Europe’s China Pivot

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By Robert Manning

“The future has already arrived,” sci-fi writer William Gibson famously quipped, “it’s just not evenly distributed yet.” Few in the United States noticed when a freight train arrived in London in January 2017, completing a 7,500 mile journey from China, yet this train, its route an echo of the ancient Silk Road, just may have offered a glimpse of the future.

China is already the world’s largest trading nation, with some $3.9 trillion in two-way trade in 2016. The European Union, with its $17 trillion economy, roughly the size of that of the United States, looms large in China’s ambitious but still inchoate vision of connecting both ends of the Eurasian landmass with a 21st century version of the old Silk Road. And to the degree the United States retreats from the post-World War II multilateral system it created, the China-EU relationship could influence the balance of the emerging polycentric order.

Donald Trump’s “America First” posture, his cheerleading of Brexit, and his swift rejection of the Trans-Pacific Partnership spurred Europe and Asia to rapidly scramble in pursuit of multilateral deals to offset the U.S. retreat. In a letter to leaders of the 27 EU member states earlier this year, European Council President Donald Tusk described Trump, along with an assertive China and an aggressive Russia, as one of three external threats to Europe’s future. Tusk argued that “[w]e should use the change in the trade strategy of the U.S. to the EU's advantage by intensifying our talks with interested partners, while defending our interests at the same time.”

The United States ($579 billion), the European Union ($529 billion), and Japan ($300 billion) are China’s top three bilateral trading partners. China’s predatory industrial policies and various tactics to limit goods and investment in competitive sectors like IT or automobiles with tariffs are leading European governments to rethink trade and investment policies with regard to China. But the allure of Chinese investment sets European states competing for renminbi.

EU-China relations, particularly for Europe’s largest economies, Germany and France, have been largely one-dimensional. As a 2015 report by a consortium of European think tanks observed, “most, if not all European national strategies toward China are dominated by the logic of economics.” This has begun to change as China’s increasingly nationalist economic policies and its assertive foreign policy actions have evoked growing concern among many European governments and the European Union itself. This was evident in a comprehensive EU strategy on China released by the European Commission in June 2016. The strategy reflects a growing European awareness of their stake in the issues China’s behavior raises, and it articulates guidelines and principles for EU policies toward China.

Nationalism in Globalization’s Clothing

Chinese President Xi Jinping may champion globalization while in Davos, but at home he prizes mercantilist, industrial policies. Yet China demands market economy status in the World Trade Organization even as it strengthens and subsidizes its state-owned enterprises.

The United States, European Union, and Japan have all rejected Beijing’s claim in a rare pursuit of parallel policies. Similarly, there is growing unease in the United States and the European Union about Chinese direct investment: Beijing targets tech companies in the West to accelerate its efforts to make a leap in advanced manufacturing (e.g., semiconductors, artificial intelligence, robotics) while blocking reciprocal access for Western firms.

But Beijing is skillful in using the enticement of its markets to divide competitors, and if past is prologue, there will be limits to how much individual European nations follow EU-wide policies.

China’s growing focus on Europe is also heavily weighted toward economics, but it fits into a broader global strategy to position Beijing as a dominant player in a post-American world. Though still more aspirational than real, China is pursuing a new connectivity of Europe and Asia with its so-called One Belt, One Road policy, a Eurasian vision that has been generally well received in Europe. One Belt, One Road would comprise an overland belt of railways, roads, and bridges and a maritime road of seaports stretching to the Middle East and Africa. One Belt, One Road also provides China an outlet for the excess capacity of its state-owned enterprises in sectors such as steel, cement, and aluminum, whose subsidized overproduction has helped sustain China’s economic growth.

It is no accident that 14 EU nations joined Beijing’s Asian Infrastructure Investment Bank when it opened its doors last year. The Bank -- membership of which Washington has spurned -- along with China’s large state banks and a new $40 billion Silk Road Fund, are seen as principal financiers of One Belt, One Road infrastructure projects, though its lending is not limited to OBOR-related projects.

China-EU Eurasian Connectivity

Many of the projects now repackaged as part of One Belt, One Road were planned or began in Europe before Chinese President Xi Jinping announced the initiative in 2013. A wide array of infrastructure projects such as a container port in Piraeus, Greece, is being modernized by China’s shipping giant, COSCO. Chinese firms are interested in seaports in Belgium, the Netherlands, Croatia, Italy, Spain, and Latvia, among others. Chinese firms are also exploring airport construction projects in a number of European cities.

European analysts see China looking to new transport corridors: a trans-Eurasian link from China to Europe via Poland and Germany, and a south-north link from Greece via Central Europe to the Baltics. One prominent OBOR project is a planned Belgrade-to-Budapest railway. Chinese rail-related firms are also engaged in connecting China with a network of cities from Poland and Germany to France and Spain.

In addition, China has seen London’s financial center as an important hub for accelerating the internationalization of the renminbi as a reserve currency. However, it is unclear to what extent that role will continue after the United Kingdom departs from the European Union.

China-EU or China-Europeans?

In a slow-growth Europe, attracting investment is a priority, and clearly many EU nations are responding to China’s economic opportunities. But the interest and impact of Chinese economic involvement, from One Belt, One Road and foreign direct investment to renminbi hubs, has varied across Europe. Reconciling OBOR with the European Union’s regulatory regime may also limit possibilities. The absence of any disciplined EU foreign policy also suggests that European responses to Beijing’s overtures will vary.

While China’s infrastructure investment has been broadly welcomed across Europe, there does exist a growing wariness of China as a global actor in Europe writ large. China’s mercantilism and assertive maritime behavior have drawn public EU responses, such as a 2016 statement condemning Chinese actions in the South China Sea. This skepticism is reflected in the European Commission’s 2016 report outlining a new strategy toward China.

The report calls for strengthening cooperation with Beijing, but it stresses the importance of such engagement being based on transparency, global norms and rules, and reciprocity -- a word repeated throughout the report. It criticizes China’s industrial overcapacity, its dumping of goods from steel and other sectors into EU markets, and its “Made in China 2025” industrial policy that seeks to create Chinese national champions in advanced manufacturing sectors at the expense of Western competitors.

The European Union is in the process of negotiating trade and investment agreements with China that will test that rhetoric. These issues will loom prominently at the upcoming EU-China annual Summit, a gathering spurred by Trump’s economic nationalist views, which have led not just the European Union, but other U.S. allies and partners like Japan, to search for new multilateral trade arrangements.

China’s growing trade with and investment in Europe has economic and strategic implications for the United States. EU-China economic ties heighten competition for U.S. firms in what has historically been a close transatlantic relationship, with $609 billion in trade for 2016 and some $1.9 trillion in cross-investment. But over time, it could presage a decreasing European reliance on the United States and a fragmenting West with an economically integrated Eurasia shifting power and influence away from the United States and toward China.