EYCK FREYMANN AND ELETTRA ARDISSINO

Last February, Russia’s invasion of Ukraine came as a shock for European leaders. Now, chastened and newly conscious of geopolitical risk, the same politicians are starting to sour on China. The China-Europe relationship will not go entirely off the rails this year because most European capitals are reluctant to sign on to an American China policy that they see as unnecessarily combative. In the longer term, however, it seems inevitable that the once-friendly relationship between the world’s second and third-largest economies will turn frosty. 

European politicians are not just blaming China for supporting Russia’s war effort. They are staking out an ambitious agenda, coordinated with Washington, to “de-risk” the economic and technological relationship with Beijing. Thanks to structural economic factors, skillful American diplomacy, and Chinese diplomatic incompetence, the breakdown in the relationship is poised to accelerate.

FROM FRIENDS TO FRENEMIES

China’s cozy relationship with Europe was forged in the Eurozone crisis of the early 2010s. German carmakers, French engineering firms, and Italian clothing brands flooded into China’s vast and fast-growing market. Smaller economies in Europe’s south and east, such as Greece and the Czech Republic, looked to China for foreign direct investment. From the perspective of Europe’s powerful business groups, the profits to be made in China were worth the onerous joint-venture requirements and risk of intellectual property theft. Expanding trade with China was not just profitable; in most European countries it was extremely popular with voters. 

This was why the China-Europe relationship seemed resilient, even as U.S. policy towards China began to turn hawkish during the Trump administration. Under pressure from NGOs and civil rights groups, European politicians periodically complained about China’s human rights policies, but these disputes were largely performative. Tensions began to simmer during the COVID-19 pandemic, as negotiations over a proposed investment agreement broke down amidst European concerns about forced labor in Xinjiang and surveys showed European voters losing confidence in China. Yet business interests made sure that the change in public sentiment did not translate into a change in policy. Former German Chancellor Angela Merkel enthusiastically embraced a China policy known as Wandel durch Handel (“change through trade”), through the very end of her term in office in December 2021 — the idea being that the more China was exposed to Western values through economic interactions, the more liberal and open it would become.

All this changed on February 24, 2022. China’s refusal to condemn Vladimir Putin alienated EU leaders from Beijing from the outset of the war. While China has so far resisted sending lethal weapons to Russia, it has provided vast quantities of dual-use equipment, including drones and chips that the Russian military uses to target Ukrainian positions on the frontline. By highlighting the China-Russia partnership, the war has also linked the geopolitics of the European and Pacific regions more closely than at any time since the Cold War. Japan’s foreign minister said last week that the country is in talks to open a NATO office. The conflict has also forced Europeans to acknowledge the risk that China may attack Taiwan, leading to a war with even greater economic fallout than the one in Ukraine. 

… Europe will seek to deter Beijing from changing the status quo by force, knowing that this would inevitably lead to war with global economic consequences. 

To be sure, U.S. and European interests on China policy are not perfectly aligned. Most European countries have released strategies for the “Indo-Pacific” region, but the bloc’s interests there are more economic than geopolitical in nature. As French President Emmanuel Macron remarked in a controversial April interview in Beijing, European countries have neither the interest nor the intention to intervene in a potential conflict over Taiwan. 

However, both sides of the Atlantic share an interest in reducing their vulnerability to Chinese coercion and unfair competition, and to deterring Beijing from destabilizing Asia as Russia has destabilized Eastern Europe. As Macron reiterated in the same interview, Europe is a trading economy and has a keen interest in peace and stability in the Taiwan Strait. This means that Europe will seek to deter Beijing from changing the status quo by force, knowing that this would inevitably lead to war with global economic consequences. 

BRUSSELS GETS TOUGH

Meanwhile, across the bloc, holding pro-China positions is increasingly a political liability. In Italy, populist Prime Minister Giorgia Meloni said last week that she intends to withdraw from the Belt and Road Initiative. In Germany, Merkel’s center-right Christian Democrats, currently in opposition, have fully repudiated her Wandel durch Handel policy, overriding resistance from their supporters in the business community. The next time Germany holds elections, conservative parties plan to attack Chancellor Olaf Scholz, a Social Democrat, as too soft on China. 

In Central and Eastern Europe, which until two years ago were some of China’s closest partners in Europe, the change has been even more profound. Several have sent delegations to Taiwan, leading to trade disputes with Beijing. Czech President Petr Pavel dismissed Xi Jinping’s offer to broker negotiations between Russia and Ukraine, saying that China does not have an interest in peace. China’s ambassador to France Lu Shaye did not help matters last month when he remarked that post-Soviet EU member states “have no effective status in international law.” (Lu has since retracted the comment.) As Gabrielius Landsbergis, Lithuania’s foreign minister, commented on Twitter: “If anyone is still wondering why the Baltic States don’t trust China” to broker peace, they need look no further.

These political shifts have created space for the European Commission, led by President Ursula von der Leyen, to push for a unified European policy on China. Von der Leyen is seeking re-election next spring and is courting the bloc’s smaller member states by proposing to “de-risk” the economic relationship. Last week, the Commission proposed sanctioning several Chinese entities suspected of aiding Russia’s war efforts. In the coming weeks, it will propose a new outbound investment screening regulation targeting venture capital and niche sectors. It is also preparing ambitious strategies to reduce dependence on China for “strategic” supply chains. More detail was announced at the G7 conference in Hiroshima earlier this month. De-risking is both rhetorically softer and more precise than the concept of economic “decoupling” favored by the Trump administration. For von der Leyen, however, it is clearly a euphemism for aligning Europe’s economy more closely with the U.S. — on the basis of a shared assessment that China is a “systemic rival” that cannot be trusted. 

China has responded by doubling down on its partnership with Viktor Orbán, Hungary’s right-wing populist prime minister. Orbán is notorious for regularly holding the rest of the EU hostage on foreign-policy decisions, which require unanimity from the bloc’s 27 leaders. In 2022, Chinese EV-battery maker CATL announced that it would invest 7 billion euros into a new plant in Hungary. Beijing may believe that by cultivating economic ties with Orbán, it will be able to sway the EU’s foreign policy process in its favor. However, the Ukraine war has demonstrated that Orbán cannot resist the collective will of the rest of the European bloc on essential foreign policy issues. His vetoes have delayed sanctions packages against Russia and aid disbursement to Ukraine, but they have not prevented them altogether. The fundamental reason is that Europe has much more leverage over Hungary than China does. In 2020, investors in EU countries accounted for nearly 60 percent of inward FDI stock in Hungary. Chinese investors’ share was below 3 percent, according to the Hungarian National Bank. 

DECLINING GAINS FROM TRADE

Akey reason for the transition in Europe’s approach is that its trading relationship with China no longer offers the clear-cut benefits it did just a few years ago. As Chinese manufacturers have moved up the value chain, they are increasingly competing with European firms in the same markets. In 2016, Europe’s trade deficit in goods with China was 145 billion euros. Last year, that figure had more than doubled, to 396 billion. Some of this change can be explained by depressed demand for European consumer goods as Chinese buyers were stuck home due to government-mandated lockdowns. But there is another, structural driver that will outlive the now-defunct zero-COVID policy: Chinese firms are purchasing fewer high-tech goods from Europe, thanks to Chinese rules-of-origin requirements that have incentivized Chinese producers to substitute imports of precision parts with domestically made alternatives.

Nowhere is competition intensifying faster than in the auto industry, where Chinese makers are becoming global exporters for the first time. Beijing has been using regulations and generous consumer subsidies to support mass adoption of EVs since the early 2010s; Brussels did not follow suit until the pandemic. As a result, European carmakers, once at the cutting edge of the auto industry, failed to take the EV transition seriously until very recently, and are now lagging behind technologically. Thus, Chinese brands are beginning to crowd out European competitors as drivers across the bloc stop buying combustion-engine cars. In 2022, over 20 percent of new EU-registered autos were electric or hybrid, up from just 3 percent in 2019. Other obstacles that previously limited Chinese cars’ attractiveness to European drivers seem to have vanished: BYD and other Chinese brands now regularly perform well on European safety tests and have a growing presence at trade shows. In February 2023, the value of Chinese car imports into the EU hit 1.9 billion euros — an increase of 144 percent over January 2019. Chinese purchases of German-made cars are up just 12 percent in the same period. 

The evolving dynamics in the EU-China relationship present a strategic opportunity for Washington, which the Biden administration is working deftly to exploit.

Brussels’ definition of economic “de-risking” will inevitably be narrower and more gradualist than Washington’s. Protectionism is philosophically anathema in an economic bloc whose origins lie in the elimination of trade barriers. It also opens up the possibility of retaliation from Beijing. In the near-term, pushback from industries that are still doing well out of the trade relationship, such as French and Italian luxury-goods firms, will limit the political space to impose radical countermeasures. In the longer term, however, the interests of European carmakers and clothing brands will diverge ever more clearly — and at that point, it is all-but-certain that the former will win out. Auto production is the beating heart of the European political economy, making up more than 10 percent of GDP in many Central European countries. Moreover, European producers of other strategically or economically crucial industrial goods are also likely to notice China’s cooling demand for their exports, even if it takes years for this frustration to translate into restrictions on imports of Chinese cars or other industrial goods. 

AN OPENING FOR WASHINGTON

The evolving dynamics in the EU-China relationship present a strategic opportunity for Washington, which the Biden administration is working deftly to exploit. European publics want a tougher line on China. European corporates will soon realize that a once-lucrative export market is now turning out formidable competitors, both at home and abroad. European leaders want to reduce their exposure to a potential crisis over Taiwan, which could be even more economically disruptive than the Russian invasion of Ukraine. Meanwhile, European institutions are relying on U.S. leadership to maintain unity and support for Ukraine’s war effort. This constellation of factors has opened avenues for enhanced transatlantic cooperation.

(Source: The Wire China)

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