Surprise! The EU knows how to handle China

Bruno Maçães writes POLITICO’s Geopolitical Union column.

“Do we need a new adversary?” With those words, Armin Laschet summed up the European response to Joe Biden’s efforts to convince Europeans to get tougher on China.

As the politician best placed to become the next German chancellor, Laschet’s open rebuke of the U.S. president was the latest example in a series of polite disagreements between the two pillars of the transatlantic alliance over how to deal with the rising Asian superpower.

What’s usually overlooked, however, especially in Washington, is that the Europeans aren’t reluctant to get on board with Biden’s efforts because they don’t want to confront China. They’re cold on the idea because they have a plan of their own — and so far, it’s working.

The plan was first devised a little over two years ago, at a time when Trump’s America had turned its back on its European partners. As described by a senior official in Brussels, the decision to call China a “systemic rival” in March 2019 was everything that the EU’s foreign policy strives to be, almost always unsuccessfully.

The European Council had given the European Commission and the European External Action Service a mandate to come up with a new China strategy. And the two institutions took full advantage of it, drafting a bold document that never traveled to national capitals for assent.

I was living in Beijing at the time and can attest to how much the term riled and confused Chinese officials. And that initial salvo was not an isolated move. One month later, the EU issued Beijing with an ultimatum, calling on it to conclude negotiations on the China-Europe investment agreement, known as CAI, by the end of 2020.

Those negotiations had been dragging on for five years. Brussels wanted results.

To this day, the logic behind these moves remains poorly understood. As one person closely involved in the 2019 deliberations explained this week, the words “systemic rival” were meant to denote something very different from the formulation used in Washington: “strategic rival.”

With the notion of systemic rivalry, the European Union hoped to separate political differences and economic links. In strategic rivalry, conflict leads. In systemic rivalry, conflict is limited to the political sphere. It is part of the EU’s political tradition to believe that politics and the economy can be insulated from each other. Even inside the bloc, political differences with Poland and Hungary are not allowed to interfere with the single market.

Performing the same trick with China is far more difficult, but the Commission has been busy putting the plan in practice. Over the past two years, it approved a barrage of new regulations limiting the Chinese state’s ability to interfere with the framework of economic links between the two blocs. These include investment screening, trade defense instruments, a package against state subsidies and a public procurement tool.

At the same time, Brussels — with a push from German Chancellor Angela Merkel, who renewed the ultimatum in June 2020 — moved forward with negotiations on the CAI, finally agreed on by both sides in December. The senior official in the Commission, who requested to remain anonymous in order to speak freely, described China’s assent to the agreement as “a gift from Beijing.”

The deal included significant concessions from Beijing, including a greater level of market access and disciplines on state-owned enterprises, transparency of subsidies and rules prohibiting forced technology transfer. “By giving us a big gift, they hoped to prevent a united front with the Biden administration,” the official said.

Beijing’s hope was not to be. What surprised China is that the EU never regarded the CAI as a political agreement. Having forced Beijing to concede on key points, the bloc did not hesitate to walk over China’s most salient red lines. On March 22, the EU joined the U.K. and the U.S. in imposing sanctions aimed at Chinese officials believed to be involved in human rights violations in Xinjiang province.

The move threw Beijing off balance — as evidenced by its reaction. Many in Brussels believed China would be too concerned with preserving the CAI to react or would do so within strict limits. Instead, the Chinese Foreign Ministry reacted with blind brutality.

Chinese embassies in Europe had been asked in advance to collect a list of undesirables, which included members of the European Parliament belonging to almost every political group. That list seems to have been approved by the top leadership in Zhongnanhai with little or no scrutiny, and little concern for the agreement’s fate.

That reaction reveals a lot about the relationship between the EU and China, and the fact that Beijing felt it had been outplayed. While a second official in the Commission told me that the top leadership in Beijing was poorly advised, none of the Chinese officials I talked to expressed any doubt that, on March 22, the Chinese leadership decided to kill the investment agreement with the European Union. The choice was conscious and deliberate.

Since taking over the brief in August 2020, Xi Jinping had fought hard to take the deal over the line. So why did he change his mind? The clue is in something the influential academic Cui Hongjian told me this week: “Strategic partners do not sanction each other.” The Chinese side had seen the CAI as a political agreement.

Like good Marxists, Chinese officials do not believe in the separation between politics and the economy. But Brussels’ decision to sanction four political officials showed that “systemic rivalry” was still valid and operational. According to an official in the Chinese State Council, Xi decided that the Europeans had betrayed the spirit of the agreement and that China should put its foot down.

Liu Zuokui of the Chinese Academy of Social Sciences expanded on the feeling of frustration in a conversation this week: “In other words, on the one hand, the two sides should overcome their differences and negotiate. On the other hand, the EU can punish China at any time according to its own needs, and it is estimated that China may acquiesce to such punishment.”

What this means is that Brussels — not Washington or Beijing — has a clear vision of what the terms of the relationship between the West and China should be: economic integration but on a European not a Chinese model.

Chinese officials may complain about the term “systemic rivalry,” but they believe in it as much as Brussels. The difference is that for Beijing, there is no separation between market and state. Interestingly, this is also the view in Washington — but Europeans are convinced they have a better plan.

They will keep insisting that to do business in their territory, China will have to do it on European terms. And indeed, Chinese officials have sent some messages that they want to continue talking. “We are very calm,” said the official in Brussels.