The New Realities

Last month this column looked at the shambolic UK China policy, or lack thereof.  For over a decade the UK has floundered when it comes to conducting a sensible and consistent China policy.  In the post-covid world with what can be called the reemergence of spheres of influence between the great powers perhaps it is not surprising that the UK is struggling to understand its role and find a sustainable policy direction to China and other powers, but what excuse can the EU have?

The EU is the world’s third largest economy, well behind the US and only slightly behind China.  It is the sole biggest trading bloc in manufactured goods and services and home to many global brands and the world’s most livable cities.  By any economic measures the EU is a formidable global player but that economic size, and commensurate wealth have failed to give it much clout on the world stage.  Just in the past week the Europe’s weakness has been on display as the US and Russian negotiated directly to try and force a peace settlement on Ukraine.  The Americans were indifferent to what the Europeans thought of the deal and even proposed European related commitments which the Europeans had never been consulted on.  This though is only the most recent example of Europe and the EU being left behind by others across a range of endeavours.  It appears at times that Europe no longer matters in the modern world, but that need not be true if Europe can find a common voice and policy soon.

Who to call?

The great phrase “who do I call if I want to call Europe” captures the overarching, but not insurmountable problem for Europe.  Europe of course describes a land mass at the eastern end of Eurasia but Europe isn’t fully represented by the European Union of 27 sovereign states.  As for the United Kingdom they decided a decade ago that they no longer wanted to be part of the EU even though it’s clearly a major European power and its largest trading partner is the EU.  The EU itself then splits its leadership between an executive European Commission lead by Ursula von der Leyen which speaks for Europe as a whole and a European Council with the heads of state or government of each state as a member.  It sounds complicated because it is complicated.  The member states themselves are highly diverse in terms of language and geography, Arctic Finland bordering Russia doesn’t seem an obvious partner to far away Portugal.  The real surprise is that the EU has been as successful as it has been.  The single market is a remarkable achievement and ironically it was driven forward by the UK which has since left it.  The ability to regulate and have common standards across such a broad group of countries and ensure those standards are met by those countries wanting to trade with the single market is impressive and a powerful tool.

Yet the EU has failed to grasp the challenges that it now faces.  As decisions require compromise and jockeying between the EU commission and individual states it is no surprise that decision making is slow.  Ursula von der Leyen may understand the threats from both Russia and China and say all the right things in public, yet she has no power to influence or change domestic policies of any member states.  While there may be a broadly common cultural history and tradition across the 27 states each is unsurprisingly very concerned about local issues.  French politics is in disarray regrading welfare reform and when workers should be able to retire, Germany is concerned with a collapse in exports and the hollowing out of its industrial sector by China which it once saw it its economic golden goose, the Baltic states are concerned that Russian is going to invade once the hostilities in Ukraine end.  Bringing domestic leadership together is going to be challenging but it is essential for Europe’s and the EU long term viability, and economic independence.

Some of the Challenges

It is important to remember that the EU’s development came out of the literal ashes of the Second World War.  Europe was the theatre of two devasting wars only 25 years apart and before that nation state wars on the European continent were more the norm rather than the exception.  Cooperation between European states and ensuring no more wars lies at the heart of the European project.  That commitment can often be forgotten in the heated debate around economics and policy for Europe.  That over 70 years of peaceful expansion was achieved in continental Europe following the end of WW2 is a historical anomaly.  The US security guarantee under NATO during the Cold War further conditioned many European leaders that war was something in the past.  That of course has now changed.  War is raging on the European continent with Russian showing no interest in stopping until it achieves it long stated aims.  It is essential now that European leaders fully grasp that China stands squarely behind Russia providing it with many essential products and a ready market for its hydrocarbons.  Since the Ukraine invasion European leaders, especially German leaders, have at last awakened to the risks that Russia poses but they need to do far more than they are currently doing because the US has ceased to be a reliable partner in either the Ukraine war or indeed as a NATO member.  Given the need to bolster their defences it seems a foolish step to not have agreed to the United Kingdom joining the EU Safe (Security Action in Europe) fund.  This is an EU low interest scheme to boost defence spending and rearm the member states.  While the UK can still be involved in the increased spending not being part of Safe will limit its contribution.  Yet the UK has been one of Ukraine’s biggest supporters, being in lockstep with the EU when it comes to defence would have been the natural step to take.

While NATO and post-war reconstruction was wholly dependent on the United States the EU’s position towards America is not straightforward.  Americans are often seen by Europeans as coarse and vulgar, and Donald Trump represents everything that (many) Europeans despise about the US.  According to the World Bank back in 2008 the EU economy was actually bigger than the US yet over the next 15 years the EU grew 13.5% and the US 87% making the EU only two thirds of the size of the US.  The EU has no tech companies to challenge the leading American ones and the internet and social media platforms of Europe are wholly American.  As America innovated the Europeans regulated and when Trump launched his trade war the EU economic clout didn’t amount to much as the EU largely accepted the terms which Trump eventually offered.  The economic war they find themselves in is already difficult enough, but the nature of the US administration only adds to the disarray which the EU finds itself in.  Not only do they find themselves ignored by the US in Ukrainian peace negotiations, but they literally don’t want to engage with such a corrupt and venal administration.  If the Europeans then find it hard to deal with the second Trump administration, then how can they come to common ground on perhaps the biggest challenge, China?

For many in the EU China was seen as a golden economic opportunity.  The EU was, unlike the US, not in the business of geopolitics and looked to economic benefits as the sole factor in dealing with China.  When discussing EU economics, the most important voice was of course Germany and by extension German industry.  Chancellor Merkel was effectively the leading spokesperson for Germany manufacturers, and they were mesmerized by the growth potential of China.  German carmakers and chemical companies were the leading European investors in China and the most vocal advocates for further economic engagement with China.  Volkswagen Santana cars made in a local joint venture factory were the default car in Shanghai in the 1990s and the footprint has only increased since then.  Germany then tapped into cheap Russian gas to power its industry while those same companies expanded their presence in the Chinese market, not only exporting precision tools and engineering equipment but establishing ever larger factories and production lines within China.  The same willful blindness that led the Germans to totally underestimate the Russian threat has resulted in German industry being hollowed out by Chinese competition.  Chinese car manufacturers still can’t make a good internal combustion engine car but they are world leaders when it comes to electric vehicles and battery production.  Chinese EV exports to the EU are booming even with EU tariffs in place and the best response by German manufacturers is to double down on China investment.  European companies and politicians have repeatedly complained of the uneven playing field when it comes to investing in China yet some of Europe’s leading companies’ response is to keep investing in China, hoping perhaps that something will change for the better.  They have failed to realize that Chinese policy is solely for the benefit of the PRC, not the foreign companies!

All is not lost

Crafting a meaningful and effective China policy for the EU is going to be difficult.  The simple aggregate summation of national GDPs makes a big number, but the economic heft of the EU can’t be easily wielded in the way the US or China use their economic size.  Decision making is going to need compromise and will take time.  The recent rare earth elements restrictions which China announced should be a screeching siren for the EU.  The EU is highly dependent on Chinese rare earth elements related exports and China’s overreach with their export license regime illustrates how the Chinese state wants to insert itself directly into European manufacturing.  The EU has too often assumed that dealing with China can be just economics but there is never just an economic deal with a totalitarian regime, politics and control always play a part as well.  The rare earths elements export regime and associated measures is part of a non-kinetic war which the CCP has effectively engaged in with the EU.  The EU needs to accept that this is not just another trade dispute, and it needs to raise the stakes.  The EU has an extremely powerful, but to date unused, tool called the anti-coercion instrument which goes beyond the usual sort of tit for tat trade measures that countries impose on one another.  Restrictions on goods, services, finance, IP usage by companies or individuals are all available to the EU.  In addition to that it should not be forgotten that Europe provides a slew of very sophisticated and precision machinery especially in the aviation industry which the Chinese rely on.  Stopping those exports, or at least threatening to, would quickly bring the Chinese to the negotiating table.

No one can look at the EU and expect it to act like the US nor indeed any other single nation state.  It simply is not constructed that way, but it does have the potential to be a powerful negotiator and limit Chinese mercantilism.  It will of course be far more effective if it can work with both the UK and the US, however distasteful that may be for some.  Underlying much of the US complaints about the EU is that they have been freeloading on American goodwill.  That is true, but they will be unable to do that going forward so it is essential that they cease the initiative abuse funding their own defence and get serious about pushing back on China.  The Chinese leadership have never seen foreign investment solely as economic, there has always been a political angle as well, it is vital that the EU realize that economic only relations with China are a thing of the past.  Only a broader geopolitical approach to China will allow the EU to meet the challenge.