Europe’s Relations with China: the new silk road in troubled waters

May 4, 2020
Editorial Europe
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In line with the rise of the People’s Republic of China as a global power, the importance of China for the EU has continuously risen over the past decade. The relationship between the EU and China has undergone different phases, and on various occasions it has demonstrated the strains arising from the fundamentally distinctive world views of either side. Nevertheless, for most of the time since the establishment of diplomatic relations in 1975 ties have gradually strengthened, leading to the agreement, in 2003, on a Strategic Partnership. During the 2010s, the economic impact of the sovereign debt crisis in the Eurozone served as a reminder of the value of bilateral trade, and also facilitated a significant rise of Chinese investment in Europe. Coinciding with the launch of China’s Belt and Road Initiative, the early assessment of these developments focused on their presumed mutual benefit and on the opportunities arising for Europe from closer economic ties. More recently, there has been growing scepticism in Europe of this view, as a number of considerations have clouded the relationship: Chinese investments in critical European industries and infrastructure are now regarded as being potentially harmful, domestic politics in China under President Xi Jinping are progressively more at odds with the EU’s normative concerns for human rights and the rule of law, and Chinese foreign policy is increasingly seen as aggressive and harmful to stability in East Asia. A key development here is the prospect of a new Cold War between China and the United States during the Trump administration, creating an awkward dilemma for the EU between its commitment to the transatlantic alliance and its partnership and economic interdependence with China.

The Evolution of a (so-called) Strategic Partnership

Formal relations between the EU and the People’s Republic of China started with the exchange of diplomatic representations in 1975, following the détente between the United States and China. It provided opportunities for European firms to invest in a China that was ‘opening’ its economy and society under Deng Xiaoping, leading to the signing of a trade and cooperation agreement in 1985. Ever since these early beginnings, economic cooperation has remained the foundation of EU-China relations, but inevitably political and security concerns have impacted on these relations. The violent suppression of the Tiananmen Square democracy protests in 1989 were a stark reminder of the nature of the Chinese political regime, and of the fundamental differences between the People’s Republic and the European project. The arms embargo imposed by the then EEC, still in force as a of 2020, was a largely symbolic response to the massacre, yet has been a bone of contention on frequent occasions since then.

From the 1990s, the disjuncture between the European Union’s aspiration towards a values-based foreign policy and the development of closer ties with an authoritarian one-party state bound to suppress civil liberties, internal dissent and ethnic minorities have become ever more evident. Yet the growth of the Chinese economy, the increasing presence of China on the world stage, and the emergence of the PRC as a global power proved irresistible for the EU. Aided by the cautious liberalisation of domestic politics under Jiang Zemin and Hu Jintao, both political relations and economic exchange between China and the EU deepened during the 1990s and 2000s. The launch of the Strategic Partnership between the two sides in 2003 can be seen as a pinnacle of this development, even though critics have pointed to the lack of an actual strategy behind the EU’s policy, and the increasingly asymmetrical nature of the relationship – generally speaking China has become more important to the EU than vice versa. This imbalance is also evident in the comparatively greater number of initiatives that the EU has launched to deepen bilateral ties.

The Strategic Partnership has nevertheless been substantial in a number of ways, involving a series of dialogues at political and technical level across three ‘pillars’ – political, economic and societal relations – and involving regular summit meetings between the Chinese and EU leadership. During this period, in the post-Cold War era, China also cultivated a strategic interest in Europe in their attempts to balance the unipolar power of the United States, who in turn developed a policy of containment vis-à-vis the rising China.

The Benefits and Costs of Economic Interdependence

The mutual interest between China and Europe in economic exchange was initially compelling: following its opening, China sought foreign investment in order to grow its economy and was keen to not rely predominantly on the US in this regard. European firms welcomed the lower labour costs that manufacturing in China offered, as well as selling their goods into a rapidly growing consumer market. The liberalisation of global trade facilitated this an expansion of bilateral trade, investment and diversification of supply chains, a process further fuelled by China’s accession to the World Trade Organisation in 2003.

The economic downturn in Europe following the global financial crisis from 2009, and in particular the subsequent sovereign debt crisis in the Eurozone, accelerated this development. The Chinese market provided welcome outlets for European manufactures confronted with the flagging domestic demand, while China recognised the opportunities of investing in European countries that welcomed the inflow of foreign capital. While the rapid rise in Chinese investments in Europe was partly driven by investors looking for commercial opportunities, this trend also tied in with the Belt and Road Initiative launched by Xi Jinping in 2013. This strategic initiative, regarded by some as China’s pivot to the West, aims at the establishment of land and maritime corridors to facilitate trade and involves massive investment in infrastructure projects in Asia, Africa and Europe. It went hand in hand with the setting up of the Asian Infrastructure and Investment Bank (AIIB), a Chinese-led multilateral development bank joined by most EU member states (against objections by the United States).

While much of this deepening of economic inter-change had been regarded as mutually beneficial, it is important to point out a number of tensions. First, EU-China trade has been significantly unbalanced for some time. In terms of trade in goods, the EU has developed a structural deficit vis-à-vis China of between €100 and €200 billion annually. Among EU member states, half of China’s EU trade is with Germany, which is also the only member state to maintain a trade surplus with China. Second, there have been persistent complaints by European (and other) investors in China that intellectual property rights are not sufficiently protected, and more generally that the regulatory environment in China does not provide a level playing field. Negotiations on a Bilateral Investment Agreement started in 2013 to address these criticisms but have not made much progress since. Third, in recent years, European policy-makers have observed a pattern where Chinese investments would not only target commercial opportunities or infrastructure projects, but also key firms in critical industries, and would then proceed to transfer know-how, intellectual property and eventually manufacturing from Europe to China. Indeed, there has been growing concern in Western countries that China’s investment in critical infrastructure could compromise national security, with the roll-out of 5G telecommunications networks making use of Huawei equipment being a particularly sensitive issue. Finally, China has been effective in exploiting internal differences and disagreements among EU countries. A key example here is the setting up of the 16+1 Partnership between China and sixteen countries of Central and Eastern Europe, making these privileged targets for political attention and economic investments. More recently, Beijing has launched a similar 5+1 initiative with the Nordic states, and Italy signed a Memorandum of Understanding to join the BRI. The concern in Brussels is that such moves involve both member and non-member states, thereby threatening to fragment the EU’s common stance, and that over time the lure of Chinese finance may lead to a shift in political allegiance.

Taken together, these factors have tarnished the earlier image of a mutually beneficial economic exchange between the EU and China. By the end of the 2010s, too much of a reliance on China as a market, exporter and investor is increasingly seen as a risk, if not a downright threat, in the European Union.

The Changing Global Context

In the multipolar world of the early 21st century, EU-China relations have evolved in the context of a challenging global environment which has further exacerbated the dilemmas of the EU’s policy towards China. One key factor in this regard has been the shift in US foreign policy under Donald Trump which has impacted on EU-China relations in contradictory ways. At one level, the progressive withdrawal of the United States from key arenas of multilateral and global governance such as the Paris Agreement on climate change, the Transpacific Partnership, and the World Trade Organisation, has created a vacuum for global leadership that both the EU and China has sought to fill. Xi Jinping’s speech at the 2017 World Economic Forum in Davos, in which he suggested that China would become a new champion for globalisation and an open global economy, was widely seen as staking a claim to succeed the United States in this regard. The EU, with its commitment towards effective multilateralism, trade liberalisation and strong global governance institutions, can be regarded as a partner, given that both the EU and China have been at the receiving end to the Trump administration’s belligerent approach to addressing trade imbalances.

On the other hand, the aggressive posture of the United States towards China also implied the expectation that allies follow the same line. In its logical conclusion, this policy leads to European states having to choose between the continued benefits of the transatlantic alliance, and the deepening of economic ties with China. The American threat that European governments who award contracts to Huawei in the construction of their 5G telecommunications infrastructure would risk limits to the intelligence sharing with the US is a prime example.

Notwithstanding the policies of the Trump administration, European attitudes towards China have markedly cooled in recent years. China’s uncompromising stance with regard to the territorial disputes in the South China Sea, its increasing presence – and competition with the EU – as a provider of development assistance in Africa, and the clamp-down on pro-democracy protesters in Hong Kong are all evidence of the growing conflict between China’s pursuit of its interests and the EU’s pursuit of its norms.

EU-China Relations in Times of Trump and COVID-19

The adoption of a new “EU Strategy on China” in 2016 and the publication of a Joint Communication of European Commission and the High Representative on “EU-China Strategic Outlook” reaffirmed the EU’s commitment to engaging with China, while hinting at a tougher stance with regard to issues of economic security, industrial strategy and investment protection. However, the EU’s balancing act between drawing the benefits from economic relations with China and protecting its interests and values is becoming ever more difficult. Not least in view of pressure from the US, the EU finds itself confronted with the impossible choice of whether to continue the path of deeper economic cooperation, and risk serious repercussions for the transatlantic alliance, greater interference of China in its internal affairs and further compromises in its normative agenda, or whether to join the US in a more adversarial posture towards China and incur the economic cost of the loss of Chinese trade and investment.

This dilemma is amplified by the COVID-19 crisis. On the one hand, China is seen by some as being responsible for the pandemic, having sought to cover up the initial outbreak in Wuhan. The crisis also served as a reminder that Europe’s dependence on supplies from China, in particular with regard to medical gear and protective equipment, has potentially serious effects in its security. On the other hand, the pandemic also provided opportunities for China, once it had overcome the peak of infections domestically, to mount an effective public diplomacy campaign in assisting European countries with medical personnel and supplies – an effort that has proven effective in countries such as Italy that were already favourably predisposed towards China.

It remains to be seen what impact the pandemic and the subsequent economic recession will have on EU relations with China. The experience of the Eurozone crisis would point to the need for trade with, and investment from, China as ways that would allow Europe to find a return to growth – especially as the Chinese economy is expected to emerge comparative strengthened from the crisis vis-à-vis the US and Europe. Against this expectation stands the possibility that in the post-COVID-19 world international supply chains are regarded as being too fragile, and ultimately too much of a security risks, accelerating the process of de-globalisation that had already underway previously – a scenario that would also push the EU and China further away from one another.

Tags China, Europe, trade

The author

Professor in the Political Science Department (Luiss)