Watching China in Europe - July 2022

July 05, 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. 

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From Symbols to Substance

Discerning where Germany’s government is heading on China has not been an easy task. One can point to the toughly worded coalition agreement between the three governing parties, which broke with the self-censorship of the Angela Merkel era by highlighting contentious issues in the relationship, from Taiwan to Hong Kong and Xinjiang. Or one can look to the signs that Foreign Minister Annalena Baerbock, Economy Minister Robert Habeck, and other members of the cabinet are determined to take Germany in a new direction in which resilience and diversification replace Wandel durch Handel (change through trade) as the guiding principle of China policy.

But one must also acknowledge that not everyone in Berlin is eager to rock the China boat. Chancellor Olaf Scholz has voiced support for deepening economic ties with China. Just last month, his top foreign policy adviser said the government’s primary goal with China was to reduce the level of systemic rivalry as much as possible. Those messages are music to the ears of German CEOs whose firms have invested billions in China and continue to double down in their largest and most lucrative market.

The trouble in assessing whether a real shift is underway and how far it might go is that the signals coming out of Germany have been largely rhetorical until now. The government has not been confronted with hard policy choices on China yet. Yes, Scholz chose to visit Japan rather than China on his first trip to Asia. And Habeck’s ministry refused to extend investment guarantees to Volkswagen due to concerns about the firm’s presence in Xinjiang. But neither of these decisions came at a real economic cost. Ultimately, they were symbolic. In the coming months, that is likely to change. Once it has, we will have a better idea whether Scholz or his Green ministers have the upper hand.

Huawei and COSCO

What will these hard policy choices look like? First, I am told that the government will be taking its first decisions on which suppliers to allow into Germany’s 5G network in the coming weeks. The IT Security Law passed by the Merkel government in April 2021 did not explicitly ban suppliers like China’s Huawei, but instead set up a complex two-step assessment process that left it to the next government to decide which suppliers of critical components are considered trustworthy and which are not. People familiar with the Scholz government’s thinking told me that it was highly unlikely that Chinese suppliers would be allowed in. “We have a new political constellation,” one official said. “Under Merkel there was no consensus. Now there is.” Still, this is one to watch.

Reaching a consensus on another looming decision may prove more elusive. I was told that the government has until September to decide whether to approve a deal that would hand China’s COSCO a 35 percent stake in one of the main terminals at the port of Hamburg. News of COSCO’s €100 million bid surfaced a year ago and, according to reports at the time, Merkel’s government was prepared to give it a green light. In the end, it never got a chance to do so because the purchase was not finalized in time. Now the deal is ready. But the green light has turned yellow. Before long, it could be red.

Scholz’s government has Europeanized the process for approving the deal, seeking input from the European Commission and other member states through the EU’s investment screening mechanism. Opinions issued by the European Commission are not binding, but regardless of where the EU comes down, I am told there is now a consensus across Germany’s foreign, economy, and transport ministries that the COSCO deal should not be allowed to go ahead. “This isn’t just about the Chinese taking a stake in a German port,” one German official told me. “This deal needs to be viewed through a broader European lens, and when you do that there are a number of reasons to view it with skepticism.”

“Geopolitical Tool”

As analysts at the Mercator Institute for China Studies (MERICS) explained in a note on the COSCO-Hamburg deal last September, Chinese companies already control roughly 10 percent of the shipping through European ports, including majority stakes in the Greek port of Piraeus, the Spanish ports of Valencia and Bilbao, and shares in the ports of Rotterdam in the Netherlands and Vado in Italy. What may be good for business in the short term may not be so good for European national security further down the line. “COSCO is competing on an uneven playing field with the backing of the Chinese state, and its market dominance is a potential geopolitical tool for Beijing,” MERICS analysts wrote.

Officials in Berlin and Brussels are reluctant to discuss the pending Hamburg decision in detail. But it is clear that many people are viewing it as an important gauge of the German government’s broader approach to China—in part because it comes with a twist. Scholz was mayor of Hamburg for seven years, a period in which trade with China through the city’s port boomed. In 2015, he paid a visit to the Beijing headquarters of COSCO, a company that has had close links to Hamburg for nearly four decades. Any decision to block the deal would have to be rubber-stamped by the cabinet, including Scholz. Might he be tempted to try to push the port deal through over the objections of his top ministers? It is a decision that will be watched closely in Germany, Europe, and beyond.

G7 and NATO

At the G7 and NATO summits last week, there were no signs of German or European unease with a tougher China stance. The G7 communiqué mentioned China 14 times, compared to just four mentions at the last summit in Carbis Bay in 2021. And the wording on the economic relationship and China’s human rights record was far sharper. Whereas in 2021, the G7 vowed only to “consult on collective approaches” to China’s non-market policies, the language coming out of Schloss Elmau in the Bavarian Alps promised more: coordinated action to promote diversification, resilience to economic coercion, and a reduction of strategic dependencies.

This is all good—except that the G7 also felt the need to rebrand its one-year-old Build Back Better World initiative as the Partnership for Global Infrastructure and Investment at a time when neither the United States nor the EU seem anywhere close to getting their infrastructure act together. Half a year after the launch of the EU’s Global Gateway initiative, we are still waiting for someone in Brussels to take the reins and deliver on European Commission President Ursula von der Leyen’s promise of a robustly funded geopolitical tool to rival China’s Belt and Road Initiative (BRI). In Washington, plans to unveil new flagship projects at the start of 2022 were quietly shelved and the main driver of the initiative, Daleep Singh, just left the White House. For now, the BRI can sleep easy.

Ahead of the NATO summit in Madrid, there was quite a bit of unease in Berlin and Paris at the idea of lumping Russia and China together as a collective threat in the alliance’s long-term strategy document. But, unlike last year, the grumbling did not break out into the open. The new document referred to “systemic challenges” from China and a “deepening strategic partnership” between Moscow and Beijing, while also making clear that NATO was open to “constructive engagement” with China. This was a balance that Germany and France could live with. “In the end, there was not much pushback from the Europeans on the China language,” one NATO official told me. “The conversation has evolved since last year. There is a greater degree of transatlantic convergence. How China has positioned itself on Ukraine has been impossible for anyone to ignore.”

Trying to Talk to China

Despite the vitriolic reaction from Beijing to the two summits, officials in the European capitals say they remain committed to dialogue with China. Berlin recently proposed that bilateral government consultations with Beijing take place in January. Annalena Baerbock had planned to pay a visit to China later this month, before logistical constraints forced her to reassess. After flying to Indonesia for a meeting of G20 foreign ministers this week, she will now travel on to Japan and to the Pacific island of Palau, one of just 14 states that maintain diplomatic relations with Taiwan.

At the EU level, the situation with China is also fraught with difficulties. After months of uncertainty, it appears that a high-level economic dialogue between Brussels and Beijing will take place in mid-July. But the EU faces a delicate balancing act. Officials plan to raise a host of contentious issues in the talks, from the war in Ukraine to sanctions, China’s zero-COVID policy, Beijing’s coercion of Lithuania, and industrial subsidies. “It will not be business as usual,” one told me. But neither do they want these to get in the way of a proper discussion on bilateral and global cooperation. Senior officials in Von der Leyen’s cabinet have made clear in recent weeks that they do not want a “Lithuanization” of EU-China relations, in which dialogue is no longer possible. But Beijing is not making it easy. EU officials who have tried to engage with their Chinese counterparts on the case of an EU delegation employee in Beijing who was detained by Chinese authorities nearly a year ago have been told, in no uncertain terms, to mind their own business.

No one in Brussels is expecting an improvement in ties before the Communist Party congress in the autumn. And even after that, the path for resolving the growing list of problems in the relationship is unclear.