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    China is finally after three decades back on the European agenda – in which way to act in the shadow of the US and Trump’s trade war with China remains the biggest question

    March 2019

    The last time EU leaders held strategy talks on China was just after the Tiananmen Square massacre in 1983. The 12 heads of state and government imposed at the time sanctions including an arms embargo over what they called the “brutal repression” by the Chinese government.

    Almost 30 years later, the European Council will use a summit this week to focus once more on China – and decide whether it is time to get tough again. Mounting concerns over Chinese industrial policy, cyber security and trade wars have all combined to put Beijing firmly back on the European agenda. To some in Brussels and member state capitals, this week’s discussion is the EU’s belated awakening to the new sway of China – and to an uncomfortable truth that it has failed to register the full implications of its ascendancy.

    Among the leaders who will sit down in Brussels to discuss China, the sentiment has shifted from what some observers see as years of complacent assumption that China could be milked for economic opportunity while being kept in strategic check. Now European countries are finally alarmed at how Beijing – like other great powers in history – is using its expanding influence to dictate terms in both commerce and diplomacy. Some EU governments complain that China discriminates against foreign companies and forces them to give up their technology; while Beijing’s foreign investments are opaque and risk leaving recipient countries in debt. There is also growing anxiety about the potential security threats of Chinese investment in sensitive parts of the EU economy. The reassurances from Beijing that these fears are groundless are increasingly falling on deaf ears. To me, it’s pretty shocking that they have never found time to discuss this earlier.

    Ahead of the summit, the European Commission and the bloc’s diplomatic service have produced a new strategy document on China that makes unprecedented public criticism – and threats. The freshly – minted paper brands Beijing a “systemic rival promoting alternative models of governance”, as well as an economic competitor and partner in some spheres. It warns the EU could tighten rules on Chinese investments in Europe if Beijing does not respond to concerns about its behaviour in areas ranging from corporate state subsidies to public procurement.

    The stakes for European leaders breaking bread in Brussels will be underscored by a burst of Chinese diplomatic activity on the continent. The same night the EU is scheduled to discuss China, President Xi Jinping is due to touch down in Italy for the first leg of a European trip that will take in Monaco and France. Rome plans to use the visit to sign a formal endorsement of Beijing’s contentious Belt and Road global investment drive. On April 9, Li Keqiang, China’s premier, is scheduled to be in Brussels for a short summit with EU leaders. He will have a longer stay in Croatia, where he will attend the 16+1 grouping of central and Eastern European countries, including 11 EU members – a group that European diplomats have long feared Beijing wants to use to split the EU.

    China in my opinion has discovered it can pick off different EU members and stop the EU having a China policy.

    The EU’s approach to China since the Tiananmen Square massacre had largely been one of attempting to reap benefits of the country’s rapid growth. Although the arms embargo remains in place and Brussels has made criticism of Beijing on human rights grounds, business has been the priority. The EU is China’s largest trading partner; China is the EU’s second-largest, behind the US. In 2018, China accounted for about a fifth of EU goods imports and more than a tenth of its exports.

    China also became an important investment destination and source. Volkswagen has been the top-selling car brand in China for much of the last two decades and the country accounted for 39% of its sales last year, while companies ranging from BASI to Carrefour to Siemens also have a large presence. But the story has changed as fast-expanding Chinese businesses have shown a growing appetite for European assets. Levels of Chinese direct investment in the EU have soared over the past five years, according to the bloc statistics and other research. Beijing’s growing economic clout – and its willingness to use it – has rattled influential EU members’ states. Similar debates are taking place in countries ranging from France, the UK and the Netherlands to Denmark and Sweden, but it is Germany that is in the vanguard of the EU’s sharper view.

    Peter Altmaier, Germany’s economy minister, has argued that China’s growing technological prowess is one of the main reasons why Europe needs a new European industrial strategy that supports the development of regional champions. He has been the most prominent European politician warning of the risks to Germany’s prosperity from Chinese competition. The BDI, Germany’s main business lobby, called in January this year for the country’s economy be made more “resilient “to the dangers posed by competition with China’s “state-dominated economy”. The group said in a policy paper that Beijing’s subsidies had caused overcapacity and other distortions in markets such as steel. It further claimed that Chinese tax incentives and soft loans from state banks were giving companies that firepower to buy technology companies. High-profile Chinese investments in companies such as Deutsche Bank and Kuka, an industrial robot maker, have raised fears in Berlin about Beijing’s reach into sensitive areas of the economy. Those have been accentuated by concerns across Europe over the use of Huawei equipment in 5G mobile communication networks – worries that China says are unfounded and unfair. In December last year, Berlin already tightened rules on investment screening to give authorities more scope to intervene when non-European companies start to build stakes in German companies. For a long time in my opinion German business sectors were highlighting the relationship with China as a bonus but now finally they are highlighting the cost of this kind of engagement which I warned for since a long time. The debate now is risk minimization. We have now to consider what the risk is if and when a non-democratic country turns against you.

    Despite the shifting EU attitude towards China, the scepticism towards Beijing is not informly held. The deepening suspicion in many north European member states contrasts with the mood in other parts of the bloc, where countries such as Hungary and Greece have been vocal advocates for Beijing. Antonio Costa, Portugal’s prime minister, warned fellow European countries earlier this month against misusing security procedures for screening foreign investments from China and elsewhere. He said it could lead to the continent becoming more protectionists. Mr. Costa described Lisbon’s experience of Chinese investment as “very positive”, showing “complete respect for our legal framework and the rules of the market”. Portugal is one of 13 EU countries – almost half the bloc – to have signed secretive formal endorsements of China’s Belt and Road international investment programme, diplomats say. Most northern member states have distanced themselves from the initiative, under which Beijing seeks to finance and build infrastructure in more than 80 countries around the world. Europe’s Belt and Road sceptics charge that it is opaque, strategically aggressive and can impose crippling debts on recipient states – all allegation that China of course denies.

    A decision by Rome to follow through on its pledge to sign up to the Belt and Road would be a diplomatic coup for Beijing and one more identity crisis for the EU in my opinion. Italy is a bloc founder member and a member of the G7 group of big industrialized countries. The five-page draft accord says the two countries are planning to “explore all opportunities for cooperation”, with the possibility that Italy will borrow from the China-led Asian Infrastructure Investment Bank. Giovanni Tria, Italy’s economy minister has taken to justifying Rome’s position by citing an Old Italian phrase: “If you are not at the table, you are on the menu.” He has argued that Italy can be a bridge between the US and China and help stop “a confrontational approach “between the two superpowers. I would like to provide Mr. Giovanni Tria with another phrase “If you are in trouble – never double”. China denies it is trying to divide the EU. It says a strong Europe helps international stability and benefits Beijing. Chinese officials have appealed to the EU to help preserve international trade structures like the World Trade Organization (WTO), which has been heavily criticized by US president Donald Trump, as well as playing on European resentment of perceived US high-handedness.

    Europe in my opinion will surely keep its fundamental long-term interests in mind and pursue a China policy that is consistent, independent and forward-leaning. So far, China and Europe relations are in good shape and there are far more areas where they agree than disagree. Some Chinese observers believe the growing concern about Beijing partly reflects the EU’s own internal divisions, including over migration and the rise of self-styled anti-establishment parties. The real concern from large EU countries including my own is that China is getting more and more influence in Europe, especially during a period when Europe is experiencing a not very stable stage itself.

    As it tries to fashion a more coherent China policy, the other difficult the EU confronts comes from the US. Superficially, Europe is moving closer to the more hawkish US position on Beijing. It could also benefit from the fruits of American pressure, such as a new foreign investment law passed by China last week that will ease restrictions on foreign companies – a longstanding goal for the Europeans.

    But diplomats and analysts say the US approach creates more fundamental problems for Europe. The EU needs and wants to co-operate with China in an effort to save big multilateral agreements repudiated by the US, notably the Iran nuclear deal and the Paris climate accord. On trade, Washington has threatened tariffs against the EU as well as China, making the idea of a common transatlantic trade front against Beijing almost unimaginable.

    The Trump administration’s focus on trade tariffs rather than standards creates a further difficulty for the EU. The bloc in my opinion is now isolated in its fight to stop Chinese rules becoming the global standard by sheer weight of their technological and industrial capacity. We have to realize that if Europe doesn’t get its act together in time, it’s going to be a case of choosing the US or China – but not much in between. EU diplomats already worry that the summit’s China agenda could be overwhelmed by another internal crisis – this time over Brexit. Even if the leaders do hammer out harder new approach to Beijing that some seek including me, the deepest fear is they have already missed their moment.

    However, today there is a lot more realism and a lot more self-realization of what our interests are, and how we must more robustly defend them. Hopefully, it’s not too late…