How China Outsmarted Europe

“The United States should warm to the idea that in a world of interdependence there will be no economic decoupling with China,” states the German Transatlanticists Group at The German Marshall Fund of the United States (GMF) in a report whose title expresses the need for more ambitious relations between Berlin and Washington . According to analysts, the deterioration of these relations throughout Donald Trump’s presidency caused a “strategic crisis” in Germany. Without the US, there will be no Western alliance or stable and united Europe. The only hope lies in the new US President Joe Biden as well as the leadership and political will of the successor of Angela Merkel, as she leaves the political stage this fall.

The desire to revive transatlantic relations does not mean, however, that Germany is ready to abandon its economic interests in the People’s Republic of China (PRC), among others. In late January, at the Davos Economic Forum, the German Chancellor made it clear that Europe should not choose sides in the trade dispute between Washington and Beijing. “I would very much wish to avoid the building of [Cold War] blocs. I don’t think it would do justice to many societies if we were to say this is the United States and over there is China and we are grouping around either the one or the other,” she stressed^[1]. Simultaneously, she agreed with the words of the Chinese leader Xi Jinping and said that “we see a need for multilateralism.” As she added, this multilateralism is reflected, among others, in the China-EU Comprehensive Agreement on Investment (CAI), which was signed in December 2020 under pressure from Berlin and Paris. The head of the German government pointed out that she is “so satisfied” with this deal. It seems that Germany wants to “have a cake and eat it too” – to improve transatlantic relations and parallelly develop trade relationships with the PRC. The question is whether this is possible, given that the current status quo, beneficial to Germany, is not accepted by either China or the US.

European Council President Charles Michel (left) attends the ‘EU-China leaders’ meeting via video conference. Brussels, Belgium, September 14, 2020.

Change through trade

As noted earlier, Berlin’s (and Paris’) aspiration to normalize relations with Beijing was reflected in the CAI, concluded after seven years of painstaking negotiations marked by Beijing’s lack of interest. The signing of the agreement was so unforeseen that it astonished even the most experienced analysts^[2]. Although the asymmetry in trade relationships between Europe and the PRC has been discussed for years, and the European Union has been trying to cope with it just as long, so far, China was reluctant to open its economy to European investors. The German public broadcaster Deutsche Welle described the atmosphere of June’s EU-China summit as “frigid” – not even one joint press release was issued throughout it. An earlier summit was canceled, officially because of the COVID-19 pandemic, but unofficially due to Beijing’s lack of interest^[3].

So why was the agreement eventually concluded? The reasons may include the desire to underline the “strategic autonomy” of Europe, an idea stemming from Gaullism that French President Emmanuel Macron has been talking about for years, and to establish relations with the PRC before Joe Biden is sworn in as President of the United States. Consequently, it would provide French and German companies, such as Daimler, Merck, or Airbus, with the best possible access to the Chinese market^[4]. In 2020, China edged out the United States as the European Union’s largest trading partner, with a trade turnover of EUR 500 billion. Furthermore, Paris and Berlin feared that their companies would lag behind the American or Asian ones following the establishment of the Regional Comprehensive Economic Partnership (RCEP) by China in November 2020 between 15 Asia-Pacific nations (including New Zealand and Australia) and the “phase one” trade deal between Beijing and Washington, concluded in February 2020.

From the standpoint of Berlin and Paris, China and the US sometimes get along and occasionally argue, so being stuck between the two may be quite undesirable in the long run. Stepping out of line seemed to be the wisest idea from this perspective. Some analysts also point to the policy of change through trade that is a part of German politics since Willy Brandt’s Ostpolitik and as a result of which Germans do not mind autocracies, kleptocracies, or theocracies as long as they are able to do business with them – in the name of political realism and preserving peace^[5]. Eventually, German democratic principles will reach even the most distant autocracies along with German goods.

It is true that a number of German social democrats still believe that Brandt’s policy, i.e., doing business with the East German dictatorship, contributed to the unification of Germany. But that happened a long time ago, and China is not East Germany. The world has changed since then, and the change through trade policy, applied to post-Soviet Russia, has not produced any tangible results to date. On the contrary, Vladimir Putin stays strong while Berlin is co-financing his rule through the Nord Stream 1 and 2 projects. Already in the early 2000s, during Gerhard Schröder’s chancellorship, the German SPD began to abandon Ostpolitik.

Change through trade has been replaced by mere hypocrisy. Berlin pretends to care about the state of democracy in Russia or China as long as it can do business with them. Nobody in Berlin believes – despite declarations in this matter, for instance those of Minister for Economic Affairs Peter Altmaier – that China will democratize as a consequence of buying German cars^[6]. This is a smokescreen expected to cover Berlin’s ruthless pursuit of interests. The German car manufacturers have just emerged from a serious crisis and need new markets. Angela Merkel refrains from criticizing Beijing for its brutal actions related to Hong Kong or the Uyghurs not because she believes that free trade leads to political freedom, but since she fears the economic consequences of such action. The PRC is known for using the so-called hard power instruments such as punitive tariffs it imposes on trading partners for expressing harsh criticism of Xi Jinping’s policies. This has happened to Australia quite recently^[7]. Moreover, China believes that “it is the center of the world, and the rest are smaller or bigger barbarous lands,” as Michał Lubina, PhD, an expert on Russia and the Far East from the Jagiellonian University, stressed numerous times.^[8]

An affront to the US

According to Beijing, China should influence Europe, that “rotten continent,” as Chinese Communist Party (CCP) politicians underlined in the face of the pandemic, and not the other way around. The political elite in Berlin is very much aware of the Chinese perspective. Statements by German politicians about change through trade, multilateralism, or the stability of the world order should therefore be regarded as elements of political theater. However, this does not mean that Berlin did not have political motivations to conclude the CAI. In fact, it did have.

Germany wants to maintain the current status quo for as long as possible, to be an “honest broker” between Washington and Beijing, an indispensable part of the new global jigsaw puzzle. Certainly, the PRC had its reasons for accepting Europe’s offer and concluding the CAI despite its earlier reluctance to do so. When it became clear that Joe Biden would replace Donald Trump and pursue the same, if not tougher, policy towards China, Beijing decided to give in to Brussels and make the deal possible. Since Chinese companies already have full access to the European market and intend to squeeze as much as possible out of it, the benefits of the deal for Beijing must be political.

Firstly, it provides legitimacy for the communist regime, not only in the internal market, at the moment when Beijing’s image has been badly damaged by the pandemic, riots in Hong Kong, and persecution of Uyghurs. Secondly, and perhaps most importantly: the Chinese authorities hope that the agreement will prevent the establishment of a united anti-China alliance, i.e., permanent coordination of policy towards China by the EU and the US. The last round of negotiations was attended by Xi Jinping himself, which shows that China wanted to strike a deal in the limbo period between the end of Trump’s presidency and the beginning of Biden’s one. Beijing wants to warn Washington that it will not surrender but instead cause disagreement between Europe and the US. China has also taken advantage of the Germany’s need to achieve success during these hard times and when the European Union is torn apart by disputes over the rule of law, finances, and the response to the COVID-19 crisis.

In comparison to the US, Beijing has thus strengthened its position and deepened mistrust in transatlantic relations. Moreover, it has secured further European investment, aiming to sustain economic and technological development. This means, of course, that relations with China will be one of the main points of contention between the EU and the Biden administration, whose pressure on Europe will be harder to ignore than the one of Trump. Simultaneously, economic interdependence with China will increase, making European companies more prone to pressure from Beijing^[9]. And yet, this is not how it was supposed to be.

In 2019, after years of strengthening economic ties with the PRC, the EU adopted a new strategy on China, in which it was labeled as a “systemic rival.” Brussels formulated a tougher policy towards Beijing on the basis of the very same reasons as the US. These include deepening authoritarianism under Xi Jinping; the abandonment of hopes for meaningful economic reform; the reassertion of the role of the CCP throughout societal and economic life; the externalization of the problematic political and economic practices through the Belt and Road Initiative (BRI); and the aggressive trading strategies, such as Made in China 2025^[10].

The conclusion of the CAI should therefore be considered a huge strategic and diplomatic success for Beijing. Jake Sullivan, the US National Security Advisor, sought to influence the negotiations, but his objections were ignored. Some of the critics, including the German Greens, believe that China outplayed the EU and point to price dumping by China, the forced labor of Uyghurs in Chinese factories, and the aggressive policy of the PRC in the South China Sea, which Beijing will probably not abandon, no matter what was promised to the Europeans.

Optimism or naivety?

The CAI was supposed to solve the first two of these problems, at least partially. But did that actually happen? The EU claims that the deal will discipline Chinese state-owned corporations and force them to obey the international rules. Moreover, Beijing will be obliged to improve access to its market for EU investors in the automotive industry, health services, telecommunications/cloud services, as well as transport and engineering services in the construction industry. Additionally, Europeans are to be protected from forced technology transfers, which are required from foreign investors in China, and gain greater transparency on Chinese subsidies.

In short, the agreement aims to remove asymmetries in market access between the EU and China and ensure fair competition. Except that China already made similar pledges 20 years ago, when it joined the World Trade Organization (WTO), and failed to fulfill them. The exposure of democratic market economies to undemocratic state capitalism proved fatal. Now, the PRC is essentially offering the same old concessions as brand-new ones^[11]. As a result of the agreement, however, the Chinese market will remain far less open to European companies than the European market is to Chinese companies. Moreover, the transparency in state subsidies will only be imposed in the services sector, while most European investment in China relates to the manufacturing sector. As far as cars are concerned, the increased market access applies only to new investments in electric vehicles, while in the telecommunications sector, it cannot exceed a 50% equity cap.

In terms of the rest of the agreement, namely labor law, climate protection, or sustainable development, Beijing promised to try to implement them. The deal does not provide for any sanctions should that not happen. However, it is hard to imagine a better treatment of free trade unions or Uyghurs in China at this stage. Consequently, the EU gained very little from China. It approached the deal, to say the least, with a fair amount of optimism (or naivety), given China’s track record of respecting the agreements, its recent trade dispute with Australia, which was severely affected by punitive tariffs introduced by Beijing as a consequence of using “Wuhan virus” term, or how it handled the situation in Hong Kong.

Now, the question remains how to accommodate the positions of Washington and its partners on the Old Continent. Some American analysts convince the Europeans that they cannot have the US security umbrella on the one hand and closer, even if only trade, relationship with the PRC on the other. Currently, Germany is in a particularly difficult position. It depends on the United States for its defense, Russia for its gas supplies, and on China for its industrial exports. This triad will prove increasingly problematic for Berlin in the coming years, regardless of its relations with Joe Biden^[12].

It would not be true to say that there were no objections to the signing of the CAI on the European side. During a meeting of the 27 ambassadors to the EU, the Belgians and the Dutch, among others, expressed doubts about the clauses concerning human rights. In turn, Poland criticized Berlin for the rush and argued that it would be better for the EU to postpone the conclusion of the agreement until this matter is discussed with the United States after Biden takes over the White House. Warsaw claimed that the deal with China should take into account transatlantic relations. However, these arguments were not considered.

To maintain the status quo

As a result, Poland is in a difficult situation. After all, it is no secret that it is dependent on the US for its security. Furthermore, during Donald Trump’s presidency, Warsaw managed to gain, for instance, an enhanced US military presence on NATO’s eastern flank. America has also contributed to Poland’s energy independence through LNG supplies. In politics, nothing comes for free. In return, potentially deeper cooperation with the PRC had to be abandoned.

Trump took advantage of the divisions in Europe and split the EU into two parts – the good and the bad. It was quite an effective strategy and, even though Biden declared that he intends to put agreement and consensus first, there is no reason why the new president would not continue this approach. This means that Washington’s mounting pressure on European countries in the matter of China will not change at all. This, again, will put Poland in a tight spot having to choose between Brussels (the European partners) and the USA. Likewise, there will be enormous pressure on Poland from Paris and Berlin to help in maintaining the current status quo, which, according to German experts, is good for Poland just as much as for Germany. According to Thomas Kleine-Brockhoff, PhD, Vice-President of the German Marshall Fund, Poland “needs stability even more than Berlin does.” In his opinion, this stability is the source of Poland’s prosperity after 1989. This is true, but would it stop China’s growth? By no means. There is no guarantee that – despite Berlin’s efforts – the current order, which Beijing and Washington reject, can be maintained. Germany’s current diplomatic game is therefore risky. For it and for Poland.

European politicians justify their decision to enter into an investment agreement with China on the grounds that sovereign decisions need to be made. According to them, the US did not seek the EU’s consent for its trade agreement with Beijing. Except the United States has the means to force Beijing to honor the agreement. What instruments does the EU have? China is interested in the European market. However, we all know that the EU would have to fear harsh retaliation if it tried to limit Beijing’s access to the EU market.

According to information revealed by the German weekly Wirtschaftswoche, Xi Jinping convinced Angela Merkel to the CAI by promising her to open the Chinese mobile services market to Deutsche Telekom. However, in exchange, telecommunications company China Mobile will be able to enter the German market. This will allow Germany’s critical infrastructure to be infiltrated by the Chinese. Moreover, the newspaper claims that France has also arranged various “side benefits” in the CAI for itself^[13]. We will all pay the price for this short-sighted policy aimed at generating immediate profits for Western European corporations.

This is, in fact, the key moment when, together with the US, it is still possible to force China to respect the basic terms and conditions of cooperation as well as international order. Soon it could be too late for that, especially if mistrust between Europe and the USA develops. The EU hopes that the conclusion of the CAI is just the beginning and that in the coming months, all the difficulties could be resolved, and matters clarified (i.e., China needs to be forced to make further concessions) prior to the expected ratification of the CAI in 2022 (under the French Presidency of the EU). Whether this strategy will succeed, however, is more than doubtful. A single investment agreement will not transition China from autocracy to democracy. It will also not eliminate discriminatory practices that China seeks to continue as they are in its interest. Certainly, however, Biden’s administration will formulate its China policy from a much weaker position – and it will owe this to its allies on the Old Continent^[14].

^[1] Merkel sides with Xi on avoiding Cold War blocs, Politico, January 26, 2021, https://www.politico.eu/article/merkel-sides-with-xi-on-avoiding-cold-war-blocs/.

^[2] Dempsey J., Is the EU-China Deal a Mistake?, Carnegie Europe, January 7, 2021, https://carnegieeurope.eu/strategiceurope/83572.

^[3] Bielecki T., Lodowata atmosfera na spotkaniu UE z Chinami, Deutsche Welle, June 22, 2021.

^[4] Ewing J., Myers S.L., China and E.U. leaders strike investment deal, but political hurdles await, The New York Times, December 30, 2020, https://www.nytimes.com/2020/12/30/business/china-eu-investment-deal.html.

^[5] Szabo S.F., No Change Through Trade, Berlin Policy Journal, August 6, 2020, https://berlinpolicyjournal.com/no-change-through-trade/.

^[6] Karnitschnig M., Hanke Vela J., Germany’s Altmaier defends Berlin’s muted response to China’s crackdown in Hong Kong, Politico, July 15, 2020, https://www.politico.eu/article/peter-altmaier-defends-berlins-muted-response-to-chinas-crackdown-in-hong-kong-germany/.

^[7] Potential tariffs not punishment but wake-up call to Australia, The Global Times, May 12, 2020, https://www.globaltimes.cn/content/1188187.shtml.

^[8] Lubina M., Chiny zdominują świat? Ekspert: to nie takie pewne, Deutsche Welle, June 16, 2020, https://www.dw.com/pl/chiny-zdominuj%C4%85-%C5%9Bwiat-ekspert-to-nie-takie-pewne/a-53193124.

^[9] Lubina M., Chiny zdominują świat? Ekspert: to nie takie pewne, Deutsche Welle, June 16, 2020, https://www.dw.com/pl/chiny-zdominuj%C4%85-%C5%9Bwiat-ekspert-to-nie-takie-pewne/a-53193124.

^[10] The meaning of systemic rivalry: Europe and China beyond the pandemic, European Council on Foreign Relations, May 15, 2020, https://www.ecfr.eu/publications/summary/the_meaning_of_systemic_rivalry_europe_and_china_beyond_the_pandemic.

^[11] Rachman G., Europe has handed China a strategic victory, The Financial Times, January 4, 2020, https://www.ft.com/content/2d759671-0b1d-4587-ba63-7480990f0438.

^[12] Lightfoot J., Germany may not like the American messenger. But it should heed his message, The Atlantic Council, June 26, 2020, https://www.atlanticcouncil.org/blogs/new-atlanticist/germany-may-not-like-the-american-messenger-but-it-should-heed-his-message/.

^[13] Wettach S., Guter Geheimdeal – oder gefährliches Spiel, Wirtschaftswoche, January 12, 2021, https://www.wiwo.de/my/politik/ausland/chinesisch-deutsche-zusammenarbeit-guter-geheimdeal-oder-gefaehrliches-spiel/26775380.html.

^[14] Dempsey J., Is the EU-China deal a mistake?, Carnegie Europe, January 7, 2020, https://carnegieeurope.eu/strategiceurope/83572.

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