This story is jointly produced by the South China Morning Post and POLITICO, with reporting from Brussels, Paris and Hong Kong. European leaders are in no mood to follow the United States in threatening trade sanctions against China as it moves to tighten its grip on Hong Kong, although foreign ministers will meet on Friday to try to hack out a common position. China’s top legislature on Thursday voted to impose a national security law on Hong Kong, sparking concerns that Beijing will limit the autonomy granted by the “one country, two systems” principle that followed the end of British rule in 1997. The US, Canada, Australia and Britain condemned Beijing’s step, hailing Hong Kong as a “bastion of freedom,” while Britain held open the prospect of citizenship for more Hongkongers if Beijing presses ahead. But despite growing tensions over the former British colony, German Chancellor Angela Merkel, Europe’s most powerful politician, insisted she still wants the European Union to reach a landmark investment agreement with China this year. And while US President Donald Trump said on Thursday the US would be announcing new US policies on Friday as “we are not happy with China” after his Secretary of State Mike Pompeo had already cast doubt on Hong Kong’s continued preferential trading status, the EU stuck to traditional diplomatic expressions of concern. EU foreign policy chief Josep Borrell said he had “deep concern” about Thursday’s move. He has previously insisted Brussels “attaches great importance to the preservation of Hong Kong’s high degree of autonomy,” but said this week he did not think “sanctions against China are going to be a solution for our problems”. Merkel also said the EU, the world’s biggest trade bloc, needed to maintain a “critical and constructive” dialogue, with trade retaliation not on the agenda when European foreign ministers meet on Friday. Sanctions are not on the table, our relations with the Chinese are simply too important Senior EU diplomat “Sanctions are not on the table, our relations with the Chinese are simply too important,” one senior EU diplomat said. The senior EU diplomat added that Hong Kong could be “a game changer” as questions increase about the rule of law in a city of 7 million people that is the base for many European investors in the region. But the key issue is whether China’s power grab in Hong Kong will weigh on the EU’s investment agreement with China. Germany wants the deal to be concluded at an EU-China summit in the German city of Leipzig in September, although the agreement was already in trouble even before the latest flare-up in Hong Kong. Michael Clauss, Germany’s ambassador to the EU and a former ambassador to China, admitted earlier this month that talks were stuck over market access rights for European companies. Joerg Wuttke, president of the European Chamber of Commerce in Beijing, has also since warned that events in Hong Kong could undermine China’s diplomatic standing. “This could seriously affect ongoing negotiations between the EU and China on a variety of critical areas such as the comprehensive agreement on investment and on issues of common concern like climate change,” he said. It would, though, require a major political shift for Europe to reverse away from the investment agreement. The EU officials in charge of the investment agreement negotiations with China were not given the mandate to include Hong Kong’s human rights issues, according to three European Union diplomats who spoke on condition of anonymity. European parliamentarians could change this, however, one of the diplomats said. “If [MEPs] insist on that, the [European] Council may have to consider something like changing the mandate, at a later stage. But this must be discussed and talked through, and the [European] Commission would have to take the initiative,” he said. Still, one high-level EU official noted that the security law could itself simply make European investment undesirable. “One of the key issues in Hong Kong is the change – the sudden, radical change – in the legal framework, legal guarantees, in how the judicial system can work. If you’re an investor, it is the key part of the reason to take into account when making investment decisions,” he said. Investment flight would be a huge problem for Hong Kong, which has always sought to entice investors by parading its openness. The city was ranked as the third most popular destination for foreign direct investment from the EU in 2017, much of which is then channelled to China. About half of the 2,200 European companies in Hong Kong also use it as their regional headquarters or offices. The EU is Hong Kong’s second largest trading partner, after China, while Germany is by far the largest European trading partner for the city, with bilateral trade amounting to some €13.97 billion (US$15.4 billion) in 2019. We do notice that many stakeholders inside and outside Hong Kong, including the [EU], are monitoring the current development closely, besides having expressed their concerns Frederik Gollob “I believe we are still looking at a strong case for Hong Kong overall,” said Frederik Gollob, chair of the European Chamber of Commerce in Hong Kong. “However, we do notice that many stakeholders inside and outside Hong Kong, including the [EU], are monitoring the current development closely, besides having expressed their concerns.” Investors had already started to feel the heat in Hong Kong since the local government’s failed attempt last year to push through an extradition law that would have allowed suspects in Hong Kong to be sent to China for trial. “The Hong Kong government has lost a lot of credibility, if not all of it. I’d not be surprised to see businesses leaving or reducing their operations or staff in Hong Kong,” said Julien Chaisse, a law professor at the City University of Hong Kong. “It’ll take time to measure this exodus, but I’d expect some clear trends to become visible after summer.” Reinhard Buetikofer, a German member of the European Parliament and chair of its delegation for relations with China, said that EU foreign ministers meeting on Friday should “speak out clearly and condemn Beijing’s attacks on Hong Kong’s autonomy.” He called for a mechanism to respond to human rights violations and for EU countries to reconsider their work with the telecommunications company Huawei “in view of the fact that China’s leadership is arrogantly ignoring international law”. Speaking to German diplomats on Monday, Borrell argued that “the pressure to choose sides [between the US and China] is growing” and that “we need a more robust strategy for China”. The fact that there are fundamental differences between us should not be an argument against exchange, dialogue and cooperation Angela Merkel Merkel, however, suggested on Wednesday that Europe would seek to avoid the open confrontation with Beijing pursued by Washington. She conceded the EU had profound differences with China on the rule of law, freedom, democracy and human rights, but that it wanted to take a different approach from the Washington-Beijing clash. “Let us think only of the situation in Hong Kong with regard to the principle of one country, two systems. The fact that there are fundamental differences between us should not be an argument against exchange, dialogue and cooperation, especially not at a time when we are experiencing a sharply increasing conflict between the USA and China,” said Merkel. Stuart Lau reports for the South China Morning Post from Brussels. Jakob Hanke Vela and Jacopo Barigazzi report for POLITICO from Brussels. Finbarr Bermingham reports for the South China Morning Post from Hong Kong. Rym Momtaz, who reports for Politico from France, also contributed to this article.