Watching China in Europe - February 2022

Welcome to Watching China in Europe, a 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 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. 

If you would like to subscribe to this newsletter, please sign up here.

Germany Wavers 

What is going on in Berlin? That is the first question I hear these days, when speaking with officials in Brussels, Paris, Washington, or Vilnius. At a time when Russia and China are flexing their geopolitical muscles, testing European unity and the cohesion of an increasingly fragile Western alliance, Germany’s new government is wavering and sending contradictory signals to the outside world. This is a precarious moment for a country that is dependent on Russian gas and whose biggest companies have spent the past decade doubling down on China. Previous governments helped deepen these dependencies instead of developing strategies to mitigate them. Now the risks of this approach have been thrown into stark relief. China and Russia, coordinating with each other like never before, are using their leverage to pursue, in increasingly brazen fashion, a geopolitical agenda that is antithetical to European interests. Central to their calculations is an expectation that, when push comes to shove, Germany will shy away from confrontation and prioritize its economic interests over broader strategic aims. Over the past month, Chancellor Olaf Scholz too often failed to send the clear signals necessary to dispel that notion.

Scholz rose to power dodging the big foreign-policy questions, but he now finds himself in a position where it is impossible to hide from them. His predecessor Angela Merkel was also known for her caution and her embrace of strategic ambiguity. But she had a knack for finding the right words when it mattered most. “Merkel had a freedom gene that Scholz doesn’t have,” one senior member of the Greens told me. “On foreign policy, his Social Democrats are divided. You still have a wing of the party that wants engagement with Russia and China at all costs. And Scholz does not want to spend his political capital pushing back against these people. As a result, there is no strong orientation from the Chancellery.”

That may be changing. The fierce domestic and international backlash against his handling of the Ukraine crisis has led Scholz to recalibrate and could convince him and his advisers that a passive approach to the big foreign-policy challenges is no longer an option. Even experienced politicians like him face a learning curve when they ascend to the top job. But there is also a risk that the Hanseatic reserve that Scholz is known for persists. “Bold is not in his DNA,” a person who worked with Scholz when he was finance minister told me late last year. “He got this far with a certain style and that will be difficult to shed.” In times of geopolitical upheaval, an inability to deliver clear messages in a timely manner can become a serious liability.

This newsletter focuses on China, not Russia. How the German government positions itself on Moscow, however, offers important clues about how it is likely to address challenges emanating from Beijing. I have spent the better part of the last month trying to get my head around this last question. It is still early days for this government, but there are some rays of light piercing through the gloom.

Indo-Pacific Partners 

First, I am told that, despite the saccharine promises of deeper cooperation with China coming out of Scholz’s first calls with China’s President Xi Jinping and Premier Li Keqiang, the Chancellery has made a decision to prioritize engagement with democratic partners in the Indo-Pacific in the first half of 2022. Following his trip to Washington in early February, Scholz is expected to travel to Japan in early spring. The Chancellery appears determined to hold its first formal government consultations with Tokyo—and possibly with Delhi as well—before it does so with Beijing. Chinese officials have been pushing Germany for a bilateral meeting of top cabinet officials in early summer, but I am told Berlin has no intention of holding the meeting so soon. “You will see this government focused on Indo-Pacific partners in a way that Merkel never was,” one German diplomat told me.

Second, I was told that Foreign Minister Annalena Baerbock has instructed colleagues to take a forward-leaning approach toward China, in which Germany champions EU initiatives—including legislative proposals on supply-chain due diligence and anti-coercion measures—instead of nitpicking them to death. “In the past, our instinct was to step on the brake,” the diplomat told me. “Baerbock has made clear that she wants us to step on the accelerator.” That does not mean she will shy away from dialogue with Beijing. Baerbock had a one-and-a-half hour (with simultaneous translation) call with her Chinese counterpart Wang Yi in late January that was described to me as “intense,” touching on all of Beijing’s red lines, from Taiwan to Xinjiang. I am told that Wang will travel to Berlin later this month for a follow-up. All the contentious issues in the relationship will be on the table when he does.

China Strategy

Diplomats in the Asia-Pacific division of Germany’s Foreign Office, who will take the lead in formulating the government’s new China strategy, are also being encouraged to push the envelope and resist old habits to self-censor. In contrast to the hush-hush approach with which the ministry has approached strategy documents in the past, this time it will be reaching out to think tanks, NGOs, and EU institutions—and may even hold a town hall meeting. There appears to be a consensus that the government’s new National Security Strategy will come first—probably just after the summer break—with the China strategy following toward the end of the year. Some parts of it will be in the public realm and others are expected to remain confidential.

Third, after a period of hesitation, the government appears to be converging around a more united and clear-eyed response to China’s coercion against Lithuania. Scholz raised Lithuania on his call with Li Keqiang in January, after resisting advice to press Xi Jinping on the issue in their call a month before. Crucially, I learned that officials in the economy ministry, which is run by Baerbock’s Greens party colleague Robert Habeck, recently asked German firms in Lithuania not to take any short-term steps to shift production out of the country in response to China’s trade embargo. In parallel, discussions are taking place in Berlin and at the EU level about how to cushion the financial blow for affected companies. These are all positive signs.

De-Escalation Hopes Fade

That said, the chances of a de-escalation of the dispute between China and Lithuania appear increasingly remote. In December, the European Commission made a push to broker a truce, meeting with members of Lithuania’s government and reaching out to Chinese officials through the EU embassy in Beijing. But a proposal floated by Vilnius to change the Mandarin name of the Taiwanese representative office at the heart of the row was dismissed by China as insufficient. There is little appetite in Vilnius for additional concessions—such as changing the name of the office from “Taiwan” to “Taipei”—in part because there are no guarantees that such moves would convince Beijing to reverse course on its trade embargo. “What is certain is that without a name change there will be no resolution of this crisis anytime soon,” a French diplomat told me. An EU official who has been involved in the negotiations added: “The longer this drags on, the higher the risk that European companies take the decision to pull out of Lithuania. I worry that we will get to a moment where European unity breaks.”

That would be devastating for Lithuania and for the EU. Still, there are signs that the country is finding ways to cope. The decision by the EU to file a case against China at the World Trade Organization was a shot in the arm for Vilnius because it ended Beijing’s hopes of framing the dispute as a strictly bilateral affair. I was told that companies are finding ways around China’s import ban—for example, by reclassifying the inputs in their supply chains to allow them to file Lithuania-free customs declarations. Taiwan has stepped into the breach, offering Lithuania $1 billion in credit financing and a $200 million fund to promote investment in strategic sectors. And the United States is pushing for a more comprehensive dialogue with Lithuania, the EU, and Taiwan to find new ways to soften the blow from China’s coercion.

Three-Pronged Strategy

The main concern in Lithuania is that the row with China does long-term damage to the country’s attractiveness as an investment destination. “What we really need right now is a big company announcing that it will invest in Lithuania,” one diplomat told me. In Vilnius, I was told, the strategy for the coming months is three-pronged: keep the fragile government coalition united in its approach to China; consolidate diplomatic and financial support from the United States, the EU, and Taiwan; and encourage partners across Eastern Europe to follow the Lithuanian lead by embracing Taiwan and leaving the 16+1 grouping with China. There is no date set for the next 16+1 summit, a format that will celebrate its 10th anniversary this year. EU officials point to a deepening split in the group between countries that are fed up with it (the Czech Republic, Estonia, Romania, Slovakia, and Slovenia), and those that appear intent on sticking with it no matter what (Greece, Hungary, Serbia, and lately Poland).

Were Hungary’s Prime Minister Viktor Orbán to lose the April 3 parliamentary elections to the China-skeptic opposition, the dominos could begin to fall. “Honestly, I am not sure that we will see a 16+1 summit for a while,” the Lithuanian diplomat told me. “If China tries to resuscitate the group, it may well find that it’s half dead. Beijing may determine that it makes more sense to leave it in an induced coma for the time being.” Regardless, China’s coercion against Lithuania is shaping up as a major test for Europe and the United States in 2022. Beijing’s aim is to show that EU and US support for Vilnius is useless. A failure to prove this wrong could invite more coercion.

April Fools' Day

EU officials tell me that a resolution of the Lithuania row is not seen in Brussels as a prerequisite for holding their next summit with China in late March or early April (although there is still no firm date, one diplomat suggested it could now take place on April Fools' Day). But without an easing of tensions, the handful of minor agreements that the EU and China have been preparing for the summit may remain on the shelf, making for a chillier affair. It has not gone unnoticed in European capitals that Beijing is doing its utmost to undermine the EU’s pushback by lavishing attention on Germany’s new government and on France, which holds the presidency of the EU Council. This was evident during a recent trip to China by President Emmanuel Macron’s top diplomatic adviser. “We can sense the desire to make France a privileged partner and use us against EU institutions,” the French diplomat said. “This won’t happen.”