US-China confrontation and repercussions for the EU

In one of his first major interviews as US president, Joe Biden outlined that the future of the relationship with China will be dominated by what he termed “extreme competition”. The Biden administration has thus made clear that it will not shift away from the tougher approach in China policy that was initiated by his predecessor. For US allies in Europe and the Indo-Pacific region, the growing tension between Washington and Beijing will condition policy choices in the years to come. But Europe is not without agency in what has falsely been characterised as a binary confrontation.

Europe’s relationship with China has undergone significant changes in the past two years. The European Union’s 2019 Strategic Outlook was a landmark document that defined China (among others) as a systemic rival, signalling the beginning of a policy shift on the continent driven predominantly by three factors: firstly, the Chinese leadership’s infringements of freedoms, rights, and the market opportunities at home; secondly, the Chinese leadership’s coercive approach to the region; and, thirdly, China’s growing assertiveness vis-à-vis Europe. All these factors are amplified by the dimension of the challenge China poses through its sheer size and market power – its growing political influence and significantly more competitive companies that are increasingly taking over leading positions in critical industries globally.

Since the 2019 paradigm shift that has taken place among European policymakers, the Chinese leadership has continued to enhance not only its surveillance activities and tightened the screws on internet censorship, but also built out an oppressive system of internment camps in the Western Chinese province of Xinjiang, where it is accused of having detained more than one million – mostly – Uyghurs under conditions that gravely violate human rights. It has also cracked down brutally on the democracy movement in Hong Kong and, with a new national security law, also cemented the end of Hong Kong’s special status. At the same time, Chinese President Xi Jinping is pressing for greater independence from global supply chains. He wants to foster indigenous innovation and force European companies to not only accept technology transfers and intellectual property violations as in the past, but also to increasingly localise their activities and supply chains in China – which is also a reaction to growing US-China tensions over the last few years, and US measures to limit China’s role in the tech supply chain.

In the Indo-Pacific, the Chinese leadership has massively increased pressure on Taiwan with daunting military manoeuvres and more fierce rhetoric threatening any move that would increase Taiwan’s international space, including on key issues such as global health cooperation. The Chinese People’s Liberation Army had been engaged in a months-long stand-off with the Indian Armed Forces along a disputed border in the Himalayas. And China is trying to coerce Australia into stopping its calls for an independent inquiry into the origins of the covid-19 pandemic and its criticism of Chinese actions. Beijing is doing so by restricting Australian imports, weaponising the close trading relationship for political gain.

Just as importantly, however, China’s economic and diplomatic approach to Europe during the pandemic has had a clear effect on overall European sentiments towards Beijing. The assertive tone with which China’s new ‘wolf warrior’ diplomats tried to control the narrative around the emergence of the virus, the country’s efforts to use medical goods for political leverage at a time of highest need, and its failure to cooperate in a meaningful way to identify the origins of the virus did not go unnoticed. Recent polling by the European Council on Foreign Relations shows that Europeans are also growing wearier of previously welcomed Chinese investment in Europe. Opposition to Chinese investment is now a widespread phenomenon. This sentiment is much stronger in wealthier EU member states – especially Germany and France – than in the less wealthy economies of the EU’s south and east. But it now also holds true for the fiercest supporters of free trade in Europe’s north.

The latest gathering of the 17+1 format, a subset of central and eastern European states meeting with China, has received a lot less political and media attention in Europe than it once did. Its best days are certainly over. Beijing is beginning to realise this, especially as one of the EU members, Lithuania, has just decided to leave the format altogether. But, while the trend of growing scepticism towards China is highly evident, European leaders have been simultaneously hedging their bets.

The most prominent example of this was the push for the general agreement on concluding an EU-China Comprehensive Agreement on Investment (CAI), which was one of the key deliverables of the German presidency of the European Council at the end of last year. The CAI, as such, is an attempt to level the playing field with China through measures ranging from additional market openings in certain sectors to increased transparency and reductions in discriminatory practices, to more resolute dispute resolution mechanisms. It has, however, been widely criticised for its timing and for avoiding confrontation around key questions on labour rights, as well as for its high degree of ambiguity and uncertainty around the use of market restrictions and other tools, such as, for example, China’s recently adopted export control regulation, which continues to make it difficult to engage in fair competition with Chinese companies both within the Chinese market and in third markets.

European policymakers so far do not want to follow the trend of decoupling from China; they still want to find areas for cooperation on global challenges, but also to further deepen the economic relationship through more trade, more investment, and more activity by European companies in the Chinese market. This is counterintuitive given the extent to which the Chinese economic system is being retooled towards greater independence from financial markets, international supply chains, and technology imports. European businesses and policymakers alike should find ways to insulate their economic interests from these developments, to avoid risking unsustainable dependence on the Chinese market. Moreover, the latest row that has emerged over the situation in Xinjiang and subsequent EU sanctions against EU policymakers, parliamentarians and researchers, as well as Chinese consumer boycotts against European companies that position themselves on the issue could be a turning point.

At the same time, the new US administration has moved away from aggressive rhetoric on just countering China to a more nuanced policy approach that leaves many previous measures intact but focuses on building a broader coalition of support around them. The administration is finding ways to engage on issues from supply chain security to technology cooperation or sustainable finance – a policy stance that has a basis in both rhetoric and substance, and that is much closer to that of Europe than it was in the past. The Biden administration is attempting to build a positive, multilateral coalition with like-minded partners to address the challenges Beijing poses to the international order and the global economy. While this has initially not been welcomed as enthusiastically in Europe as many in Washington may have expected, the conditions may now be changing.

Europe cannot pursue by itself a more ambitious agenda that has European interests at its core. The European sovereignty agenda that has emerged over the last four years was informed by a strategic vision for the international legal, economic, and technological order. To foster European interests in functioning multilateral action and rules-based trade and economic relations, there needs to be a greater focus on the emerging realities in China, as well as on the approach of partners and allies across the Atlantic and in the Indo-Pacific. If hedging and strategic indecisiveness continues, European policymakers risk new forms of dependency that the Chinese leadership deliberately wants to create, thereby actively undercutting its own sovereignty agenda. It is time for Europeans to really engage on these issues and not give room to Chinese efforts at winning over select European governments in return for short-term economic gains. Not making these choices will be a strategic and diplomatic victory for China.