Seven Years, Seven Weeks

The Comprehensive Agreement on Investment (CAI) between China and the EU took about seven years to negotiate yet fell apart in little more than seven weeks.  This column (GRICI 1807) on the first of this year wrote with surprise that the deal was even agreed.  A big final push by Angela Merkel to cap not only Germany’s presidency of the EU council but also cement her legacy of 16 years as German Chancellor meant a proverbial rabbit was pulled out of the economic hat to agree terms with the Chinese leadership.  On the Chinese side Xi Jinping had directly intervened to complete the deal.  Prima facie the EU could claim parity with the US in terms of European corporate access which the US had secured under their Phase One deal, and the Chinese side could trumpet the deal showing how China remained open for business and that the US driven decoupling with China couldn’t stop greater engagement between the EU and China.

Today that signature piece of economic engagement between these two economic superpowers lies in tatters.  The robust and forceful debate which this column expected within the European Parliament never even materialized as last week saw the Parliament vote 599 in favour, 30 votes against with a further 58 abstentions, to halt all discussion, consideration, or ratification of the CAI unless Chinese sanctions against the EU were lifted.  To add insult to injury the Parliament also called for greater scrutiny of foreign inbound investment into the EU and closer cooperation with the US when it comes to Chinese engagement.

How did things fall apart so quickly?  The EU China policy seems in disarray although the EU is getting a crash course in the realities of Chinese foreign policy when things don’t all go China’s way.  The recent events in Europe may mark a turning point in Europe’s China policy, one based on the reality of what China is in total, not simply what German industry and exporters would like it to be.

The Chinese sanctions referred to by the European Parliament were imposed by China in response to the joint sanctions announced by the US, UK, EU and Canada in late March which targeted Chinese officials and entities involved in the human rights violations in Xinjiang.  Those joint sanctions were undertaken by the EU and others as a direct action to uphold the basic human rights enshrined in various United Nations treaties.  To that extent the EU considers the sanctions justified and legal.  China of course denies any wrongdoing at all in Xinjiang, although it should not be forgotten that when the concentration camps were first exposed China actually denied they existed at all.  CCP denials frankly don’t really matter much and as journalists in China often joke, nothing can be regarded as true until it has been officially denied.  China’s response to those joint sanctions was to then sanction individual parliamentarians, a highly respected German think-tank and diplomatic bodies.  A truly scatter gun approach which doesn’t even have much weight in Chinese law let alone international law.  The EU Parliament vote then halted the CAI stating that nothing will progress until the Chinese lift their sanctions, yet the Chinese will not do so unless the EU lift the Xinjiang sanctions which seems inconceivable unless China drastically changes its actions in Xinjiang.  So ends the CAI discussions.  It is worth noting that Angela Merkel has yet to speak out against the Chinese actions, a truly pathetic ending to her long years in office.

The dramatic break down in China relations should not really be that much of a surprise.  The EU had hoped to have a multi-faceted approach to China and in the past few years there has certainly been an increase in criticism of China’s worsening human rights record and unfair trade practices but Merkel and others like President Macron of France thought they could neatly segregate these different issues into distinct compartments.  They can’t.  As this column has highlighted before there simply can’t be solely economic relations with totalitarian states.  The EU being a grouping of 27 countries already struggles to speak with one voice on many topics but EU high level engagement with China has been seen both inside and outside the union as effectively German industry policy towards China.  Once the CAI had been signed German industry and politicians started to lobby for approval and considered it very much their deal.  Such high handedness on the part of the Germans did not go down well.  It should be remembered that it was Merkel and Macron who sat virtually alongside Xi Jinping when the deal was announced, Germany as current president of the EU council but Macron represented France, not as the next incoming president (which would have been Portugal) but as the president following Portugal and it was assumed that Macron would be the leader when the deal was eventually ratified!  Both these leaders are simply out of touch with the changing China winds both within the EU political structures and at the ground level where public sentiment towards China has soured dramatically.

China’s failing Europe policy

If Europe’s policy appears to be unravelling, then it is equally true that China’s Europe policy is failing.  The Chinese sanctions were simply disproportionate and poorly thought through.  They have completely backfired on the Chinese who were determined to keep the US and EU split, or at least at odds when it came to Chinese engagement.  But the CAI collapse is only part of China’s growing trouble in Europe.  China had established a 17+1 grouping of European nations, normally smaller and ex-iron curtain states where China tried to curry favour and develop closer ties.  This grouping was by definition limited in scope and action as all EU trade deals must go through the EU proper but it was a source of influence for China within Europe.  Lithuania this week just announced that it was leaving the group as it found dealing with China more and more problematic and called the Chinese approach to Europe divisive.  China downplayed the withdrawal but it is becoming ever more clear to Europe, across all levels of the society, that China doesn’t just play tough but plays dirty, and what once appeared as a friend is very willing to turn and hurl abuse at you if they perceive a slight, however small.

The recent midair state sponsored hijacking of the Ryanair flight over Belarus, although not directly linked to China also heralds more problems to come.  What is China’s position on this dreadful illegal action?  Reading the Chinese language press it parrots the Belarussian government line about a bomb plot and how the intervention saved lives yet there is no mention of the arrest of a journalist and his girlfriend.  But reading the English language Chinese press and the story changes.  There lip service is paid to questions surrounded the arrest, but doubt and suspicion is sown to play up the Belarussian position and downplay the lawlessness of the act.  Does China condone such actions?  Perhaps it sees this as a useful tool it could use itself?  China has already demanded that Cathay Pacific provide crew lists pre-flight for any flight over their airspace to vet any pro-HK protest staff.  Why would they not look to intercept flights carrying who they consider a danger to state security?  China would be far bettered served by condemning such acts if it seeks to be a responsible world power but this seems too much for it.  Its preference is to stand with authoritarians and dictators as they trample long accepted norms and cause mischief around the globe.

Europe’s path forward

Europe has no choice but to rethink how it deals with China.  No doubt the announcement of the CAI left selected Europeans feeling smug that they could rebuke Trump and claim a victory for Europe while adopting a less confrontation approach towards China, but that smugness looks misplaced now.  Trump was disliked by many in Europe, he was seen as boorish, a bully, uncouth and encapsulated all that was bad about America yet he had correctly focused on China as a long term problem for the current world order.  But Trump is now gone and the China questions remain.  By the end of this year Merkel will be gone and the future of German politics is far from certain.  What is likely though is that the old days of Chancellor Merkel as salesperson-in-chief for German exporters is gone.  Merkel’s departure will deprive France’s Macron of a partner in the business first, everything else second approach which has been followed for too long.  China has changed in the past twenty years, and especially in the last 8 years under Xi Jinping and Europe needs to change to cope with that new reality.  The failure of the CAI, the change at the top of German politics and the growing belligerence of Beijing means that Europe will almost certainly become tougher on China yet falling short of the American position.  The consensus nature of the EU means that all countries must agree on a position and Hungary has traditionally planned a spoiling role when it comes to a tougher line on China.  That may have more to do with internal EU politics as President Orban in Hungary weakens its democracy and thumbs his nose at Brussels rather than being a stooge for Beijing.

Europe doesn’t just have a China problem to address.  It has failed to tackle Russia as well, as Putin has grown more and more belligerent the European response has been lacking.  Again much of the European weakness translates into German weakness.  Merkel oversaw a strong German economy and booming export industry yet failed to push back against Russia and China.  She will leave her successor a very difficult starting position.  Her refusal to stop the Nordstream 2 pipeline from Russia will only increase European dependency on Russia and help undermine an already weak Ukraine.  To stop the Nordstream 2 pipeline would simply be too much of a cost to German industry and that seems to be her sole concern.  Broadly geopolitical issues are ignored, or at least compartmentalized to be dealt with another day.

Europe needs and wants Chinese investment.  It will struggle to recover from the Covid pandemic and there are sectors of the economy which have still to fully recover from the global financial crisis.  That desire to do business is only natural and China will continue to be a center of growth for many years but it will be a much more circumspect EU.  China will find it harder to deal with the EU and it will certainly come in for more criticism from it.  The EU should, as the Parliament has already proposed, work closer with the Biden administration when it comes to China, but European elites will not want to play second fiddle to the US even if it led by a democrat.  If Merkel had never pushed the CAI at the end of last year, then the break now would not have been so dramatic.  The CAI was the big prize of EU-China engagement and it has failed spectacularly.  It will be years before the deal can be resurrected in its current form if it even can be.  The EU has its work cut out in the next few years.  The EU Commission failed miserably to handle the vaccine supply issue earlier in the year and it exposed some frankly incompetent leadership at the very top.  The EU faces major challenges from both Russia and China but it also will need to put aside rivalries and pettiness when dealing with the US and UK if these great democracies are to come together and push back on Chinese threats and pressure.  The CAI was to be a major milestone in EU China relations, it has proved to be so but for very different reasons than was originally thought.