Despite French President Emmanuel Macron’s recent statements that Europe not be a US vassal, the EU continues to follow Washington down the path of confrontation with China.
EU foreign ministers met on Friday and backed a more hardline position on China; now they just need to to figure out how to put it into practice, foreign policy chief Josep Borrell said. The ministers agreed that coordination with the United States will “remain essential” as they work to, as President Ursula von der Leyen put it recently, “de-risk” from China.
Well now it looks like those efforts are starting to get mighty risky as the European Commission is also discussing slapping sanctions on eight Chinese companies Brussels accuses of aiding the Russian war effort by sending dual-use goods like microchips to Moscow. There’s also talk of introducing a new mechanism that would restrict EU exports to countries that flout sanctions (a final decision isn’t expected until later this month or potentially June).
Chinese foreign minister Qin Gang happened to be in Berlin when news broke of the potential sanctions, which led to the second war-of-words appearance in a month of him and his German counterpart Annalena Baerbock who continues to do her best to damage ties between Berlin and its largest trading partner.
While Qin stressed China’s neutrality and its efforts to formulate a peace plan, Baerbock insisted neutrality is not an option. “Neutrality means taking the side of the aggressor,” she told Qin while also labeling China a “systemic rival.” Qin assured his counterpart that Beijing would retaliate if the EU moves forward with its plans to sanction the Chinese companies. Beijing has a wide range of options at its disposal to hit back at the EU, as Reuters notes:
Beijing has plenty of leverage. At $5 trillion in 2021, China’s manufacturing value-added is roughly equal to the United States and Europe combined. It cranks out critical industrial widgets including mid-range chips, makes most of the world’s active pharmaceutical ingredients, and hosts global competitors in high-speed rail and clean energy, including nuclear. It is the leading miner and processor of rare earths, which are used in everything from batteries to guided missiles; last year it manufactured over 90% of the world’s solar power wafers.
At the same time, Beijing is still dreaming that somehow wiser minds prevail and the EU will free itself from the US’ grasp. China is hoping that France and Germany can get on the same page and create some sort of European strategic autonomy. We’ll see what Macron and German Chancellor Olaf Scholz come out with after a scheduled meeting in July. It’s doubtful they’ll muster enough mettle to stop the wheels in motion. Scholz, after all, doesn’t seem to be running much of the show in Germany. For whatever reason, he cedes those duties to his Green partners in government, Baerbock and economic minister Robert Habeck – who are like German versions of US Under Secretary of State Victoria Nuland and Secretary of State Anthony Blinken.
China will likely continue to go soft on any response measures while holding out hope that Europe can be peeled away from the US. From the South China Morning Post:
Chinese foreign minister Qin Gang has warned that the real “risk” Europe faces comes from “a certain country” that is waging a “new cold war”, imposing unilateral sanctions and exporting its own financial problems to others.
Qin did not mention the US by name, but accused the country in question of fomenting ideological confrontation and engaging in camp confrontation, when asked about the EU’s “de-risking” strategy…
Qin said he appreciated the stance of Berlin and Brussels, but raised Beijing’s concerns that the strategy could become a “de-sinicisation” of the continent that would cut opportunities, cooperation, stability and development.
Indeed, that is what is slowly happening. While the EU plays with semantics (de-risk vs. decouple) the playbook is eerily similar to the one the EU followed with Moscow. With Russia it was the stated fear of energy reliance; with China officials like Baerbock and von der Leyen claim Europe is too dependent tradewise.
Fair enough, but do they have any plans for self-dependence beyond magical thinking? Similar to the Russia escapade, the line of thinking seems to be to do what the Americans say and figure it out on the fly. That usually doesn’t work out well:
See, biggest imports are semi-finished goods like active pharmaceutical ingredients.
So if you buy drugs from India so as to “friendshore”, you’ve in fact just added a middle man between you and China. Just like the Russian oil the EU buys from India 😏https://t.co/8pBl3mRzUA
— Arnaud Bertrand (@RnaudBertrand) May 8, 2023
Prior to her humiliating trip to China, von der Leyen elaborated on her China “de-risking” strategy in March in a speech on EU-China relations at the Mercator Institute for China Studies and the European Policy Centre. Some excerpts on Europe’s plans:
The starting point for this is having a clear-eyed picture on what the risks are. That means recognising how China’s economic and security ambitions have shifted. But it also means taking a critical look at our own resilience and dependencies, in particular within our industrial and defence base. This can only be based on stress-testing our relationship to see where the greatest threats lie concerning our resilience, long-term prosperity and security. This will allow us to develop our economic de-risking strategy across four pillars. The first one is: making our own economy and industry more competitive and resilient.
Von der Leyen proceeds to tout the bloc’s Net-Zero Industry Act (NZIA), which aims for the EU to process 40 percent of the strategic raw materials it uses by 2030. The NZIA would allow projects to bypass many environmental and social impact reviews. But the proposals do not earmark any new money, and the policies do nothing to change Europe’s disadvantages, which include a lack of subsidies compared to the US and China and much higher energy costs thanks to their “de-risking” away from Russian energy. More from von der Leyen:
We know this is an area where we rely on one single supplier – China – for 98% of our rare earth supply, 93% of our magnesium and 97% of our lithium – just to name a few…This is why we have put forward the Critical Raw Materials Act to help diversify and secure our supply.
The Critical Raw Materials Act would allow the EU to label some projects as “strategic” and fast-track the permitting process so that processing facilities could be granted approval in less than 12 months, and mines could theoretically be operational within 24 months (compared to an average of 10 years today).
Von der Leyen goes on to say that the EU will consider restrictions on outbound investment to China and that a major part of the de-risking strategy is alignment with partners, i.e., the US. She also promoted the bloc’s Anti-Coercion Instrument (ACI), which aims to take countermeasures against outside countries that attempt to pressure bloc states using the member states’ economic dependencies. The ACI allows the EU to retaliate with import tariffs, trade restrictions, or public procurement measures.
In the winter of 2021, China enacted trade sanctions against Lithuania after the latter allowed a de facto Taiwanese embassy to open up shop in Vilnius. There is a possibility the EU could start using the ACI right out of the gate in response to the China-Lithuania spat. From Euractiv:
Lithuania, therefore, was a strong supporter of the new instrument. Foreign Minister Gabrielius Landsbergis called it a tool “to stop dictators bullying the EU with unofficial sanctions” in a tweet celebrating the agreement between member states and the Parliament. “The EU just got stronger,” he said.
However, it is unclear whether the instrument will be used against China for its coercion attempts against Lithuania. An EU official showed himself rather reticent about the idea of opening negotiations on cases in the past, while the European Parliament’s Bernd Lange argued that it should also be applied to this case.
Lange has said that “sometimes you have to put a gun on the table, even when you know that you might not use it.” In response to the very limited economic fallout in Lithuania due to the Chinese sanctions, the European Commission provided low-cost loans to affected businesses, and the US Export-Import Bank threw in a $600 million export credit agreement.
If this is sounding familiar for Europe, that’s because it’s following the same blueprint it did with Russia. European officials repeatedly claim they learned from the error of their ways in importing cheap Russian gas and promise they won’t make the same mistake with products from China. Should they have learned another lesson?
We are entering a world of permanent government energy subsidies for European companies. pic.twitter.com/anfV7D9Mp4
— Philip Pilkington (@philippilk) May 6, 2023
The problem (again) for the EU is that its roadmap to reduce reliance on products from China will take years and is filled with question marks, but if Europe continues to damage ties at the current rate, it runs the risk of derailing its green transition efforts while further wrecking its economies.
At his meeting with Baerbock, Qin acknowledged that China would be hurt by a “new Cold War” but noted Europe would suffer more. He mentioned a recent report from the Austrian Institute of Economic Research and the Foundation for Family Businesses, which estimates that Germany’s GDP would drop two percent if it “de-risks” from China. And it’s obviously not just Germany. Agathe Demarais, global forecasting director at the Economist Intelligence Unit, outlines some of the other negatives for the EU as a whole:
The EU would lose its biggest trading partner for goods. The consequences of this would be dire for European export-oriented firms, as China is their third largest export market. Losing access to a market of 1.4 billion consumers is simply not an option for many European businesses.
Goods shortages would become commonplace in Europe, as EU imports from China are twice the size of those from the US (the EU’s second-largest source of imports). The competitiveness of European firms is too low to replace all imports from China, notably for basic manufactured staples. As such, decoupling from China would weigh on growth and fuel consumer inflation.
Besides, a European decoupling from China would probably provoke Chinese retaliation. Beijing has an ace up its sleeve with rare earths. China controls the vast majority of known rare-earths deposits. It could curb the access of European firms to these crucial raw materials. Without them, the development of electrical vehicles, military gear, and semiconductors would stall in Europe.
Nonetheless, Berlin continues to do its best to wreck ties between the two countries. Germany’s education minister, Bettina Stark-Watzinger, visited Taiwan in March – the highest-level visit by a German official in 26 years. That provocative move upset Beijing, which just postponed on short notice a meeting between the Chinese and German finance ministers.
Additionally, there were recent reports that Germany is planning to ban the export to China of chemicals used to manufacture semiconductors (Berlin denies this). Germany is also working on its “China Strategy,” which is being steered by Baerbock and is expected to formalize a much more hawkish stance against Beijing when it’s released in the coming months. This is the same Germany that said no thanks to Russian gas and just shut down its remaining nuclear power plants.
While Europe struggles to deal with the loss of Russian energy, the EU Commission and Germany seem determined to make matters worse for the people of Europe. Germany is leading calls for EU nations to begin major deficit reduction efforts while countries are also expected to start ponying up more for the Ukraine war effort. From Thomas Fazi at Unherd:
The European Commission announced its billion-euro plan to increase Europe’s capacity for producing ammunition to send to Ukraine, for which member states will have to contribute up to a billion euros — yet another step in Europe’s “switch to war economy mode”, as commissioner Thierry Breton put it. In other words, European countries will soon be required to cut back on social welfare and crucial investment in non-defence-related areas in order to finance the EU’s new defence economy — we might call this military austerity — in the context of the bloc’s increasingly vassal-like subordination to US foreign policy.
All of which points to the inevitability of Germany’s return as the EU’s “economic policeman”. For the past year, the country has been trying to redefine its role in light of the massive tectonic shifts brought about the war in Ukraine — especially Europe’s geopolitical pivot from the West to the East. Perhaps it has finally found one: in the form of a renewed “special relationship” with the US as its primary Western European proxy, particularly when it comes to foreign policy. As Wolfgang Streeck has argued, this would entail re-establishing a position of economic leadership within the EU, on the provision of managing it on Washington’s behalf and of “tak[ing] responsibility for organising and, importantly, financing the European contribution to the war”.
How about the second and third largest economies in the EU, France and Italy? Are they on board with the Baerbock and von der Leyen China hawks?
While Macron seemingly had a change of heart while on his April trip to Beijing, it’d be nice to see some action from the Elysee before declaring him another de Gaulle. Let’s remember that ahead of Macron’s trip to Washington last year the French were offering to help convince European recalcitrants to get tougher with China – as long as the US threw the EU a bone on the Inflation Reduction Act. Well, the US has continued to ignore French and European pleas, offering only a mostly meaningless concession in March.
Italy, the only G7 nation to join China’s Belt and Road Initiative (BRI), appears unlikely to renew the deal when it expires early next year. Despite all the hyperventilating over Italian Prime Minister Giorgia Meloni’s election last year, she has proven herself to be a dutiful subject. As Reuters points out:
Meloni met Chinese President Xi Jinping in Bali last November and accepted an invitation to visit China, but a date has not yet been fixed.
Meloni has also not yet visited Washington and the government official said she did not want to travel to Beijing without having first been received by U.S. President Joe Biden.
Europe made its vassal status all but clear late last year when the Dutch came under heavy US pressure over ASML, which dominates the market for deep ultraviolet lithography machines used in chip making.
Washington wanted the Netherlands to forbid the company from selling Beijing equipment used in making the most advanced chips. The Dutch foreign trade minister initially stressed that “the Netherlands will not copy the American measures one-to-one. We make our assessment — and we do this in consultation with partner countries.”
It was a major decision for the Dutch and Europe as a whole as Michele Geraci, former undersecretary of state at the Italian Ministry of Economic Development said:
If they continue to do business with China, they will flourish, they will reinvest the money, and they will continue to advance in development. And Europe will retain a very strong presence in the semiconductor industry, which is the industry of the future. If they stop selling microprocessor machinery to China, China will make them by themselves, maybe not today, maybe not next year, but in 2 or 3 years’ time. And ASML will lose its competitive strength and Europe will also lose one of the great companies that they have in this sector.
So what’s the best choice? They need to manage the pressure from the US because it’s a very important decision between short term and long term. If the Netherlands government chooses to listen to the US, they will destroy their long-term future in exchange for some short-term gains. And in exchange, China will lose in the short term, because China will suffer a little bit, but in the long term will win.
Well, about a month after the Dutch foreign trade minister talked tough, the Netherlands caved and joined the US efforts.
While Europe became convinced of the China threat relatively recently and wants to remedy the issue overnight, China has been following a long-term strategy of reducing its dependence on foreign technology and capabilities for more than 15 years and has projected that strategy forward another 15 years. The results of those efforts from the Harvard Business Review:
China has done more than just leverage its size and abundant low-skilled labor. It has also invested heavily in education to expand its skilled talent pool, increasing the number of college graduates from one million in 2000 to more than 8 million in 2019, 5 million of whom earned degrees in science, technology, engineering, and math, giving China more STEM graduates than India, the United States, Japan, Germany, France, Italy, the UK, and Canada combined. It has also upgraded its physical infrastructure by spending more money on building roads, rails, and airports than the U.S. and Europe combined.
Of course, European along with US elites aided all these efforts by outsourcing much of their industry to China, but it shows how Beijing likes to play the long game. The CPC plans to do the same with Europe, unless pushed to do otherwise. Zhou Bo, a retired PLA colonel and current senior fellow of the Centre for International Security and Strategy at Tsinghua University, writes the following about the Cold War between the US and China at the South China Morning Post:
The battleground won’t be in the Global South, where the US has very much lost to China, especially in Africa and Latin America. It won’t be in the Indo-Pacific either, where few countries want to take sides. It will be in Europe, where the US has most of its allies and where China is the largest trading partner.
Gradually, the transatlantic alliance will relax. Even if America’s decline is gradual, it cannot afford a global military presence. It will have to retreat from around the world, including from the Middle East and Europe, to focus on the Indo-Pacific, where the US sees China as a long-term threat. Successive US presidents, Republican and Democrat alike, have asked Europeans to take greater ownership of their security. In other words, Europe has to have strategic autonomy, even if it doesn’t want to. That Europe takes China as a partner, competitor and systemic rival at the same time says more about Europe’s confusion about China, than what China really is.
Barring some drastic change of course and the removal of hardcore Atlanticists like von der Leyen and Baerbock, Europe will almost certainly blunder its way into a destructive de-risking or whatever they want to call it with China before it can resolve that confusion. That’s might be a major problem with Beijing’s logic: if European relations with Russia are any indication, Brussels is more than happy to shoot itself in the foot, and it will do so primarily for the sake of the US that is engaging in the same practices through the Inflation Reduction Act that the EU claims is one of the reasons it must take a tougher stance against China.
National Security Advisor Jake Sullivan said the following at an April 27 speech on “renewing American economic leadership” at the Brookings Institution:
We will unapologetically pursue our industrial strategy at home—but we are unambiguously committed to not leaving our friends behind. We want them to join us. In fact, we need them to join us.
With friends like these…