A major investment deal reached in December between the European Union and China, after seven years of painful negotiations, may end up being the high-water mark for ties that are now quickly deteriorating again.
Since then, the EU’s executive branch and Germany have each formulated legislation that would make life harder for Chinese entities to invest, while joining the U.S. in swapping tit-for-tat sanctions with Beijing.
Italy’s government has turned from being an enthusiastic backer of President Xi Jinping’s Belt and Road Initiative to blocking planned acquisitions by Chinese companies.
In France, China’s ambassador didn’t even show up when summoned in March, citing “agenda reasons.”
Taken together, the moves signal a hardening of the European stance on Beijing. The biggest shift could be yet to come; polls show the German Greens party on course for a significant role in government after September’s election, raising the prospect of a more China-skeptic chill from Europe’s biggest economy.
Chancellor Angela Merkel spoke with Chinese Premier Li Keqiang last week, and the two pledged closer cooperation on COVID-19 vaccines and fighting climate change.
Yet the talk in Berlin is that optimism around the relationship is gone, and one Chinese official characterized ties with Europe as on a downward trajectory. Whether the Greens come to power in Germany or not, EU-China relations are at a critical juncture, said the official, asking not to be identified speaking about strategic matters.
The multiple signs of strain suggest Europe’s biggest players are moving closer to the views of U.S. President Joe Biden’s administration in America’s standoff with China.
As Secretary of State Antony Blinken holds talks in London this week with his Group of Seven counterparts, a Europe more aligned with Washington would signal some repair to the damage done to trans-Atlantic ties by the Trump administration, with implications for trade, tariffs and access to technology.
“There’s been a mood shift,” said Joerg Wuttke, Beijing-based president of the European Chamber of Commerce in China and a board member of the Mercator Institute of China Studies in Berlin, one of the entities sanctioned by China in March.
He cited the “perfect storm” of China’s assertiveness toward Taiwan, its move to impose political control over Hong Kong, and international sanctions over alleged human-rights abuses in the Xinjiang region, overlaid by the fact that China hasn’t followed through on its promises of opening up economically.
To be sure, Europe is not uniform in its outlook, with EU members such as Hungary still eager to engage with China. And whereas Biden has said that China can expect “extreme competition” from the U.S. while it also seeks to work with it on global issues such as climate change, Europe faces more of a dilemma as its strives to forge its own path.
Economic ties remain paramount since China is the EU’s biggest trading partner, with a total volume of some $686 billion in 2020 outstripping U.S.-China trade of $572 billion. Yet now even the Netherlands, which is among China’s top 10 trading partners, is growing more wary, protecting its high-tech companies from takeover and enacting a dedicated China strategy. According to the Chinese official, the U.S. has forced the EU to take sides.
The sentiment had seemed different just four months ago when Merkel helped steer the bloc to seal the EU-China Comprehensive Agreement on Investment, which Commission President Ursula von der Leyen said was “an important landmark in our relationship with China.”
Still subject to ratification by the European Parliament, it would provide improved access to the Chinese market for European investors while committing China to “ambitious principles” — including on forced labor.
Yet by late March, the EU had joined the U.S., Canada and the U.K. in imposing sanctions on China over alleged mistreatment of Muslim Uyghurs in Xinjiang, including forcing them to work. Beijing responded with its own sanctions, while a public backlash saw Swedish fashion retailer Hennes & Mauritz AB subject to an unofficial boycott.
“The EU has recently added more agenda items tied with human rights, ideology, democracy,” said Zhang Monan, senior fellow at the U.S.-Europe Institute at the China Center for International Economic Exchanges in Beijing. “This kind of opposition and friction is expected to continue.” She added that the EU is expected to formulate policy independently since it doesn’t want to be subordinate to the U.S.
The European Commission is now proposing rules to levy fines and block deals targeted at foreign state-owned companies, while Merkel’s Cabinet approved additional powers over foreign investment last week aimed at high-tech sectors including artificial intelligence and quantum computing. Both measures would hinder China.
China had hoped to separate economic issues from political issues and to bind Europe with its huge consumer market, but that’s increasingly impossible now, said an academic at a Chinese government-affiliated think tank. Ratification of the CAI has become more challenging, said the person, who was not authorized to comment publicly due to rules on speaking to foreign media.
Signs of the tensions were on show during the virtual talks led by Merkel and Li. In a departure from usual practice, the opening remarks were not livestreamed and there was no concluding press conference. A transcript posted several hours later by Germany showed that Merkel addressed human rights, saying there were differences of opinion particularly over Hong Kong.
“China and Germany have different views on some issues, this is a fact,” Li told Merkel, urging Germany not interfere in internal matters, according to a statement from the Chinese Foreign Ministry. Li said he hoped they could “eliminate unnecessary distractions” to maintain “healthy and stable” bilateral ties.
The shift in Europe has not been lost on Washington. A Biden administration official said there has been a sea change in European thinking, coming on board with the U.S. stance on China. There’s been real evolution in Germany too, the official said.
That change could become more pronounced if the Greens convert their opinion poll lead into a strong showing or even victory in September, with Merkel set to step aside.
While all coalitions involve policy trade-offs, the Greens have a harsher line on China than the current administration, calling for an end to Beijing’s “blatant human-rights violations” and for closer European and transatlantic coordination on China.
A coalition with the conservatives, as suggested by polls, would see continuity in German foreign policy but with “different nuances” on China, said Jana Puglierin, head of the Berlin office of the European Council on Foreign Relations. “The Greens would clearly advocate a less mercantilist policy than we have seen under Merkel,” she said.
For now, Europe is determined to avoid decoupling entirely with China. French President Emmanuel Macron and Merkel held a joint call with Xi in April, and a report in China’s Global Times on April 28 referred to “optimism and confidence in China-Germany cooperation” despite the risk of “some impacts” after the election.
Merkel’s would-be successors and business leaders know the “great potential” of Europe working with China, “so they need to ensure healthy ties won’t be interrupted by any third party or internal conservative forces,” the report noted.
Still, Wuttke at the European trade chamber said that China underestimates the concern over human rights in Germany.
Especially after the departure of Merkel, who favored engagement with China, that’s likely to “translate into possibly more assertive policy in Berlin,” he said.
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