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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All the Tools

European Commission President Ursula von der Leyen has a history of using her state of the union speech to drop policy bombs that send technocrats in the Berlaymont building scrambling for cover. Her annual address in mid-September was no exception. The big surprise this time was her announcement that the Commission would be opening an anti-subsidies investigation into electric vehicles (EVs) from China. The announcement takes Europe into uncharted territory with Beijing at a time of heightened bilateral tension. And it points to a broader policy pivot by the Commission in response to growing pressure from member states, most notably France, whose support von der Leyen needs to secure a second term.

Going forward, we should expect less focus on new rules and regulations to restrict economic engagement with China and greater emphasis on using the tools the EU has already developed to level the economic playing field and shore up European industrial competitiveness. Tougher export controls and outbound investment restrictions are out for the time being, victims of robust resistance from the big member states (more on this below). Use of traditional trade tools and the EU’s new procurement and foreign subsidies instruments is in. “The EV investigation may be dominating the headlines, but you can’t see it in isolation,” one Commission official told me. “You are going to see a greater use of trade defense instruments. We will be making use of all the tools in our toolbox.”

French Flavor

This looks like a Europe with a stronger French flavor. As another Commission official told me: “Out of all the governments in the EU, there was only one that was asking for this EV investigation and that was France.” Berlin, by contrast, is looking on with growing anxiety, concerned that any retaliation from Beijing would hit its companies far harder than their less exposed French counterparts. “No one in Berlin was consulted. No one saw this coming. Anyone who says differently is simply wrong,” a senior German industry official fumed.

It all points to a growing Franco-German divide in dealing with China, a worrying development at a time when the EU’s two biggest member states are already at loggerheads over nuclear energy, defense policy, and green subsidies. Germany and France have been engaged in an awkward dance over China policy since Olaf Scholz became chancellor nearly two years ago. French officials are still annoyed that Scholz rebuffed Emmanuel Macron’s invitation to travel to Beijing together in late 2022. German officials were sharply critical of the French president’s solo trip to China last April, when he responded to von der Leyen’s nascent de-risking push with a slew of business deals, whispered sweet nothings to Chinese leader Xi Jinping over tea, and appeared to play down Europe’s stake in Taiwan’s fate.

Protocol for Content

My fear is that harmless private sniping between Berlin and Paris over China policy now risks turning into something more serious. As one French diplomat put it to me: “The decoupling between France and Germany on China is real.” I spent several days in Paris in late September gauging the mood on China and came away with two main conclusions, both of which will make the Germans squirm. First, as detailed above, Paris is leaning aggressively on Brussels to use its trade defense instruments to counter what it views as a dual economic threat from China and the United States. Where the Germans are risk averse, due to their extensive investments in China, the French are willing to live with a world where retaliation from Beijing is a growing possibility. “France was smart enough not to be as successful in China as the Germans,” another French official told me. “Now they are much more exposed.”

Second, Paris is selling itself to Beijing as the pragmatic alternative to a Berlin and Brussels bent on de-risking, diversification, and reducing dependencies. This was the message on Macron’s trip to China in April. And it appears to be at the heart of his plans for next year, when Paris and Beijing will celebrate 60 years of diplomatic relations. Macron is hoping to host Xi in 2024 as part of those celebrations, although French officials are playing down the likelihood of a visit in late January, when the date of the anniversary falls. When I pointed out that Berlin had gone out of its way to keep the 50th anniversary of German-Chinese relations low key, despite pressure from Beijing, I was assured that France would do it differently. “Sometimes you can trade protocol for content,” a third French official told me.

Out in the Cold

That explains why Macron was happy to refer to China as a “robust and close comprehensive strategic partner” in the lengthy joint statement he issued with Xi in April and why he will send former prime minister and longtime China friend Jean-Pierre Raffarin to attend the Belt and Road Forum later this month, alongside Russian President Vladimir Putin. All but a few European countries are staying away. “Macron sees that the Germans are under political pressure to get tough on China, so he is casting himself as a friend,” an EU official told me. “Ultimately, it is about securing opportunities for French business.” A veteran observer of France’s China policy put it this way: “Macron is two-faced with the Chinese, cozying up to Xi while pushing for tariffs on Chinese EVs. The Chinese can see through it. But they are perhaps more comfortable with Macron’s open contradictions than they are with Scholz’s murkiness.”

Behind the French approach is concern that its carmakers, whose footprint in China is dwarfed by that of the Germans, could be shut out of EV supply chains that the Chinese dominate. Hence the aggressive push to lure investments by Chinese firms such as BYD, whose headquarters French Finance Minister Bruno Le Maire visited in late July. And hence the push for the EV investigation and a separate French subsidy scheme for EVs that would penalize cars produced with high emissions. Both are meant to discourage exports from China, while encouraging Chinese investments in France. “The only hope for France is that Chinese EV and battery makers invest here,” the French diplomat told me. “Our carmakers don’t have the relationships with Chinese carmakers that the Germans do. This raises the risk that they are left out in the cold.”

Full-blown Rebellion

Where Berlin and Paris have found common ground is in their opposition to von der Leyen’s economic security agenda. Although some German and French officials have signaled an openness to deeper European cooperation on export controls and the idea of an outbound regime, opposition at the top levels of government and industry runs deep. “The economic security strategy is doomed to fail,” a French finance official told me, accusing the Commission of a power grab and of doing the Biden administration’s bidding. A new internal position paper from the Federation of German Industries (BDI) is also withering, slamming the Commission for trying to “securitize” economic policy and failing to complement greater trade controls with a positive trade agenda. An outbound regime, the paper says, would represent a “major interference in entrepreneurial decisions and international investment flows”.

An EU official told me that there was a “full-blown rebellion” against Commission plans to implement core tenets of the EU’s 2021 dual-use regulation, which allows individual member states to put export controls introduced at the national level (but not approved in multilateral regimes such as the Wassenaar Arrangement) on the EU agenda. The Netherlands, Spain, and Lithuania have introduced national controls in recent months, but other states are refusing to discuss collective implementation. The French see Spanish controls on quantum computing as a threat, I was told. And not a single state has signaled a readiness to follow the Dutch on their chip controls. “The Commission is being forced to backtrack,” the official said. “The member states are furious.”

Against this backdrop, the Commission unveiled a list of critical technologies this week that will form the basis of joint risk assessments with EU member states over the coming months. There are no surprises in the list, which includes a total of 10 technology categories, four of which (advanced semiconductors, artificial intelligence, quantum, and biotech) are seen as priorities. Despite fierce opposition from some member states, the Commission’s push to examine the risks tied to these technologies is vital. This Commission may not achieve a breakthrough in tackling these risks before EU elections in June of next year, but the debate on controlling them will not go away. “The resistance is mainly a turf problem,” a Commission official told me. “Gravity is in our favor. There is no way to ignore the issues von der Leyen has put on the table.”

Transatlantic Impasse

Given the member-state backlash, I expect a US-EU summit scheduled for October 20, which the Commission had hoped would send a signal about transatlantic unity on export controls and outbound restrictions, to say nothing new on these topics. A comprehensive deal on green steel and aluminum is also looking elusive. I was told that the United States and the EU will announce a “political agreement” on tackling excess capacity that will be opened to other countries. But the two sides are unlikely to square the circle on decarbonization, the other half of what was intended to be a broader deal reconciling the EU’s carbon border adjustment mechanism (CBAM) with US plans for industrial emissions reduction.

Barring a last-minute breakthrough, the threat of a return of Trump-era steel and aluminum tariffs, and EU countermeasures, will likely persist. A two-year tariff truce between Washington and Brussels is due to expire at the end of this year. “It is clear that the tariffs should not come back,” an EU official told me. “But we still have to find a way to hit the pause button in legal terms.” This would be a sub-optimal outcome for von der Leyen, who has been trying to build a bridge to Washington on China while fighting off a rear-guard action by the French to swing the transatlantic focus back to the US Inflation Reduction Act (IRA) and its damaging effects for Europe. In a nod to this pressure, I was told that a report on the impact of the IRA will be presented to the European Council later this month.

The View from Beijing

How is all this seen in Beijing? A recent trip to China by EU Trade Commissioner Valdis Dombrovskis offered some clues. Chinese officials, I am told, did not issue any concrete threats of retaliation against Europe during the visit. But they did make clear that the EU was venturing into dangerous territory with its EV investigation, targeting of Huawei, and threats to deploy other instruments in its China toolbox. “There are people in Beijing who think that China can address its economic woes by flooding global markets with green technologies,” an EU official told me. “This, rather than structural reform, is seen as the solution to their problems. So, by going after electric vehicles, we are attacking their growth strategy.” The EU should tread carefully, but it shouldn’t lose its nerve. On that, the French have it right.