Europe’s China Dilemma

Introduction

• The EU’s approach towards China was set out in a Strategy adopted in 2016 and updated in March 2019 in a Joint Communication of the European Commission and the High Representative.
• The balance of challenges and opportunities presented by China has shifted over time.
• For the EU, China is simultaneously (in different policy areas) a cooperation partner, a negotiation partner, an economic competitor and a systemic rival.
• The EU pursues realistic, effective and coherent engagement with China, based on our values and interests.
• The COVID-19 pandemic has demonstrated that things emanating from China can have a real impact, whether positive or negative, on the international system.
• Given the country’s size, a negative impact is too big to ignore or to easily contain.
• But working together with China is difficult when the country’s prickly ego, informed by all manner of real and imagined historical grievances, gets in the way of international cooperation by refusing to even acknowledge the origins of a problem such as the pandemic.
• Liberal democracies in Europe with small populations may split by differing conceptions of national interest, would find themselves incompetent to deal with the adverse consequences of an authoritarian power’s rise, especially when that power follows the logic that norms and rights must bow before its own strength.
• This is a serious concern in order to shape the credibility of the European Union (EU) as a geopolitical actor even as slow economic growth ties its fortunes eastward, to China and perhaps other illiberal powers.

Recent development between EU and China

In a recent development, the European Union (EU) and China agreed in principle to the EU-China Comprehensive Investment Agreement (CAI) that was tentatively approved.

• The Comprehensive Agreement on Investment has been seven years in the making.
• The deal removes barriers to foreign investments in China for certain EU industries, such as new energy vehicles, cloud computing services, financial services and health.
• It will also be the first agreement to deliver on obligations for the behavior of state-owned enterprises and comprehensive transparency rules for subsidies.
• For China the deal includes investment possibilities in renewable energies on a reciprocal basis.
• AI core focus
• Access to the markets: Provide for new opportunities and improved conditions for access to the EU and Chinese markets for Chinese and EU investors (more specifically, broadening the EU investors’ access to the Chinese market by eliminating quantitative restrictions, equity caps, orjoint venture requirements).
• Addressing challenges: Address key challenges of the regulatory environment, including those related to transparency, predictability, and legal certainty of the investment environment.
• Guarantees protection: Establish guarantees regarding the treatment of EU investors in China and of Chinese investors in the EU, including protection against unfair and inequitable treatment, unlawful discrimination, and unhindered transfer of capital and payments linked to an investment.
• Non-discrimination: Ensure a level playing field by pursuing, inter alia, non-discrimination as a general principle subject to a limited number of clearly defined situations.
• Sustainable development: Support to sustainable development initiatives by encouraging responsible investment and promoting core environmental and labour standards.
• Dispute settlement mechanism: Allow for the effective enforcement of commitments through investment dispute settlement mechanisms available to the contracting Parties and to investors.

 Europe & China Behind the presumption

• Europe and China have been major partners for a generation.
  • According to the Global Office of the International Comparison Program at the World Bank, China and the European Union (EU) jointly account for nearly 35% of global GDP in PPP terms.
• Europe championed China’s case for World Trade Organization (WTO) membership and China supported the ‘European Project’.
• A single example is sufficient to demonstrate how critical China is for European prosperity.
  • Between 1995 and 2012, Germany, Europe’s economic powerhouse, enhanced its industrial value by 37%, the largest chunk of which came from supply chains not in the United States but in China.
• The European Union’s High Representative for Foreign Affairs and Security Policy, publicly proclaimed that “China is without doubt one of the key global players.
• In March 2019, the EU Commission published “A Strategic Outlook”, describing China as, simultaneously, a cooperative partner, an economic competitor and a systemic rival promoting alternative models of governance.
  • This was the product of a long process of distillation during which the political and security dimensions began to jostle with the economics that had been the primary determinant of China-EU ties for two decades.

Assessing the importance

Why is China important for the EU?

• Rapid growth: Over the past decade, the rise of China has happened with unprecedented speed and scale.
  • Internally, China aims to shift away from its old economic and social model to a more balanced path of development.
  • On the international stage China is now a heavyweight, both economically and financially.
• Significant trading partners: China is the EU's second biggest trading partner and, looking for a stable and legally secure environment, Europe is now the most important destination for Chinese companies' foreign direct investment.
• Omnipresent: China is also ever more present in all regions of the world with regard to its international political and military presence.

As a consequence, China's political, economic and social development matter to the EU more than ever. They present major opportunities for the EU, especially in creating jobs and growth in Europe, but need to be addressed in a coordinated and effective way in order to produce the best possible outcomes for both the EU and China.

Why is the EU important for China?

China matters to the EU, and the EU also matters to China.

• Sustainable economy: In its aim to develop into a sustainable economy, China needs to move up the value-chain and boost its domestic, consumption-driven market.
• International support: Standing at this critical juncture of reforming and opening up - a process that is complex and may not always be smooth - China needs all the support it can get.
• Trading partner: Furthermore, the EU is a key partner for China with regard to trade - the EU is China's largest partner in trade, both with regard to imports and exports - and investment, as a destination and source of Foreign Direct Investment.
• Gaining from experiences: China also stands to gain a lot from the European Union's own experience. The EU can support China's economic reform programme with its know-how and use its many dialogues with China to share ideas and experience.

Europe and China’s Dilemma

The following issues raised flags for Europe:

• China’s efforts to cultivate separate European sub-constituencies like the 16+1 Format with the Central and Eastern European States, and meetings with the Nordics and the Southern Europeans
• the sailing of the PLA Navy into the Baltic Sea for joint exercises with Russia in 2017
• cross-sectoral hybrid threats including information operations in European countries
• Chinese behaviour in the South China Sea and Indian Ocean
• its targeted acquisition of key high-technology companies such as Kuka in Germany or key ports like Piraeus in Greece
• China’s early handling of COVID-19, and even more importantly, the clumsy Chinese efforts to use the confusion inside Europe to their propaganda advantage, led the EU to make a rare and blunt accusation against China on June 10, 2020:
  • “Foreign actors and certain third countries, in particular Russia and China, have engaged in targeted influence operations and disinformation campaigns around COVID-19 in the EU, its neighbourhood and globally, seeking to undermine democratic debate and exacerbate social polarisation, and improve their own image in the COVID 19 context.”
• China’s aggressive actions in the South China Sea, on the Line of Actual Control with India, and in Hong Kong, among others, have also gained European eyeballs.

This then is the European dilemma.

Implications for Europe

5G

• Europe is not unaware of what is happening. But, the larger concern is really of the United States. Here the idea of 5G assumes importance.
• 5G is something that everyone is concerned about because 5G gives one access to artificial intelligence which is unimaginable as compared to what we are seeing today.
• Now, what would happen if the Chinese get there first and they capture this market? The EU is working on it, including Italy.
  • India is also working on it, but we are nowhere near where the Chinese are currently.
• The Americans, the Japanese and Israel are also all on to it. The American’s have concerns over Huawei’s 5G technology.
• The fact that Huawei is also a major player in many countries, including India and it is through their equipment that the Chinese get a backdoor. So, there is a feeling that the Chinese would be able to spy on the rest of the world.

Strategic investment

• Currently, the Chinese are also buying Italian bonds. The Chinese have bought 2.8 Billion USD worth of Italian bonds.
• When China buys up huge currencies like this, and if the Italians are not in a position to repay back, then we really don’t know what the Chinese would be going to do.
• The Chinese can then apply pressure.
• When they start applying pressure, they can break one country; after which they break the second and the third, and then they break the EU.
• Further, the Chinese are not really concerned about time.

What are the key concerns for EU?

• Unfair games: Not playing fairly by the rules of the game (China keeps on subsidizing and most of its subsidies are not very well publicized- they are hidden subsidies, which makes it very difficult for one to put his/her finger on)
• China’s industrial overcapacity: A key concern for the EU is China's industrial overcapacity in a number of sectors, notably the steel sector, but also in other sectors such as aluminium.
• Unfair competition for EU companies: Domestically, the challenge is a big one for China, but it also creates unfair competition for European companies if this results in the EU's market being flooded by dumped Chinese goods
• Technological dominance: The state-owned enterprises which often back financial deals where the front is a Chinese company and in terms of the Make in China initiative of 2025, of which the U.S. is particularly concerned, because it would catapult the Chinese to technological dominance over the global trading arena- this is funded mainly by the State.
• Re-payment of loans: Further, if there is a default in paying back the loans which China provides for building infrastructure, then there would most certainly be consequences. With other projects across the globe, there are problems with the repayment of Chinese loans irrespective of however long the tenures of these loans are.
  • This is in fact a major source of worry as well- because if loans are going to suck a country into indebtedness, and then, the only way out is to sign-off on some strategic asset like a port or a telecom network, or a pipeline, then that could have very grave implications for the rest of the world.

What are Chinese ambitions and goals in Europe?

• Chinese would attempt at playing a very steady game. The Chinese would not want to move things in jerks. They have got a plan laid out for a long period of time. The focus now is really on money-power and trade. The Chinese look into the weaknesses in leadership of nation states, and then they attempt at buying people out.
• From an Indian point of view, our areas of concerns stem from having to deal with hostile non-state actors, like for example, Pakistan’s state-sponsored terrorism.
• The Chinese would control the Pakistani’s to the extent that the spread of terrorism doesn’t spread to the Xinjiang province. China is willing to take the risk of being called a supporter of a terrorist state rather than actually come out openly against Pakistan because their own stakes are also pretty high in this particular game. Regardless of all other considerations, India needs to do two things- these two things are also very simple:

• We need to look after our economy and ensure that our growth rate gets into double digits and remains there for about two decades. Indian diplomacy has a very important role to play to ensure that we reach higher on the world stage.
• We also have to be militarily strong. This is because a weak military cannot guarantee a strong foreign policy.
• The final point is that on all strategic issues, all political parties must be on one common platform.

Determinants and focus now

• The European debate is no longer simply about market access, industrial subsidies, over-capacity in steel and hi-tech industries; stealing of IPR, and China’s assertive approach to the security, resilience and stability of digital networks.
• It has begun to turn towards how to balance economic co-dependency and co-prosperity with China’s strategic global intentions and efforts to seek military supremacy and its bearing on European security.
• In the trinity of determinants identified by the EU in March 2019 — namely [negotiating] Partner, [economic] Competitor and Systemic Rival — the last dimension is gradually becoming the dominant political narrative.
• China also views Brussels as increasingly antagonistic.
• Ironically, the retreat of the U.S. from global leadership is providing the Chinese with the means to take advantage, even when they no longer deem it in their strategic interests to support the “European Project”.
• The Chinese intention is to delay the former by dangling the economic carrot.

A role for India

• Benefit of Brexit: Political conditions are favourable especially after the withdrawal of the United Kingdom.
• Significant role in Indo-Pacific: The Europeans recognise India’s role in helping provide peace and prosperity in the Indo-Pacific.

The opportunity for India and the EU to build a partnership that is both economic and strategic is there for the taking in a post-COVID-19 strategic scenario.

Conclusion

One of the things which Macron and Merkel have been mentioning was on the possible merger between Siemens and Allstrom. This would have produced a European champion in the railways, which could have taken on the Chinese giant railway companies. This has unfortunately been turned down by the European Commission. India would also need to put a lot of money and effort into research. This research spans across the board.

India needs to work in a very decisive manner to ensure that her growth rate remains above 10 percent. Secondly, the political parties need to be more mindful of a much focussed foreign policy as well as a defence policy with regards to the neighbours and with regard to the world. Thus, we need to continue in that direction.

India should also nominate a few industries as strategic industries- for example, 5G, Artificial Intelligence, and the Aerospace sector. These have to be given priority over and above what we do normally. That means, that they need to be run in a manner that ISRO is being run- not essentially as a normal government concern; but as an organization with a different structure, access to finances, and ensure that we become world leaders, the way that we have become world leaders in space.