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Foreign Policy

Europe Confronts “China First”

Apr 29, 2019

The past few weeks have seen a rapid succession of events affecting Europe-China relations.  At first glance, China has reaped some good results: Italy and Luxembourg have signed on to the Belt and Road Initiative (BRI), Switzerland has promised to follow during the latest BRI summit, and Greece was granted full membership to the Central and Eastern Europe-China 16+1 framework. Yet, ahead of his European tour, Xi Jinping was confronted with a stern EU-China communication that qualified China also as a “systemic rival”. Moreover, the language of the Italy-China Memorandum of Understanding (MoU), as well as the joint statements produced at the EU-China and Central and Eastern European-China (16+1) summits suggest that China is softening its position in light of international pushback on its distorted market practice. European chancelleries are reacting to China’s “China First” economic practice, which potentially represents a larger challenge than America’s variant.

In January 2017, Xi Jinping famously extolled the merits of globalization and of China’s economic contribution to global growth, in an apparent jab at Trump’s “America First” protectionism. Yet, China’s growth has defied earlier expectations of progressive reform towards a market economy, particularly strong during its accession to the World Trade Organization in 2001. On the contrary, China has climbed up the added-value chain while doubling down on its dirigiste economic model and taking advantage of unreciprocated economic openness abroad. European governments more than welcome China’s sustained growth, through its vast reserve of talents and capital, not least because there’s much to benefit from trade and investment ties with the world’s second largest economy. But China is in many ways no longer a developing country; and needs to live up to international market standards and implement a level economic playing field for foreign companies. Chinese innovation and growth ought not to take place through forced technology transfer, the infringement of intellectual property rights, state-sanctioned predatory mergers and acquisitions, and internal market distortions against foreign competition. It is these practices and the lack of reciprocity, not Chinese growth per se, that have fostered substantial resentment in Europe—which has traditionally been open to China’s investments.

Under Xi, the Chinese state has made a comeback, and with a roar. Xi’s ambitious “Made in China 2025” industrial policy has given further proof of Beijing’s dirigiste instincts in strategic sectors. And the Belt and Road Initiative has been understood as a way to export Chinese overcapacity and political influence through infrastructure projects. According to a study, the overwhelming majority of BRI contractors (89%) comes from China. Scrape the surface of Xi’s “win-win” rhetoric, Beijing abided and benefitted greatly by a tacit “China First” vision.

For this reason, European governments have recently pushed for boosting their defensive mechanisms against potentially rapacious state-led economic behavior. In the past two years, several European governments have tightened the screws on their foreign direct investment screening regimes and, as of now, 14 EU countries have investment screening legislation. The EU has inaugurated an investment screening mechanism that allows for an exchange of best practices, information and opinions between EU member states and with the EU Commission regarding foreign investments into critical infrastructure, such as power grids and ports. Scarcely noticed, Italy signed up to the Belt and Road MoU while strengthening its FDI defense to 5G technologies, in a direct jab to Huawei. Secondly, the Franco-German entente is pushing for changes in the EU’s public procurement policy to allow greater reciprocity with China. It is also pushing for changes to the EU’s industrial policy, in favor of European business champions that can compete with Chinese juggernauts. Lastly, the European Union recently came up with an Asia connectivity strategy of its own that identifies principles for sustainable, multilateral, transparent financing that takes into account local needs. This is a jab at the Belt and Road Initiative’s deficiencies, but– different from the United States’ confrontational approach—it is inclusive and aims to constructively improve China’s financing practice.

In light of Europe’s economic pushback and especially the tensions between the US and China, China has conceded to using constructive language in the above joint statements. In fact, the 16+1 summit and the Italy-China BRI MoU couch their cooperation within the framework of EU initiatives. The EU-China joint statement provides a deadline for realizing a bilateral investment framework between China and the EU and to the protection of geographical denominations in the Chinese market. China has agreed that “there should be no forced transfer of technology” and that they should “intensify the discussions with the aim of strengthening international rules on industrial subsidies.” Early indications suggest that China is also trying to improve its practices in the BRI, gearing up for the upcoming BRI Forum.

Yet, it remains to be seen when these promises will concretely materialize. China very well could take a wait-and-see approach, considering concomitant factors that point at intra-EU disunity. While much of the EU and Franco-German entente’s strategic rationale is laudable, those who passionately demand a united EU front– and conversely lament the behavior of those governments not closing ranks– fail to consider powerful economic fundamentals.  For instance, many Southern European governments had to respond to the worst economic crisis in decades with crippling austerity measures and major structural reforms. These measures have been aimed at instilling confidence in investors and political leaders in lender countries, although budget cuts under economic duress have –unsurprisingly– made economic recovery a mirage. In turn, painful pro-cyclical policies and growing economic inequalities have led to the emergence of Euro-skeptic parties across the old continent, in turn inviting Chinese economic embrace. For countries badly hit by the financial crisis, “authoritarian influence” came from ideology-driven, if not self-serving, diktats within Europe rather than from afar. In his memoirs, Greece’s former Finance Minister Yanis Varoufakis testified to Athens’ bargain basement sales to China and the hope that Beijing would buy treasury bills that were coming to maturation. If history is of any guide, Southern European countries will want to keep the door open to Chinese investments, economic ties, and bond buying to compensate for lack of maneuvering space over expansive fiscal policies and, eventually --with the end of the European Central Bank’s quantitative easing-- monetary policy aimed at full employment.

Thus, the EU’s stern China communication, described by some sharp voices as a Copernican revolution, might very well lose steam if intra-EU economic imbalances are not rectified. Smaller European economies too will disagree on some of the prescriptions contained in the China communication paper, such as the creation of “strong European players around strategic value chains,” if that means the creation of intra-EU oligopolies that favor large European economies at the expenses of other European players. On top of that, Germany’s incredible current account surpluses –higher than China’s in both relative and absolute terms– are already a source of substantial frustration both in Washington and within Europe. These factors suggest that a united EU front and, potentially, a united Transatlantic front, are still unknowns.

In light of all of the above, China has softened its economic practice due mounting US-China tensions and a growing European hardening, but only time will tell if these will be sustained. Much of it rests on coordination within the European Union and with other like-minded partners, such as the United States of America. 

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