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German Chancellor Angela Merkel, seen here shaking hands with President Xi Jinping in 2018, has made 12 trips to China and been a dependable ally of Beijing. Illustration: Perry Tse

EU-China ties hinge on Germany’s political future as reign of Beijing ally Angela Merkel nears its end

  • During her 15 years as German chancellor, Angela Merkel visited China 12 times to foster the relationship, but her legacy could suffer if an EU-China investment treaty is not secured
  • The tide seems to be turning, with Huawei, Hong Kong’s national security law, trade and human rights abuses fraying EU ties with China

This is the third in a series of five articles analysing the potential for an EU-China investment treaty, looking at negotiating positions, sticking points and geopolitical tensions. You can read part one in the series here part two here, part four here and part five here.

For more than a decade, as China experienced a dramatic global ascent both economically and geopolitically, Beijing has counted on one person to ensure Europe’s overall amiability and thus avoid the sort of decline into hostility that has defined its relationship with Washington.

Angela Merkel, the long-term German chancellor and, by extension, the most influential voice in the European Union, remains China’s staunchest ally in the West, even as Beijing found itself increasingly alienated in recent months due to a slew of contentious issues involving Huawei, Hong Kong, Xinjiang and the coronavirus pandemic.

But as Merkel prepares to step down after next summer, the clock is ticking for Beijing – particularly in terms of securing a long-negotiated bilateral investment treaty with the EU that she has sponsored.

“She is a very powerful force behind this,” said Max Zenglein, chief economist at the Mercator Institute for China Studies (Merics) in Berlin. “You just have to see how many times she has been to China to foster the relationship, this was viewed as a very prominent legacy-building issue for her.”

EU leaders in 2020 hold a sharply different view of China than they did 15 years ago, when she assumed power.

A joint statement from the eighth EU-China Summit in 2005, chaired by then-premier Wen Jiabao and former British prime minister Tony Blair, said “the EU side welcomed the achievements China has made towards building a market economy”.

Now, however, China is routinely cast as a systemic rival and source of disinformation, while officials have taken to self-critiquing previous relations as being naive.

00:55

EU ‘deplores’ China’s decision to enact national security law for Hong Kong

EU ‘deplores’ China’s decision to enact national security law for Hong Kong
The US general election in November could also tip the balance on EU-China ties. A loss by incumbent US President Donald Trump to Democratic Party challenger Joe Biden would immediately draw the bloc much closer to Washington, according to European diplomats.

“With a new German leader representing Europe and working with, let’s say, a new president representing the US, that would be a nightmare for China,” an EU ambassador told the South China Morning Post on condition of anonymity.

Biden, who has spent much of his career on foreign policy and who holds a commanding lead over Trump in opinion polls, has previously suggested that he would pursue a coalition with US allies – a move that would concern policymakers in Beijing.

On the European side, 2020 marks a self-imposed deadline for completing its investment agreement with China. The agreement seeks to open up the Chinese market for European companies. However, some of the critical conditions – such as abolishing China’s preferential treatment for its massive state-owned enterprises – remain hard for Beijing to swallow.

With a new German leader representing Europe and working with, let’s say, a new president representing the US, that would be a nightmare for China
EU ambassador

The treaty is seen as a last-ditch effort by Brussels to try to enforce change on Beijing and rebalance the bilateral economic relationship.

“If those negotiations fail – as many now expect – then the EU is likely to switch to an enforcement agenda with China, using means at its disposal in a more robust way than we’ve seen so far,” said Andrew Small, an expert on EU-China relations at the German Marshall Fund think tank.

While the United States has made headlines the world over with its aggressive trade policy on China, the EU has been methodically drawing up trade defence mechanisms against Chinese enterprises, particularly those that receive state subsidies.

In June, the EU adopted a white paper dealing with the distortion caused by foreign subsidies – largely seen to have been directed at Chinese firms.

00:59

EU leaders warn Xi of ‘negative consequences’ if China imposes national security law in Hong Kong

EU leaders warn Xi of ‘negative consequences’ if China imposes national security law in Hong Kong

In the same month, Brussels imposed tariffs on Chinese makers of glass fibre fabric both in China and Egypt, after an investigation found that they had benefited from unfair state subsidies that allowed them to undercut European competition. The bloc is also, along with Japan, lobbying the World Trade Organisation to “strengthen existing [World Trade Organisation] rules on industrial subsidies” – another move seen as targeting China.

“Because the EU moves really slowly, these actions that were set in motion 18 months ago have plodded along,” Small said. “But once these things grind into gear and they lock in, they do not change in the same kind of capricious fashion that we’ve seen with the Trump administration.”

The mood in Brussels is souring even as investment from China fell last year to its lowest level since 2013, marking a 69 per cent drop from the peak of €37.3 billion (US$43.22 billion) in 2016, according to research from Rhodium Group and the Mercator Institute for China Studies, following the introduction of a foreign investment screening regulation designed to stop Chinese buyers from hoovering up strategic European assets.

“Given that many Chinese outward investors are state-owned or state-invested firms with access to state-owned banks, showing an absence of government subsidy could be difficult. Thus, the proposal alone can deter Chinese investment activity in Europe. In short, the pandemic has led to greater fear of Chinese unfair practices, not less,” said Mary Lovely, senior fellow at the Peterson Institute for International Economics.

Hervé Jouanjean, former European Commission director general in charge of Asia, including China, said he recognises that many of the issues yet to be resolved are the same ones he struggled with a decade ago when negotiating with China’s since-purged commerce minister, Bo Xilai, “except 10 years ago we still thought the Chinese would come towards a market economy”.

With it now clear to EU officials that “China does not have any intention of changing”, he expects Brussels to act accordingly.

“I don’t think the EU will ever take measures the way the US does – this is not our way of doing things. But we will act using all the tools at our disposal to persuade our Chinese friends that the best route is to make an agreement,” said Jouanjean, now a senior trade expert at law firm King & Spalding, referring to the push to get China to accept a revised subsidies agreement at the World Trade Organisation.

Even Margrethe Vestager, the EU’s antitrust tsar who just a year ago blocked a Franco-German bid to merge their train companies to fend off Chinese competition, has changed her tune on Chinese state-owned enterprises, singling out “market-distorting behaviour” when she rolled out the white paper on state subsidies.

The West was naive with regard to China; we thought that with increasing trade there would be change
Josep Borrell

The EU’s foreign policy chief, Josep Borrell, was more blunt. In an interview with German magazine Der Spiegel this week, he said: “We are not just discovering today that China is a communist country with an authoritarian regime. What is new is that Beijing now sees itself as a world power and is acting as such.”

“The West was naive with regard to China; we thought that with increasing trade there would be change,” Borrell added.

Some in Merkel’s cabinet, however, still believe this is the right course to chart. Indeed, Merkel herself is said to be wed to many old views of China as a source of trade and investment, without much of the baggage.

“I struggle to see any progress in Merkel realising this shift,” said Zenglein at Merics. “I think she is still stuck in this past sense of optimism in how China will evolve as a partner for Europe, and [she] has not adequately adapted to the new reality … and it is quite possible that Chinese leadership is betting on this to seal a deal.”

Last week, Merkel’s economy minister, Peter Altmaier, told POLITICO: “I have always been convinced, and I still believe, that change can be achieved through trade”.

Asked whether he could be sure that China would respect an investment agreement negotiated with the EU, given that China has been accused by British Prime Minister Boris Johnson of breaking the Sino-British Joint Declaration on the handover of Hong Kong, Altmaier said: “It is a prerequisite for all trade relations that you stick to agreements.”

Germany would benefit most from a comprehensive investment deal, given the vast business interests of companies such as Volkswagen and BASF in China. But even within Merkel’s own coalition government – and her Christian Democratic Union (CDU) party – calls are mounting for a tougher line on China.

Norbert Roettgen, one of three contenders to be the next CDU leader, has been leading the German parliament’s hawkish turn on China, pushing for a ban on Huawei’s involvement in Germany’s 5G networks.

Most polls are pointing to a CDU-Green Party coalition next year, which could see the junior party, known to contain several China hawks such as Margarete Bause or Reinhard Bütikofer, take up the role of foreign minister.

We must be wary of any Chinese strategy that could exploit us
French President Emmanuel Macron

The departure of Merkel could also see French President Emmanuel Macron’s influence in Europe swell – that is, if he wins re-election in 2022.

While Macron has advocated “strategic sovereignty” for Europe, a euphemism for a path independent from the US, he was the first European leader to call out “naivety” towards China’s ambitions. He also called for EU unity in dealing with China, and he is viewed as a proponent of more forceful language on China in official EU statements.

“We must be wary of any Chinese strategy that could exploit us,” the French President is quoted as saying in The Last President of Europe, a recent book about Macron written by William Drozdiak of the Brookings Institution research group. “Control of maritime routes, cables, infrastructure, and transport in Europe: this is not compatible with our interests. Chinese policy in this context is hegemonic, and we must push back.”

And push back they did.

00:44

China rebuffs EU criticism over Hong Kong security law

China rebuffs EU criticism over Hong Kong security law

In 2019, the European Commission published a strategic outlook on China, calling it a “systemic rival” for the first time. Even countries that have enjoyed economic support from China, such as Italy or Greece, or those under the “17+1” group of Central, Eastern and southern European nations courted by China, endorsed the ambitious strategy.

Recent unanimity among EU member states promoting statements condemning China’s imposition of a national security law on Hong Kong was another example of the growing wariness towards China’s strategic goals.

“[China] is extremely strategic in its thinking and not just mercantile,” Macron warned in the book. “China is like a player of Go.”

Additional reporting by Finbarr Bermingham

The first in the series analysed the negotiating positions, sticking points and geopolitical tensions, while the second part looked at how the negotiations are viewed in political circles within China. The fourth part in the series, meanwhile, looked at how the United States factors into the EU-China relationship, as Washington moves towards a frenzied election season, while the fifth part looked at Britain’s position, and expectations, going into negotiations.

This article appeared in the South China Morning Post print edition as: The end of the affair
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