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Foreign Policy

China in Europe: Leverage Friction to Solidify Ties

Oct 11 , 2019

Against the backdrop of the US-China trade war, Chinese foreign policymakers are diversifying and safeguarding relationships in Europe. Looking to stabilize and expand regionally while relations with the US fluctuate, the Ministry of Commerce and the Ministry of Foreign Affairs have explored new partnerships and have doubled-down with other friendly parties. Policymakers are solidifying a relationship with Italy and making inroads with new Eastern European partners, a strategy that holds implications of the US and China potentially being able to project their interests in Europe. As Trump strains existing partnerships and picks fights in international institutions, Chinese policymakers are attempting to amplify their nation’s influence around the globe in the face of anti-Chinese sentiment. 

Strained China-EU relations 

Beyond the US-China trade war, one factor motivating China’s expansion in Europe are signs of investment atrophy. 2018 Ministry of Commerce data indicate that Chinese investment in the European Union fell 13.6 percent year-on-year to $8.87 billion. Diving deeper, Chinese foreign direct investment fell far further, by 40 percent year-on-year, marking an FDI downturn for the second consecutive year. The top three European recipient countries for Chinese FDI (the UK, Germany, and France) declined from 71 percent to 45 percent. A variety of economic and geopolitical factors have driven this trend, including global economic downturn, unilateralism, and trade protectionism. 

Protectionist sentiment has played out in diverse ways in the EU, including through introduction of a screening mechanism for FDI. Announced in April, this tool allows EU officials to more carefully review Chinese FDI, which may threaten EU state national security. Individual member states were granted the ability to choose to adopt this mechanism, and in fact, subsequent adoption among member states increased from 12 to 15. Even traditional Chinese-investment partners, like Germany, have upped their mechanisms for scrutiny and can now more closely scrutinize a foreign investment proposal if the foreign company’s share is up to 10 percent. 

China’s Europe strategy 

In response to signs of waning appetite for Chinese investment in Europe, Chinese policymakers have recalibrated, adopting multilateral, bilateral, and domestic measures to expand their reach. Foreign policymakers have continued the push for broader multilateral agreements while still pursuing the more traditional Chinese strategy of working bilaterally. Two multilateral agreements have been particular points of focus: the China-EU Investment Treaty and the Regional Comprehensive Economic Partnership (RCEP). In April, both China and the EU agreed to finalize the China-EU Investment Treaty by 2020 on the sidelines of the 21st China-EU Summit. This agreement would allow for improved market access and thus boost investment. 

Bilaterally, Chinese leaders have directed significant attention towards courting a range of countries, including Italy, Hungary, and Norway. With trade deals and Belt and Road projects, Italy is perhaps the best example of active engagement. During a state visit from President Xi Jinping in Rome in March, Italy signed onto a memorandum of understanding (MOU) that signaled Italy’s participation in the Belt and Road Initiative. The MOU signed by China and Italy covers a range of initiatives that aim to develop Italy’s transport and logistical capacity, including agreements to invest in ports in Trieste, Genoa, and Palermo, which could increase efficiency the Chinese shipping of goods to Europe. On the sidelines of the MOU, Chinese investors signed onto 29 trade deals totaling $2.8 billion. 

These deals have not been received warmly by the rest of Europe, as some view Italy’s decision to grow more intertwined with Chinese infrastructure expansion as a challenge to Europe’s bid to withstand China’s economic might. The announcement of the China-Italy deals came just a day after French President Emmanuel Macron proposed a coordinated European approach to economic exchange with China. Exacerbating these frictions are clashes between EU and Italian leadership over migration and spending priorities. Recent deals with Beijing are likely to lead to further deterioration in relations with Brussels. By levering Italy’s dissatisfaction with the European Union leadership, Chinese foreign policymakers are astutely navigating existing geopolitical frictions to work to their advantage. Meanwhile, Trump’s bellicose language about existing trade partners in Europe only serves to amplify confusion about the direction of US foreign policy in the region. 

In addition to bilateral and multilateral approaches to diversify and solidify ties in Europe, China is prioritizing a swath of domestic policies intended to improve the climate for multinationals in China across the board. These initiatives principally include streamlining regulatory approval and increasing access through free trade zones. China recently announced six new free trade zones across the country, which will cut tax rates and shorten bureaucratic processes for multinationals setting up shop.

European relations in context: Future implications

China’s courting of European countries dissatisfied with either EU or US leadership is not value-neutral. Domestically, foreign businesses will be subject to the murky but increasingly well-outlined social credit rating system, which will gather and scrutinize large amounts of data at every step of the process. Internationally, standards and practices of trade deals and infrastructure projects institutionalize Chinese interests in ways that will impact partner countries for decades to come. In the absence of US leadership as a counterbalance to Chinese influence, European leadership will need to step up to push diverse European interests. Their challenge: striking the balance between protecting European long-term strategy and avoiding all-out trade protectionism. This task will prove challenging given current political sentiments, but adopting an evenhanded approach is crucial in order to establish a sustainable strategy. 

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