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Did China Try to Blackmail Europe?

Oct 17 , 2011

Last month news emerged that China was seriously considering buying sovereign bonds from distressed European economies—a move that could have buoyed financial markets giving Europe additional breathing room as it works on hammering out a long-term solution to the Eurozone debt crisis. Yet, China was not simply signaling its willingness to offer Europe a bailout, it also wanted something in return: to be granted “market economy status” by the European Union (EU)—a move that would give China enhanced legal trade protections, especially in anti-dumping disputes. In the end, Europe rejected the quid pro quo and Beijing subsequently changed its tune suggesting it was never that serious about rescuing the Eurozone.

This episode marks the most explicit attempt by China to link financial aid to policy changes in the world’s advanced economies. But, more than anything, it marks a serious miscalculation by Beijing. If China played its cards right, its reputation could have been greatly enhanced in Europe and around the world; instead, China overplayed its hand and now looks like a country willing to stoop to blackmail in order to achieve its foreign policy goals.

There are several reasons attaching strings to the rescue offer was a mistake.

First, even with a no-strings-attached offer, there is a good chance Europe would have still declined the offer. Germany and other surplus economies in the Eurozone want to keep the pressure on the likes of Greece and Italy in order to ensure these countries make tough and unpopular economic reforms. Berlin is more concerned about the spending side of the equation than it is about the credit side—its continued reluctance to expand the size and mission of the European Financial Stability Facility (EFSF) is case in point here. In short, China could have alluded that an unconditional offer was on the table, yet still have avoided buying risky sovereign bonds. In this case, however, it would have emerged looking as generous friend rather than a petulant rising power.

Second, this whole incident just attracted attention to the fact that China is still, in some respects, a second-tier power. Europe is a basket case at the moment, yet Beijing showed the world that on an issue very important to it, the old powers still have the upper hand. Europe may be weakened right now, but China overestimated its desperation. Crisis or no crisis, the EU is not a middling power that can be pushed around. Indeed, the continent still holds considerable clout in key international economic institutions. Not even a Europe in disarray was willing to kowtow to such a brazen demand and China should have realized this before it asked and was made to look foolish. Instead of drawing the world’s attention to where it is strong, China reminded everyone where it remains weak. 

Third, when compared to how the United States has reacted to the European crisis, China looks especially juvenile. Rather than kicking Europe while it is down, Washington has shown its willingness to do whatever is necessary—without precondition—to assist the Eurozone. These efforts have been led by the Federal Reserve which has made unlimited dollar financing available to the European Central Bank (ECB), helping to prop up distressed commercial banks on the continent. Of course, the U.S. does have enormous interests in a stable Europe, but so does China (the EU is China’s biggest trading partner). In a direct comparison of the two global titans, the U.S. clearly comes off looking like the benevolent power here in stark contrast to China. 

What should China have done?

Instead of entering into backroom bilateral meetings with deficit European economies (as China reportedly did with Italy last month) Beijing should have quietly entered into talks with the so-called “Troika”— the EU, ECB, and the International Monetary Fund (IMF)—which is the group responsible for overseeing and structuring Eurozone bailouts and austerity plans.

In this setting, China could have plainly made it known it was willing to provide a certain amount of credit as part of a joint bailout, asking for nothing in return. Then, it should have walked away. This way, Beijing would have made it clear it was acting in the interest of Europe and the global economy as a whole rather than using the crisis as an opportunity to  attain policy concessions from its economic partners. 

If it were called upon to be part of a multilateral rescue effort, China would have only been asked to contribute a tiny fraction of its more than $3 trillion in foreign exchange reserves. But this small contribution could have generated a lot of good will. Even if it were not asked to participate, the fact that there was a standing offer on the table would have been a sign of good will. Either way, months or perhaps years down the road, China would have been able to use this instance as an example of its leadership, generosity, and another reason why it should be given a full-time seat at the adults’ table, including market economy status.  

China now claims that it was never that serious about a European bailout to begin with. While at the IMF/World Bank meetings in Washington last month, the president of China Investment Corporation—the country’s sovereign wealth fund which would have been the likely source of a European rescue—said, “We can’t just go save someone. We’re not saviors. We have to save ourselves.”  This change in the narrative seems especially disingenuous in light of Europe’s refusal to give Beijing want it wanted. Had the EU agreed to recognize China as a market economy, would Beijing still have cooled to the idea of a rescue? That outcome seems doubtful.

This episode is yet another example of how Beijing is continuing to adjust to its rising international status.  On paper, China may already be a great power. But in the art of economic diplomacy, it still has much to learn. Simply put, this attempt to strong arm the EU was a foreign policy failure. Had Beijing thought things through more carefully, China could have been remembered as Europe’s friend in its moment of need as well as an emerging defender of global economic stability. Instead, the world will remember that when Europe was at its weakest, China opted for blackmail over assistance.

Daniel McDowell is a Bankard Fund for Political Economy Pre-Doctoral Fellow at the University of Virginia and has written for Foreign Policy magazine, The Washington Times, and is a regular contributor to World Politics Review

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