Europe’s Pushback on China

So far, talks aiming at policy changes from China have failed. Having had enough of waiting, the European Union just used the occasion of a direct virtual meeting, on June 22, 2020, with Xi Jinping and Prime Minister Li Keqiang, to point out their many divergences. This "frank and intense" talk by Europeans is a new and welcome start.

China has risen to become strong and self reliant, while Europe wants to foster multilateralism and global integration. Does that make Europe vulnerable?How did we get here, and where do we go?

2020 has been designated as the official EU-China year. Chancellor Angela Merkel had organized a second EU-China Summit in Leipzig with all 27 Member States during Germany’s semester presidency. The hope was to come to concrete agreements on a number of stalled policy issues with China. Given the deep economic involvement in China, and its EU presidency starting from July 2020, Germany holds a significant role in the advancement of the EU-China agenda.

However, China has just hit the pause button for the September "leaders’ meeting" in Leipzig, once more freezing talks with Europe. All things considered, it seems like China is in no urgent need for a deal with the EU, at least until the US November elections.

The Covid-19 outbreak however pushed the two parties to organize a short, last-minute virtual summit on June 22 to discuss cooperation and bilateral relations. This is occurring in a context where Europe is addressing its economic vulnerabilities. In addition to the EU’s new investment screening regulation, the EU and some Member States are creating new guidelines and temporary rules on financial take-over by non-EU actors. For instance, in March, the European Commission published a Guidance to the Member States Concerning Foreign Direct Investment. In June, it published a White Book on Foreign Subsidies, which is to be reviewed by member states by September.

1. Europe wants China to stop delaying negotiations and to finalize a Bilateral Investment Agreement (BIA). The purpose of this agreement would be to set the concrete terms for all investments between the EU and China.
    
2. Europe also wants to agree with China on concrete steps in the following policy areas:
   • Climate change
   • Vaccines
   • Preservation of the multilateral system
   • Urban planning
   • Sustainable development.

What is China’s stance on all of this? It has not made openings in the negotiation for an investment agreement. It has also refused to come forward on other issues that could create a bridge with Europe, particularly on maintaining multilateralism. There has been no progress in talks over WTO reforms, or climate change. It has navigated the EU’s efforts for engagement by signing off non-binding statements, avoiding legal commitments or mechanisms for verification.

During the pandemic, Europe heavily depended on China’s mass production of masks and personal protective equipment (PPE). At the same time, the crisis also created public resentment at China’s initial mishandling of the crisis.

In fact, Covid-19 has had a surprising effect on the Chinese economy. The IMF has predicted a 7.1% decrease of GDP for the EU, and a 1.2% growth for China. But external demand appears to be a key component for China’s growth, as indicates a record-breaking $62 billion trade surplus in May.

Overall, there is a huge spike in medical exports related to the pandemic – a short term outcome of China’s "mask diplomacy" which seized the trade opportunity provided by the world’s dependence on the Chinese supply. According to Chinese statistics, from March to May, China exported 70.6 billion masks. The selling of masks has greatly contributed to China’s export value in euros. In the category of textile yarn and fabric products, there was a 93.53% YoY increase in May.

In this context, the issue of voluntary de-globalization and reshoring of European companies has come to the forefront. The scarcity of medical supplies during the Covid-19 pandemic was of course a shock that echoed in public opinion. The arguments for decoupling should be judged as much on economic grounds as on security grounds These don’t always coincide. As China increases its own self-sufficiency, it also facilitates its own economic resilience in the eventual case of a protracted conflict. At a moment when China initiates at the same time violent skirmishes with India in the Himalayas and aggressive maneuvers in the South China Sea and close to Taiwan, the risks from a military conflict cannot be completely overlooked by Europeans.

• China is not afraid to exercise hard power. After the announced imposition of a transposed national security law into Hong Kong, China has also increased its pressure on Taiwan, through declarations, naval and aerial maneuvers. Most recently, China’s border disputes with India have also turned deadly for the first time since 1962.
   
• The Chinese response is based on a calculation of respective strengths. The US has engaged in a harsh trade conflict with China, while also setting up a series of technology denials. Yet, China has taken no retaliation. Ultimately, China remains rather dependent on the US. The threat of technology denial (now effective through the case of Huawei and a number of other key Chinese companies), of decoupling from Chinese producers or subcontractors, and the possibility of financial sanctions are a unique combination. To this, one should add the hard power competition: despite the rising strength of the Chinese military, the US military presence on China’s periphery remains the most tangible obstacle to China’s further rise as a global military power.
   
• Everything will depend on the outcome of the US elections, which is ultimately the reason why China is choosing to pause negotiations with the EU at the moment. If Donald Trump is re-elected, China will finally find some interest in a deal with Europe on core trade and investment issues, against the risk of a US-led decoupling.

It is now up to Europeans to make their own interests and values China-proof.