China must be seen to be a trustworthy partner to ensure success of its investment deal with the EU

China should abandon attempts to ‘divide and rule’ Europe, rein in boastful diplomats and seek collaboration by taking minority, rather than controlling, stakes
Though dismissed by some as underwhelming, the investment agreement will open a door for a more collaborative, mutually beneficial relationship

Winston Mok

Published: 12:30am, 13 Jan 2021

Why you can trust SCMP

In light of events at the US Capitol last week, the EU’s decision to agree on an investment deal with China at the end of 2020 seemed prescient. Can a “post-truth” ally be trusted when democracy’s most fundamental institution – the peaceful transfer of power – is undermined from the top?

Among President Donald Trump’s more constructive legacies was perhaps the impetus he provided to the EU-China investment deal, so long in the making.

The agreement will not suddenly transform China into the West’s ideal. But at least it is more principled than America’s phase-one deal with China, reached early last year, which blatantly predetermined trade outcomes at the expense of US allies. So what’s wrong if Europeans can compete on a more equal footing with domestic firms in China, perhaps with an edge over American companies?

The damage has been done even if President-elect Joe Biden were to reverse the tariffs Trump imposed on European countries. Did the US consult the EU substantively before reaching its phase-one deal with China? Can the EU reasonably expect to significantly shape the renegotiation of any US-China deal so Europe is not disadvantaged?

While some may see the EU-China deal as somewhat underwhelming in substance, it perhaps portends a new era in international relations. Just as the European Union saws off a former world power, it has astutely deepened its economic ties with the next world economic power.

The incoming Biden administration is likely to launch a global “united front” against China to try to deliver more substantive punches. China is faced with a stark choice: be isolated by the US or isolate the US.

Despite the Trump administration’s self-inflicted damage on America’s international relations, Western countries still have much more in common with one another in terms of culture, history and ideology. China’s levers with the West are all economic – its vast market and financial prowess. China must leverage its economic advantage to win political space in a world turning against it in the “post-Covid-19” era.

If China’s motivation is primarily political, the EU’s incentives are mainly economic. Brexit is a lose-lose situation for both the EU and the UK. The EU now has to struggle with post-coronavirus recovery when its economy is already being dragged down by Brexit. Some countries which have suffered the most from Covid-19 – Italy and Spain – are the same ones that were hit hardest in the 2008 financial crisis.

Crowds stroll along the Navigli and the Darsena in Milan, Italy, on January 10. A curfew is in place from 10pm to 5am to curb the spread of the coronavirus. Photo: EPA-EFE

Unlike the self-interested response of some EU nations on medical supplies when Covid-19 broke out, EU leaders have agreed on magnanimous support across its member states to spark economic recovery. These financial resources must come from somewhere, other than from more debt. China represents the best hope for economic growth – both as a market and an investor.

Can you blame EU leaders for striking a realistic balance between political ideology and economic imperatives? In the investment agreement with China, Beijing accommodated the EU on labour rights issues; it arguably gave more concessions than would have been the case for a US-led coalition.

Yes, a larger coalition could theoretically exert more leverage. But “no deal” is perhaps a more likely outcome.

China-EU relations face uncertain future despite investment deal

That must be part of China’s calculus. Unless and until the US accepts China’s rise, which could be at least a decade away, the US may be a “lost cause”. The best China can hope for, while strengthening its influence among developing nations, is to maintain productive economic partnerships with other developed nations. Thus, it must sincerely accommodate the EU.

Some European countries have had resounding success in China, epitomised by Germany’s VW (including the Audi brand). Yes, they must operate as joint ventures. But look at the streets of Japan and South Korea; China’s auto market, dominated by foreign brands, has been much more open.

A broader range of European companies will find more ready access to the Chinese market, whose middle class may soon exceed the population of post-Brexit EU.

Workers inspect an excavator production line at Volvo Construction Equipment (China) in Shanghai on December 17 last year. Under the investment agreement, a broader range of European companies will find more ready success in the Chinese market. Photo: Xinhua

Some of China’s greatest foreign investment successes have also been in Europe. Geely has been able to use the acquisition of Volvo to upgrade its quality and technology, including launching the high-end Lynk brand. Midea’s acquisition of Kuka also facilitated China’s rise in robotics.

Amid the great power rivalry, China needs technology partners. It has a tech powerhouse at its doorstep – Japan. But legacies make collaboration difficult. Hence, Europe’s relevance.

And it’s not just Germany. Based on the latest Global Innovation Index, seven of the top 10 most innovative countries are in Europe. Many are small countries – the Nordic countries, Switzerland and the Netherlands. They are important collaborators in China’s quest for innovation-driven growth.

More than the letter of any agreement, it is how China behaves that will define the long-term success of its relationship with the EU. First and foremost, it should stop any attempt to “divide and conquer” the EU. Its attempts to do so have only backfired and sown distrust among Europeans.

Second, it should moderate the self-aggrandisement of some of its diplomats and act with more empathy and humility.

China urged to do its part to reverse ‘worrying’ erosion of goodwill in EU

Finally, Beijing should look for collaboration opportunities through taking minority rather than controlling positions. In other words, don’t just swagger in with big cheques. Be Confucian. Give as much as you take. China must be seen as a responsible contributor rather than a threatening raider.

There will be attempts to derail the EU-China investment agreement on its path to ratification – from inside and outside the EU. China needs to tread wisely with restraint at home (including in Hong Kong) and abroad, both leading to and even after ratification. China cannot replace the US but it should position itself as a trustworthy partner.

Winston Mok, a private investor, was previously a private equity investor