowed operators like Deutsche Telekom, Vodafone, and Telefonica to deploy the Chinese firm’s hardware across the country. Eventually, a cross-party rebellion led by conservative lawmaker Norbert Röttgen forced her government to backtrack (for a detailed look at the 5G debate, I recommend my GMF colleague Andrew Small’s excellent new book). In the spring of 2021, the Bundestag approved an IT Security law that seemed to settle the matter once and for all. The law set up a cumbersome bureaucratic process for vetting high-risk 5G vendors, which effectively kicked the can to the Scholz government, but it also included language that was seen as a death knell for Huawei in Germany. Berlin, it was assumed, was phasing out Huawei without saying so explicitly.

5G Fiasco

We are now a year into the post-Merkel era, and the role of Huawei in Germany’s 5G network is still unresolved. I learned that the government agreed in recent weeks, in an out-of-court settlement, to drop one of the core elements of its strategy for vetting high-risk vendors—namely its insistence that the operators submit declarations of supplier trustworthiness to the government. Berlin caved after the operators refused to provide these guarantees and challenged the legal requirement in court. Perhaps more worrying is that under the government’s approach, the components that go into the 5G radio access network (RAN)—the part of the mobile telecommunications system that connects individual devices like smartphones and computers to other parts of the network—are not considered “critical” and therefore are not subject to government approval. This has allowed the operators to continue deploying Huawei components across Germany this year.

Rumors of Huawei’s demise in Europe, it seems, are greatly exaggerated. After two years of relative silence, the Biden administration is now raising the issue with European allies again. John Strand, an independent telecommunications consultant, has likened Germany’s security approach in the RAN to putting pillows, instead of airbags, in cars. An upcoming report from his firm, Strand Consult, estimates that by the end of this year, 59 percent of the 5G installed RAN in Germany, and nearly 100 percent in Berlin, will have been supplied by Huawei. “In practice, all those who live and work in Berlin and use a mobile phone are forced to send their traffic through a Chinese mobile network,” Strand said.

Three experts I spoke to likened Germany’s dependence on China in mobile telecommunications to its dependence on Russia for energy before the war in Ukraine. “There is no doubt in my mind that we already have a major national security problem because of Huawei’s presence in the network,” a former cybersecurity official in the government told me. “Could we get them out if we wanted to? At this point I’m not even sure. A dependence has been created which will be increasingly difficult to correct.” After all these years, Germany has still not taken a stance on Huawei. The government is hiding behind a bureaucratic process that is proving horribly ineffective. I understand that some ministries are beginning to ask questions about the security of the 5G network—and are not being given satisfactory answers from the relevant regulatory bodies.

What does Scholz think of all of this? We do not know. In the last Merkel government, the finance ministry he headed had ultimate responsibility for the state’s stake in Deutsche Telekom, at a time when the firm was pumping Huawei components into the 5G network like there was no tomorrow. Still, Scholz managed to avoid articulating a clear position on the issue. This looks like Nord Stream 2 all over again. The difference is that Nord Stream 2 never went into operation.

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Watching China in Europe, a must-read monthly update from GMF's Asia Program, lifts the curtain on what policymakers in Europe think about the relationship with China. At a time when China has emerged as the top foreign policy priority of the United States, transatlantic cooperation is essential to address the wide range of political and economic challenges presented by Beijing. This makes an understanding of Europe's evolving stance all the more important.