• Varshini Sridhar

Through the Rubicon: EU-China Relations in 2020

Marco Polo’s extensive travels across China laid bare to the western world, the wonders of its economic, political and cultural systems. By the 14th century, stories and illustrations about life in China spread widely and aroused curiosity among Europeans. Although Polo was not the first to visit the middle kingdom, it was his account that first sparked Europe’s interest in China. Thus began the long-standing dynamic relationship between Europe and China.

It was not until 1975 that China and the European Economic Community established diplomatic ties. Until the 2000s, China’s relationship with the EU was primarily economic in nature. The beginning of the 21st century witnessed an emerging schism between the US and EU with the rise of the United States as a hegemon. The same time period also marked a colossal shift in the relationship between China and the EU. It was the starting point for China to explore areas apart from trade and investment for close collaboration with the EU.

With growing Chinese influence and economic presence within the EU, the bloc has shown mild changes in its attitude towards China. Without affecting its economic ties, the EU is trying to level the playing field and mitigate risks while cooperating with China. In 2019, it released the EU-China Strategic Outlook while labelling China as a systemic rival that promotes alternative models of governance.

A Fractured EU

The EU member states have unique bilateral relationships with China that have frequently undermined the EU’s collective effort to hold China more accountable. China engages with the member states in strategically different ways, creating an asymmetry in their relations with the country. In the last few years, it has become apparent that the EU is struggling to reach a consensus on a coherent strategy that will govern its partnership with China. But this is not the only aspect that is bothering the EU. For China’s largest trading partner, what is equally worrisome is that such trends are gradually tilting the power balance in China’s favour. As a result, the EU’s influence, particularly in trade and investment, is diminishing while China is gaining more flexibility in setting the rules.

Based on their level of bilateral engagements with China, the member states are scattered along a spectrum of varying approaches towards the country. At one end of the spectrum lie the assertive member states that are more willing than others to confront China in the event of unjustified actions in the economic and political sphere. Germany, UK and Sweden fall into this category. On the other end, are countries who are compliant and unopposed to China’s growing influence such as the Czech Republic, Portugal, Spain and Hungary. Greece, Italy and Portugal particularly owe it to Chinese finance for pulling them out of the debt crisis. In between these two extremes lie countries such as Belgium, France, Denmark and the Netherlands that advocate fundamental freedoms and rights but refrain from confronting China publicly for fear of economic retaliation. They prioritise their economic ties with China as they receive a big share of Chinese investment.

As domestic leaders change, so do their priorities and approach towards China. Notably, some member states such as the Czech Republic and Poland, who were previously assertive have now become reluctant to take positions that would infuriate China. Both these countries share a history of hostility and active criticism directed towards China’s unfair economic engagements. Meanwhile, countries like the UK and Sweden have become more vocal in recent times.

Policy of Engagement

EU’s economic ties with China are very strong, as it has been observed that its strategy for China has always been governed by the logic of economics. Bilateral trade accounts for 3.3% of the EU’s GDP and nearly 6% of China’s GDP. Between 2002 and 2018, China’s exports to the EU increased rapidly and the EU’s trade deficit with China grew at 9% annually.

Despite the EU’s concerns regarding market access, subsidies, non-tariff measures, intellectual property rights, and anti-dumping actions, China continues to be the EU’s second-largest trading partner. Having assessed its economic relations with China, the EU is gradually moving towards a policy of engagement. It marks a reorientation of EU’s “accommodating” approach. The change in EU’s stance towards its economic relations is reflected in Nicolas Chapuis’s (the EU ambassador to China) statement, “We think that policy of engagement, clarity, the possibility to strike smart deals, to take stock of china’s innovation policies and formidable economy of this country is of interest to us and engagement rather confrontation is the right path,”.

Correcting the Economic Imbalance

Over the years, Europe has emerged as a leading destination for Chinese investments. The abundance of the skilled labour force, stable regulatory environment, open and barrier-free market and advancements in innovation have drawn Chinese investors towards European markets. From EUR 2.1 billion in 2009, Chinese investments grew at a rapid pace and hit a record of EUR 37 billion in 2016. Chinese investments are pivotal to a majority of the economies in the EU. But so are these investments to China. As a bulk of these are tied to the sectors covered in Made in China 2025 policy, China’s FDI in EU is strategically important.

During 2018, China directed 42 per cent of its foreign direct investments towards the sensitive sectors with 24 per cent of such investments made by state-owned firms, and 58 per cent directed towards sectors targeted by the Made in China 2025 policy.

China’s investment destinations have also been very well-thought-out, typically targeting the big EU economies. The largest recipients of its investments include the UK, Germany, Italy, France, Netherlands and Finland.

However, the lack of reciprocity has strained the EU’s economic ties with China. More businesses in Europe complain about China’s lack of transparency, its discriminatory policies against foreign companies including tariffs and non-tariff barriers, excessive domination of state-backed firms and weak implementation of intellectual property rights. Chinese foreign direct investment flows into Europe witnessed a fall in 2018, partly due to the EU’s regulatory pushback against Chinese investments.

The EU’s most unified and assertive response till date has been the investment screening mechanism. Bothered by the rising number of Chinese takeovers, leaders from Germany, France and Italy urged the European Commission to revamp the foreign investment rules. The screening framework sets the guidelines and requirements for member states who wish to adopt it at the national level. Naturally, its success hinges upon the national investment screening rules. Many of EU’s member states have already made significant strides in that direction.

Germany reviewed its foreign investment regulations, a few years back and put in place more stringent measures to protect the critical sectors of its economy from risky foreign takeovers. The shift in policy came after the Chinese took over the Bavarian Robotic firm Kuka. Although steady Chinese imports of German cars and machines have fuelled Germany’s economic growth, the growing presence of China’s state-backed investors with their rapid purchase of stakes in German firms has overridden its benefits from trade with China.

Others such as France, Italy, Netherlands and the UK have broadened their investment screening mechanism to protect strategic assets from Chinese takeovers. Notably, France passed a government decree that provides the economy ministry with the power to stall the takeover of assets in the defence, energy, water, electronic communications, and public health industries. It is in the process of extending this rule to other critical industries like artificial intelligence. In Italy, the government recently exercised its powers under the screening system for high technologies by mandating rules governing the purchase of Piaggio Aerospace's P180 turbojet business by PAC Investments, a Chinese state-backed consortium. China responded to the new regulations in its own way.

Last year, Chinese firms spoke of the challenges they encountered as a result of the EU’s new investment screening mechanism. The survey conducted by the China Council for the Promotion of International Trade recorded 80 per cent of its respondents agreeing that Chinese firms will be subject to unfair treatment under the new investment screening rules. The respondents pointed out the lack of transparency, huge costs, delays in approval and the difficulties in getting work visas as the major problems. Despite these concerns, around 78 per cent of the respondents mentioned the EU as their first choice for investment.

EU’s lukewarm response to the Belt and Road Initiative

Right from the outset, the European Union has not been very welcoming when it comes to China’s grand Belt and Road Initiative. Although the EU, at large is highly supportive of infrastructure and connectivity projects, the BRI has created an air of scepticism within the bloc. Its concerns go beyond opaque procedures, spiralling debt and questions regarding the sustainability of an infrastructure financing model controlled by China’s state-owned banks. For European businesses operating in third party countries, Chinese firms pose a major threat. The EU complained that European firms have had to engage in unfair competition with Chinese enterprises, who are likely to gain projects every time the Chinese government decides to finance infrastructure under the BRI.

As of now, the EU lacks unanimous support from its member states to closely monitor the BRI. The fragile state of their economies and the timely assistance from China under the BRI have turned many of them into strong advocates of the initiative. Countries such as Greece, Hungary, Italy and Portugal endorse the BRI. In Greece, China is investing heavily in the Piraeus port to develop it into the largest transit hub between Europe and Asia. A high-speed railway line from Budapest to Belgrade is yet another China financed project. Similarly, China is making inroads into the Balkan infrastructure by constructing bridges, roads and railways in Serbia, Croatia, Montenegro and North Macedonia. China’s priority is to undertake connectivity projects under the BRI in countries that act as a gateway to the rest of Europe.

The 17+1 Initiative which is a connectivity cooperation framework between China and the Central and Eastern European countries has also caused some worry. Many of these countries are members of the EU and within the bloc, there is a growing concern that these countries will be reluctant to take actions that might not align with Beijing’s interests.

Meanwhile, China has been using different platforms to boost EU member states’ confidence in BRI projects. It has been asking its partner countries and organisations to promote the benefits of BRI. By stressing upon the fact that China only undertakes BRI projects in countries that show interest in partnering with it, it hopes to increase credibility and transparency.

5G Toolbox: A Cautious Move

To guide its member states in making key decisions and mitigating risks while investing in telecommunications infrastructure, the EU has come up with a set of strategic measures known as the 5G Toobox. Although final say in deciding about the security risks to 5G networks and licenses still lies with the member states, the Toolbox is a significant step. If adopted by member states, it can serve as a safeguard for member states to regulate and limit the involvement of risky telecom companies like Huawei. The EU’s decision to limit rather than ban Huawei also indicates that it is trying to balance its relationship with the US and China. In the UK, the government announced its decision to permit Huawei to be involved in its 5G networks with certain restrictions. EU’s response to the rising security concerns regarding the Chinese telecom giant signals a cautious yet effective approach that the EU has adopted towards China.

Human rights, Rule of Law and Democracy

While addressing the protests in Hong Kong, the EU spokeswoman for foreign affairs and security policy, Maja Kocijancic stated that “We share a commitment to fundamental freedoms, the rule of law and human rights.”

Lately, the EU’s commitment to fundamental rights and freedoms have been put to test more often especially in light of the ongoing struggle for independence in Hong Kong and the detention of Uighur Muslims in Xinjiang. Sadly, the EU hasn’t fared very well. Its response has hitherto been limited to verbal rebukes and warnings. A deeply fractured EU further impedes any critical stance towards China’s human rights violations, its crackdown on dissent and lack of respect for the rule of law. While some countries remain silent, a few others openly side with China. One such member state is Greece, an important beneficiary of China’s infrastructure investments. In 2017, Greece vetoed the European Union’s decision to condemn and confront China’s human rights abuses at the UN.

While the EU’s response has been faint, it is simultaneously exploring other ways to engage China. For instance, Ilham Tohti, a geography teacher from the Uighur community received the Sakharov Prize from the European Parliament for his efforts in encouraging dialogue between Muslim Uighurs and the Chinese people.

As for the protests in Hong Kong, the EU went so far as to condemn police brutality and called for an investigation into the causes of the protests and violence. This, in turn, invited a harsh response from China, which criticised both EU and France for their statements. The threat of economic retaliation limits the EU’s ability to take more concrete action in such cases.

Mapping future EU-China relations

In the future, EU-China relations will no longer be solely determined by the logic of economics. As much as the EU needs China, China needs the EU too. Both sides will take cautious steps to prevent jeopardizing their economic ties. However, current steps taken by the EU also highlight that it is more determined to limit China’s excessive political influence in the region and prevent the erosion of the EU’s solidarity.

The EU’s investment screening mechanism is noteworthy and is likely to have a huge impact on the flow of Chinese investments, particularly those made by state-owned firms as it covers a huge share of Chinese investments in EU. For the EU, it is however important that the member states adopt it at the national level. If member states enforce screening rules more stringently, it could be successful in monitoring Chinese investments in those countries.

In all likelihood, BRI will be the one to drive a wedge between the EU and China. The EU can be expected to undertake tougher scrutiny of BRI projects. Simultaneously, China’s infrastructure financing will spread across the EU as the BRI acts as the primary gateway for China to the rest of Europe.

The EU and China have significant leadership in critical fields like innovation, renewable energy and technology. These open up new areas for cooperation. By sharing resources and knowledge, the EU and China could collaborate to solve global problems.

As an active voice for fundamental freedoms and rights, the EU must take effective steps to address China’s violations of human rights and the rule of law. EU already faces mounting pressure to take a stronger stand against China’s treatment of Muslim Uighurs and the violence in Hong Kong. In response, intimidation and the threat of retaliation from China can be expected. But it must not discourage the EU from responding with adequate measures.

Views expressed are solely those of the author.

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About the Author

Varshini Sridhar graduated from Christ University in 2019 with a Bachelor of Arts in Economics, Political Science and Sociology. She aspires to a career in international affairs and as a step towards the same, she completed the Summer School Program in International Political Economy at the London School of Economics. After valuable internship stints at NITI Aayog, PwC and Greenpeace she is currently at Janaagraha while pursuing her long-distance Graduate Diploma in Economics from the University of London and learning Mandarin. A trained Bharatanatyam dancer she enjoys performing on stage.

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