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Is Europe Prepared to Deal with the China Challenge?

A ChinaFile Conversation

Chinese President Xi Jinping is on a grand tour of the western end of the “New Silk Road,” in visits to Serbia and Poland this week before he returns to Beijing via Uzbekistan, a more eastern outpost on China’s expanding 21st Century trade route. Xi was present in Belgrade and Warsaw at the signing of a series of agreements in areas ranging from trade, education, finance, technology, and civil aviation as China looks to bolster its presence in central and eastern Europe. Chinese foreign direct investment to Europe hit a record high in 2015 of around 20 billion euros (U.S.$22.45 billion), a 44 percent annual rise. Germany, France, and Britain—whose voters on Thursday voted to exit the European Union—accounted for almost half the total. Central and eastern European countries are competing for Chinese investment, looking to lure firms in need of new markets while trying to develop a path for their own products to land in China’s huge but complicated market. What kinds of challenges does this growing level of engagement produce, and how should European countries and institutions respond to them? —The Editors

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China has dramatically increased its footprint in Europe, but the continent has been slow to awaken to the challenge. President Xi Jinping’s trip to Poland and Serbia this week symbolizes China’s acute interest in establishing Central and Eastern Europe as a gateway to the rest of Europe. At the same time, China is investing in European infrastructure and buying up companies across the continent with the aim of technological upgrading at home.

China’s growing economic presence in Europe has not only made relations with Beijing much more tangible for Europeans. It also creates greater potential for conflict, not only over economic issues but also about security-related matters. The stakes are high and a range of strategic issues currently on the table have the potential to shape the nature of European-China relations for years to come. In this critical phase, China tends to set the tone for engagement.

China’s outbound global investment strategy aimed at technological leapfrogging has triggered hot public debates and is currently receiving top-level government attention in Germany and France. In the meantime, the E.U. is faced with the complex decision of whether or not to grant market economy status (M.E.S.) to China. Such status would make it harder for the E.U. to impose duties on cheap Chinese imports. At the core of these debates is the question of how to deal with a state-driven economy that carries enormous global weight and is a key trading partner for Europe.

An increasingly authoritarian and nationalistic China also makes its clout felt in security matters, raising concerns in Europe. The South China Sea may be far away from Europe, but it is becoming harder for European policymakers to ignore the potential fallout from escalating tensions in the region for their efforts to uphold a global order based on the rule of law and multilateralism.

European policymakers are not yet equipped to launch and sustain the strategic repositioning process necessary to ensure greatest possible alignment of China’s more consequential role in Europe and beyond with European interests.

Through its engagement in Europe, China increasingly shapes mutual perceptions among Europeans countries, reviving old and deepening existing fault lines. China’s 16+1 cooperation initiative with Central and Eastern European countries is raising eyebrows in “old Europe.” Meanwhile, Germany and the U.K. provoke distrust among their neighbors as they foster their “special relationship” with China.

Amidst rising mistrust among Europeans and with a critical set of decisions to be taken in the near future, Brussels has made efforts to define a collective European response. The “China strategy” the E.U. released this week offers a very clear-minded and sober take on relations with China. It therefore points the way for Europe’s overdue strategic repositioning.

Yet overall, the E.U.’s China approach remains predominantly defensive. Issuing joint E.U. statements on the territorial disputes in the South China Sea is important but especially with regard to the future of economic interactions with China the Union lacks a proactive agenda. The debate over the M.E.S. decision shows that unanimity is hard to attain even in key areas of European competence.

It would be fatal if European naval-gazing in light of the British E.U.-exit that is now underway prevented Europe from pursuing its interests vis-à-vis China. Member states (and E.U. institutions) must step up their game on promoting joint European monitoring of and information sharing on China as well as greater transparency on national dealings with China among member states. A key role of Brussels will also be to smarten up on damage control when interests within the E.U. collide.

Getting the European house in order is not only difficult but also not sufficient to get our relationship with China right. Finding new ways or working with the U.K. and building alliances beyond Europe will become key: The recent G7 statement on the South China Sea serves as a good example. The OSCE could become a vehicle for interacting with an increasingly assertive China in Central Asia.

Most importantly, key member states will need to organize a much higher degree of strategic transatlantic coordination in ongoing trade and investment negotiations with China to face Beijing from a position of strength.

I agree with Huotari and Gaspers that, from an economic standpoint, it behooves the European markets to organize strategically so as to “face Beijing from a position of strength.” However, using this same approach to security matters only sets up Europe (and the U.S., when it all too frequently follows this same positioning) to foster the renewal of a Cold War-era relationship.

The West far too easily falls back on a pre-1980’s view of the global order—a mindset that has been demonstrated to have been framed mostly through habit and presumption, not on actual intelligence gathering.

There are fundamental differences in some values between the E.U. and China. Notable exceptions include policies and actions in recent years inhibiting free speech in some member states. However, when confronted with an often condescending and arrogant West, we have time and again seen a defensive reaction from China that tends to drive Chinese policy in the opposite direction from our intentions or hopes. Europe has the opportunity to use its growing trade relationship with China to redefine how it sees the country, starting with its assumptions of China’s intentions on the global stage. If Europe wants China to align with it more closely on security issues (such as U.N. Security Council votes regarding intervention in Syria, for example), then it needs to start thinking more seriously of China as a potential partner and act like an actor that China can trust.

The reality confronting European policymakers is not about interests, but what are they prepared to do to uphold those interests vis-à-vis China. “Is Europe Prepared to Deal with the China Challenge?” should be reframed as what consequences Europeans will accept and impose when Beijing bends if not breaks the rules the West describes as in their interest to uphold.

Year after year, Europeans (as well as Americans) continue to restate the basic set of interests, such as in the recently-released E.U. External Action Service strategy paper for China. These interests follow a familiar form: a rules-based international order, commitments to peaceful resolutions of disputes, and movement toward ever freer trade of goods and services as well as a nod toward protecting human rights. A related point that often passes implicitly is that China’s rise should be peaceful. The principal implication is that China, irrespective of its different political system and perspectives on foreign affairs, should not alter this basic set of arrangements.

Much of China’s assertive behavior falls below the threshold of easy decisions about whether Beijing has directly challenged the status quo or the rules-based order. At the very least, questions should be asked and answered in a way that allows a fact-based approach, such as the following three questions:

  • Is China’s proposed ‘New Type of International Relations’ compatible with Western visions of order?
  • Do Beijing’s actions in the East and South China Seas qualify as ‘peaceful’ or ‘predictable’?
  • Are Chinese policies related to technology transfer rules-based?

Keeping China’s rise peaceful is simple: do nothing. Beijing has acted, but whether China’s rise is free from conflict is now up to others. Europe lacks U.S. military resources, so creative thinking about how Beijing can be influenced will be required. U.S. military power can be used to buy time in some arenas, so any long-term policy should be coordinated with Washington.

Meeting the China challenge requires rebuilding leverage, which requires a psychological shift above all. For years, even when China was substantially less important, China experts warned against a tit-for-tat contest, regardless whether the provocation began in Beijing. Now that critical interests and principles are being threatened, shifting the mode of thinking will be a necessary first step. The second step is to reconnect all the ways of policy—diplomatic, informational, military, and economic—rather than following the conventional wisdom about isolating areas of competition and cooperation in dealing with China. Strategic action is predicated on the coordinated use of all forms of national power. Pressuring a country as large as China cannot be done if policy simultaneously bolsters and undermines Beijing.

Similarly, European countries need to be wary of letting Beijing divide-and-conquer. The competition to represent Beijing in Europe and gain privileges in China undermines nearly all of the stated interests Europe has with respect to China’s rise.

European countries, especially in concert, have a tremendous amount of resources at their disposal. For example, even in the military domain where Europe is weakest in Asia, European states can support freedom of navigation exercises in the South China Sea—just as they have done quietly elsewhere. China no longer needs public announcements to know what ships are operating on its periphery. Economically, questions need to be raised about future plans relying so heavily on China and what might be done reshape the assumptions underpinning corporate forecasts. These public-private discussions need to take place to generate the domestic policy options that shape the tools available for foreign policy.

Softer pressure can be brought to bear through administrative measures. Scrutinizing the activities of Chinese state-owned enterprises, enforcing standards to an exacting degree, and generally ensuring a problematic level of red tape all offer ways to signal displeasure. Moreover, tracking leading Chinese families’ (and their proxies’) financial assets provides still another way build leverage, making policy accountability personal.

It is admirable that European analysts and policymakers see the need to revisit Western interests in East Asia; however, China’s actions already are changing the reality that European countries want to protect. Without thinking through how to rebuild leverage over Beijing and preparing to pay the costs, China will continue to change the reality in Asia to suit its narrow set of interests. Chinese leaders have been betting that each provocative action falls below the threshold that spur Europeans to act. Making the mental and material preparations to pressure China and pay the costs of doing so are a necessary part of upholding a rules-based order, free trade, and a modest commitment to human rights.

Xi Jinping’s visit takes place in momentous times. Lucky coincidence for him, but not for Europe. Great Britain’s vote to quit the E.U. makes it an absolute certainty that Europeans and their leaders will continue their “navel-gazing” more than ever. Worse than that, they will also face China’s challenges without a common approach. It will be easier than ever for Xi to exploit their divisions. Britain under David Cameron was already one of the “weaker links” in the E.U. In order to foster the role of London as a global financial hub by attracting Chinese investments, the British government had subdued any criticism towards Chinese violations of human rights, including in Hong Kong where the U.K. should be especially engaged and vocal. Whoever will be the next British prime minister, after Brexit we should expect more of the same as London will try to compensate with additional flows of non-European investments the possible loss of some financial business with the Continent. Inside what remains of the E.U., a “race to the bottom” (in terms of dignity, principles, and national interest in a long-term perspective) will follow, in order to attract Chinese investments. All the more so, because Brexit will trigger new financial instability, with the risk of a recession, even as Europe never fully recovered from the 2008-2009 systemic shock. In desperate need of investments, European governments will further lower their vigilance on the consequences of Chinese expansion. Meanwhile, back in China, the E.U. Chamber of Commerce is denouncing the creeping protectionism of the government, which multiplies hidden obstacles to European companies.

As I argue in a forthcoming piece for The Asan Forum, China is slowly reweaving the international fabric of interrelations and governing structures. In contrast, the E.U. behaves as if geopolitics and power politics no longer exist. It often prefers to see Chinese actions as benign, which breeds complacency. However, to paraphrase Tolstoy, even if you are not interested in geopolitics, geopolitics is always interested in you.

For the E.U., China is an important economic partner, it is perceived as both a trade partner and a source of investment with the potential to stimulate the sagging European economy. The P.R.C. sees Europe as a useful source of advanced technology even though an arms embargo is in place. E.U. member states interpret the arms embargo in their unique way, which allows for sales of security and dual-use technologies the P.L.A. cannot obtain from the United States. Loosely defined, “dual-use” technology sales by European companies to the P.R.C. have accelerated the P.L.A.’s development of military might and contributed to the changed strategic calculus and landscape in East Asia (so much for "we don’t do geopolitics"!)

Chinese investment in Europe has ramped up. Competition between E.U. member states to attract Chinese F.D.I. may give Beijing increased influence and leverage. Neither the E.U. nor its “Big-3” have an investment vetting mechanism akin to the Committee on Foreign Investment in the United States (C.F.I.U.S.) to weigh economic opportunities against national security concerns.

Through the One Belt, One Road Initiative, China aims at creating political goodwill among its partners along the transport corridors. China has already launched a new forum for cooperation with Central and East European countries: the ‘‘16 + 1.’’ The 11 of these 16 countries that also are members of the E.U. easily can form a pro-China lobby and, therefore, influence policy making in Brussels.

In the past, the E.U. has carefully danced around the complex issues involved in the South China Sea disputes. It has no interest in antagonizing China, needing it as an economic and security partner, given problems of its own, both internally (migration, terrorism, economic imbalances and now Brexit) and externally along its southern and eastern neighborhood. However, the June 22 E.U. Joint Communication on “Elements for a New E.U. Strategy on China” recognizes the importance for the E.U. of freedom of navigation and over flight, given the large volume of international maritime trade passing through the South China Sea.

On balance, if the E.U. had to choose a camp after the announcement of the ruling of the Arbitral Tribunal, it is likely that it would either not have any position at all, with each member state choosing its own camp, or that the E.U. would align with the United States. The French statement of June 5 confirms that at least some E.U. member states are likely to take a position similar to that of the United States. If China chose to disregard the verdict of the Arbitral Tribunal, the United States has indicated that there would be a price to be paid, most likely in sanctions against China. In this case, it is likely that the E.U. would choose, albeit unwillingly, to join and impose its own sanctions, as in the case of Russia.

Europeans need to do more to prepare to deal with China. But given all the challenges facing Europe at the moment, this is going to be tough to achieve. There is much to discuss from the contributions above, but I want to make three points on European interests.

The first is that the starting point for European policy makers should be an assessment of European interests. This is not straightforward. Interests vary across Europe (as the MES debate shows), and policy making needs to recognize this. Where there is consensus, Europe can speak with one voice, but this will not always be possible. Divisions which become apparent are a reflection of differing interests, not a divide-and-rule strategy from Beijing. While it is good to encourage more joined up policy (as the E.U. Joint Communication document does), Europeans need to be pragmatic about what is achievable.

Second, European interests are served by bearing in mind global interests—this is particularly the case when it comes to common global challenges from climate change to boosting economic growth or tackling inequality and poverty. This means that European interests may differ from those of China, but also of the U.S. or China's regional neighbors. U.S. interests (or mythical 'western interests') are not the benchmark against which Europeans should judge their policy. This is relevant to the current debate around the South China Sea - for example, were Europeans to engage in naval operations (as a few people have suggested), this would only contribute to the worsening regional security dilemma. Instead, Europeans should be encouraging both the U.S. and China to stop provoking each other.

Third, it is hard to see Brexit doing anything other than leaving the E.U. weaker and Britain marginalized (a subject for another discussion). This is obviously not good for the E.U. But neither is it in China's interests. China benefits from a strong E.U., primarily as a more attractive trade and investment partner, but also as a potential geopolitical balance. Chinese investment benefits from the single market, so anything that might fragment that is not in the interests of China or its companies.

To fully comprehend the challenge presented to Europe by the current Chinese diplomatic offensive, I think it is important to look at two often underreported aspects: First, the “Eurasian Integration,” or fast rapprochement between China and Russia, and second, Chinese activities in Central and Eastern Europe (C.E.E.) and the post-Soviet space.

“Eurasian Integration” started in earnest after the May 8, 2015, Moscow summit between Vladimir Putin and Xi Jinping with a joint declaration on coordinating the Eurasian Economic Union (E.E.U.) and the “Silk Road Economic Belt”. This agreement itself reflected Putin's shift from a previous vision of a “Greater Europe” from Lisbon to Vladivostok to a “Greater Asia” from Shanghai to St. Petersburg, driven by his post-Crimea rift with the West. The new accommodation between the two powers allows Beijing unhindered access to the post-Soviet space, previously considered Russia's exclusive sphere of influence. In a symbolic sign of the thriving “Eurasian” partnership contrasting with European gloom, Putin has spent much of the fateful Brexit week sumitting with Xi, first in Tashkent and then in Beijing.

The emerging cooperation manifests itself most clearly in Central Asia, traditionally a Russian sphere of influence but now a crucial staging ground for China's New Silk Road (OBOR) initiative. Some analysts in Moscow have been grumbling about Russia essentially reduced to a “security agency” for Chinese business, but the arrangement appears agreeable, at least for now, to both powers, and also to the Central Asian “Stans” who seem more comfortable with Russia's might and China's business than the other way around.

Somewhat similar arrangement, minus Russia's military power, now appears to be forming in the C.E.E. Beijing has been very active in the region both collectively through the “16+1” formula, and bilaterally through high-level contacts (Xi Jinping has personally visited the region twice this year, already). Russia not only does not object against China's apparent encroachment on its traditional sphere of influence, but appears to actively facilitate it: It is often Russia's closest allies that also spearhead China's advance in C.E.E. At the nation-state level, this can be exemplified by Serbia; at the elite politics level, by the Czech Presidential Office in Prague that boasts key advisors from both Russian Lukoil, and a somewhat mysterious Chinese company called CEFC, operating in mutual harmony.

In the 16+1 group of states lingers considerable historical Russian influence, plus an emerging Chinese one, now apparently working in tandem. Eleven of these states are also EU members, forming a potentially powerful bloc in the Union. After Brexit, disintegration tendencies are bound to increase in the E.U. With the China—Russia partnership a.k.a. Eurasian Integration rising, and capable of projecting its interests onto the already weakened E.U. through its eastern flank in a coordinated manner, Europe will find itself under some stress. The traditional Western geopolitics of the World rotating around the maritime Euro-Atlantic and Asia-Pacific axes will soon have to deal with a powerful, continental “Eurasian” axis, pushing steadily westwards.