Introduction: Pursuing a principles-first approach in EU China policy

By Mikko Huotari and Jan Weidenfeld

This is the introduction of the MERICS Paper on China "Towards Principled Competition in Europe's China Policy: Drawing lessons from the Covid-19 crisis."

• China’s behavior during the Covid-19 crisis has reminded European decision makers and wider publics of their deep interdependence with China and of the resulting vulnerabilities.
• European China policy needs to be grounded in a recognition of China’s sustained non-convergence with principles and values that underpin the European project.
• Europe needs to be prepared for all eventualities, including disruption, deterioration, and landslide change in the relations with China in the years ahead.
• Europe’s economic and political system is in competition with China’s strategic priorities. Economic relations with China that continue business as usual threaten to become a liability.
• Effective EU China policy will require swifter and more decisive leadership, and the emergence of ad hoc coalitions able to advance decisions quickly.

2020 was meant to be the year in which decisive progress was made in EU-China relations. EU institutions and the German government, which assumed the Presidency of the Council of the EU during the second half of the year, had long started preparations for an unprecedented gathering of all EU heads of state and government and their Chinese counterparts on 14 September 2020 in Leipzig. Celebrating the EU-China partnership, EU and China leaders were expected to announce the conclusion of an ambitious bilateral Comprehensive Agreement on Investment (CAI) as well as meaningful commitments to stepping up cooperation on fighting climate change and promoting development and stability in Africa.

The Covid-19 pandemic changed all that. The Leipzig meeting was postponed, CAI negotiations have stalled and China’s hardline course in Hong Kong is now putting a heavy strain on relations with Europe. It is unlikely much progress will be made by the end of the year.

To some extent this is just a culmination of trends that have been visible for some time. Disillusionment with China has been growing across Europe for years, as policy makers and negotiators have found it increasingly difficult to find common ground with Chinese counterparts. The last regular annual EU-China Summit between the leaders of the EU institutions and the Chinese leadership in June 2020 ended with zero deliverables: no agreement was reached on a new EU-China cooperation framework or any other agenda point.

Two other factors underpin the ongoing rethinking of China relations across Europe. First, mounting tensions in the US-China relationship make it increasingly challenging, if not untenable, to maintain an upbeat EU-China policy agenda. The deterioration of the relationship between the US and China has led some observers to declare a new “Cold War”. It is, however, more complicated than that, as there will be no revival of a dyadic geopolitical struggle centered on political blocks, military capabilities, and alliances. The US-China conflict unfolds under conditions of deep economic, financial and supply chain interdependence and in a world that is unlikely to fall into two neat camps. This makes it much harder for European countries to position themselves.

Second, the Covid-19 pandemic and developments in recent months have exposed the challenging nature of China’s domestic governance and international behavior. This has served as a stark reminder of the vulnerabilities of European politics, business and societies caused by interdependence with China. If there is one key lesson from the Covid-19 crisis to be learnt about China, it is that Beijing’s policies and behavior abroad do not differ fundamentally from its behavior at home. European political decision makers, business, and societal actors all face similar difficulties in engaging with representatives of an increasingly authoritarian, politically hardened, and globally assertive party state that
seeks to exercise control and influence where possible.

At the same time, the Covid-19 crisis has clearly served as a wake-up call. These challenges are no longer only apparent to European elites who deal with China on a regular basis; they are now beginning to affect domestic politics and wider European society. From Stockholm to Rome, from Prague to London, China policy is no longer an issue only for top-level decision-making circles; it is now an issue for day-to-day politics across government departments, at all levels of political parties and in regional politics.

China’s behavior during the Covid-19 crisis has reminded European decision makers and wider publics of their deep interdependence with China and of the vulnerabilities that result from this exposure. Beijing’s questionable handling of the crisis at home and its forceful diplomatic offensive abroad, aimed at shaping narratives and engineering loyalty, increased skepticism about the trustworthiness and ambitions of its leaders. The uncertainty caused by the global pandemic will reinforce nationalistic politics not only in the US but also in China, fueling a vicious cycle of distrust, closure and scapegoating, and putting the US-China relationship on a dangerous path.

Going forward, European decision makers can no longer afford to grant China’s party state leaders the benefit of the doubt about eventual convergence with liberal political and economic norms or benign intentions. Nor can they hope to be a bystander or even a beneficiary in the unfolding US-China conflict. European China policy rethinking needs to be grounded in a realistic assessment of China’s current trajectory: leaders in Beijing are pursuing a “China first” mission that can be summarized as making China's rise inevitable, resistance futile and collaboration profitable. More specifically, Beijing’s global “China first” trajectory is likely to be characterized by four features.

First, China is doubling down on strengthening party and state capacity. President Xi Jinping has overseen a massive concentration of power in the CCP top leadership, focusing heavily on the renewal of party cadre loyalty and aggressive punishment under the guise of an anti-corruption campaign. During the summer of 2020, internal politics hardened further, with a purge in the security apparatus and a “political-legal rectification” campaign to support Xi’s grip on power.

With ideological conformity as a primary goal, Beijing has also dramatically expanded control over the internet, media and civil society and is introducing state-of-the-art surveillance technology. As a result, the system is geared more than ever to suppressing dissenting voices and to disseminating the CCP’s populist narrative of a renewed China that is returning to its former greatness. However, with the centralization of power, the CCP has also become more prone to displaying mistakes, weaknesses, and vulnerability. Failures of control, such as CCP document leaks over detention camps in Xinjiang, or Beijing’s initially indecisive response in 2019 to public unrest in Hong Kong have hinted at persistent defects in China’s political system. Insecurities and power struggles among Chinese governing elites have created a domestic and global outlook defined by paranoia, which lends itself to a permanent mindset of friend-foe distinction.

Second, China is increasingly confident about approaching global affairs based on just such a clear friend-foe distinction, which often puts it at odds with the interests and actions of OECD countries. CCP elites have come to identify “global governance” as an area of persistent struggle in their desire to carve out a more visible and fitting role for China. As with domestic governance, China rejects the liberal norms underpinning existing global rules and multilateralism. These include the universality of human rights and some of the building blocks of international law. China is also establishing elements of a “parallel order”, bolstering bilateralism at the expense of multilateralism. Where Western powers pursue a multi-stakeholder approach, China promotes state-centric norms. Beijing has only partially modified its approach when faced with pressure, largely shrugging off criticism for non-compliance with WTO principles or of the Belt & Road Initiative’s (BRI) questionable approach to financial, environmental and social sustainability. Instead, Beijing is contemplating options for transforming BRI countries into a China-centered club of less advanced economies, providing an alternative to stringent WTO rules and OECD association.

Third, economic policy making in China will continue to put a high premium on strategically managing China’s global economic interdependencies. The economic outfall of the Covid-19 pandemic has put China’s economy and companies under considerable pressure. In response to external and internal pressure, Xi is promoting a new theory of “dual circulation” meant to propel China’s development and competitiveness, protect China from outside shocks, and support his techno-nationalist visions. As a result, China is likely to see elements of “war time style economic policy”, offering little room for urgently needed structural reforms and meaningful opening to foreign competition.

Rather, China’s economic policy will continue in its neo-mercantilist fashion, focusing on crisis management, central party leadership and control, upgrading of the state sector, doubling-down on autonomous innovation and continued attempts to localize high-tech value chains. US-China economic competition will only accelerate China’s existing drive for technological self-sufficiency and bolstering the autonomy of its indigenous innovation capacity, while the uneven distribution of credit, over-investment in government-priority sectors, the ubiquitous nature of non-tariff barriers, and discriminatory standardization policies will continue to present formidable challenges for European companies.

Fourth, and very visible during this crisis, leaders in Beijing are defining China’s global role as a peer competitor to the US. Other relationships are seen first and foremost through that prism as well. From a Chinese perspective, competition and conflict with the US will play out in all relevant geographic and functional arenas, including in Europe. Accordingly, a stable but indecisive Europe would be a convenient economic partner and helpful counterbalance to the US, while a strong and self-interest driven Europe that acts in a way that is aligned with like-minded partners would not be in China’s interest.

European China policy needs to be grounded in a sober recognition of China’s frequent and sustained non-convergence with principles, values and best practices that underpin the European project and liberal-democratic market economies in the OECD world. Leaders in Beijing are no longer content with just preventing such principles and values from taking root in China; they are also seeking to push back on these internationally. Europe will therefore have to accept what CCP leaders have long concluded internally: Europe’s system of economic and political governance is in competition with China’s strategic priorities and political preferences.

While China is set on a course that is challenging to Europe, it is also in many respects key to meeting EU ambitions. To create the competitive, green, digital, sovereign, and more geopolitical Europe that the current European Commission has pledged to accomplish, the EU institutions and member states will need to make China policy and relations with China a success. This is particularly true with a view to:

1. Establishing Europe as a third actor in global digital competition next to the US and China;
2. Integrating China in a global green deal;
3. Developing a firm position in unfolding US-China strategic competition; and
4. Tackling China’s growing influence in geographies of interest to Europe.

Against this backdrop, economic relations with China that continue business as usual threaten to become a liability for Europe. Lack of progress on negotiated bilateral agreements with Beijing as well as China’s patchy compliance with existing multilateral rules with regard to greater market access (CAI), fairer competition (“competitive neutrality”), and the future of rules-based trade (WTO reform), create long-term challenges to European competitiveness and economic security. Commercial opportunities no longer outweigh the growing political and strategic disagreements and challenges in Europe-China relations.

The uncertainties associated with the unfolding trade, tech, financial and societal decoupling between China and the US and the potential costs of just “muddling through” are a case in point. Often grounded in a desire to avoid putting economic relations with China in jeopardy, European politicians can no longer get away with postponing major strategic decisions, such as on the role that Chinese companies should have in building critical European infrastructure like 5G networks or energy infrastructure, or the extent to which European companies and research institutes should engage in research, development and innovation cooperation with China. Whether intended or not, taking decisions on issues like these will position Europe in the unfolding US-China strategic competition and have potentially severe ramifications on European relations with both sides.

What was largely seen as the automaticity of a mutually beneficial deepening of economic relations between the EU and China is now not only questioned but overshadowed by a growing list of contentious issues. Europe cannot ignore the abolition of the “one country, two systems” approach in Hong Kong and the systematic human rights violations in Xinjiang. As European public scrutiny of China and its actions grows, European leaders can no longer content themselves with facilitating business dealings between European and Chinese companies. They have to publicly position themselves in relation to Beijing’s assertive behavior in the South China Sea and towards Europe’s partners, like Australia, Canada, Japan, India or Taiwan, and to respond to the more open attempts of Chinese actors to influence European politics.

China also poses growing challenges to European security and sovereignty. China is not only leaving a security footprint in geographies closer to Europe such as in Serbia, Belarus, or the Middle East but also becoming a leading player in the cyber and space domain. Beijing’s alignment with Russia, including in the UN security council, shapes the global security architecture as does China’s military build-up and its seemingly soft-security cooperation with an expanding network of partners. China challenges Europe’s strategic autonomy with disinformation and political dealignment. Its actions have the potential to undermine economic security and the development of a sustainable (defense) industrial base, secure supply chains and European digital sovereignty. Most fundamentally, China is already a major point of contention in the transatlantic relationship, which is still seen by many EU member states as the bedrock of European security.

It is time for Europe to rise to the challenge and shape more decisively what is going to be one of its most consequential relationships in the 21st century. To do so, principles and power matter more than lofty notions of a diplomatic partnership with China (see Box 1).

Future European strategies and policies towards China should be defined by China’s actual conduct, behavior, and normative impact, rather than vague hopes for change in China, Chinese alignment with OECD norms, and mutually productive cooperation between China and Europe as a default outcome. In forging a new relationship with China, it is neither in Europe’s interest to tolerate Beijing’s vision of co-existence on primarily Chinese terms nor to pursue a policy aimed at equidistance between authoritarian China and, what has lately seemed all too often, a flawed US liberal democracy. Full-fledged decoupling and an all-in alignment with hawkish US policies towards China is not in Europe’s interest, but abandoning efforts to revive transatlantic cooperation is certainly even less sensible.

Taking the March 2019 “EU-China: A Strategic Outlook” Communication of the European Commission and the HR/VP to the European Council as a basis for thinking about the future shape of EU China policy, it becomes clear that such policy should be rooted in a principles-first approach, with competition as the default when engaging China. This does not imply a singular approach but the bundling of different types of strategic action that are essentially geared at meeting three goals, namely improving (1) Europe’s resilience, (2) its comprehensive competitiveness, and (3) Europe’s global relevance, including vis-à-vis China. Such an approach still leaves room for targeted cooperation with China where this serves European interests and strategic goals. It neither excludes forceful push back and the formation of counter-China alliances, nor the possibility of negotiated improvements in the relationship with China if these shift the trajectory towards fair(er) competition from a European perspective. Europeans should continue to expect and demand upward convergence from China in areas where interests align and fundamental differences matter less.

Overall, however, when calibrating actions on critical policy issues, the EU and its member states should take into consideration the extent of systemic differences with China and their own relative power. In a first step, the EU must sharpen and systematize the application of its current framework of assessment of China as a partner, competitor, or systemic rival. In short-term policy choices, this might simply require assessing where there is superficial alignment in EU and Chinese interests which might provide space for tactical cooperation.

In a more strategic calibration of longer-term action, the EU should consider the extent to which China’s behavior and policy choices are aligned with (or at least constrained by) OECD political norms and economic principles. This includes first and foremost a commitment to pluralist democracy based on the rule of law and the respect of human rights, adherence to open and transparent market economy principles, boundaries for state interference and a shared goal of sustainable development.

As a second step, the EU will have to conduct realistic assessments of its relative power in pertinent policy domains and vis-à-vis China. Relative power is primarily a function of

1. how much (collective) political will the EU is able to mount,
2. the resources available to pursue its interests (alone or with partners), and
3. the EU’s dependence on China and ability to bear the costs of non-conformity with China’s expectations.

Weighing these factors, the EU can pursue four principal courses of action towards China, as set out in Exhibit 1.

As the remaining chapters in this MERICS Paper on China set out in greater detail, in the years ahead, EU China policy will have to aim first and foremost at strengthening European resilience, promoting competitive liberalism at home and abroad, and generating greater global influence, including by working together with like-minded partners on matters regarding China. Often this will require the EU and its member states to combine defensive and offensive measures in their China policies and, in some cases, this might even require managing a partial disengagement from China.

Resilience

A successful China policy starts at home. More societal debate and discussion about the right path forward should be welcomed as these create awareness and a political sense of urgency. They also ground China policy in some of the most important sources of European resilience toward China: openness, transparency, and adaptive democratic consensus.

• To protect the EU’s political sovereignty and unity, decision makers need to contain China’s attempts to coopt elites and swing European and public sentiments in favor of authoritarian approaches to governance. This will require first and foremost investments in transparency and openness. Independent European knowledge production industries are indispensable to counter China’s promotion of its strategic narratives and disinformation activities. European governments also need to promote stronger rules around transparency, disclosure, and revolving doors in countering Beijing’s cultivation of elites. To tackle pressure for self-censorship, the EU and its member states need to facilitate information-sharing and learning from like-minded affected partners.
• To pursue safe interdependence with China, European decision makers in business and politics need to face up to long-term competitive risks, immediate vulnerabilities, and the potential for exploitation of economic dependencies for political gains. They must be smart and selective about how they choose to reduce exposure to China. That will require objective decision-making on the costs and benefits of such moves. Europe should adopt a more systematic approach and recalibrate interdependence in a way that addresses European vulnerabilities while building on its strengths. Based on EU-level and national-level reviews of strategic industries and specific goods that are critical to national security, the EU should limit its exposure to China through a strategy that prioritizes diversification – and in some cases relocation – of critical supply chains. To pursue a security-conscious approach to managing evolving interdependencies with China in emerging technology ecosystems, economic policies will have to be fused more systematically with EU and member state security policies. This will also require innovation and technology policies that prioritize deepening relationships with like-minded partners. New institutional mechanisms fulfilling the functions of an “economic security council” would enable member states and the EU to devise forward looking policy responses at the nexus of technology, trade, and security.

Competitive liberalism

Brussels’ current focus on reciprocity and fairer competition in Europe’s China relationship is right but European competitiveness in a more encompassing sense is at stake. As it remains unrealistic for the EU and member states alone to alter China’s trajectory, they will have to compete fiercely to make their own interactions with China and the world safer for liberal-democratic market economies – big and small.

• To compete (with China) in the digital age, with the US-China tech conflict heating up, decision makers will face increased pressure to think even more strategically across policy domains and competences. The challenge is to translate industrial and digital strategies into action and to overcome longstanding weaknesses in terms of digital market fragmentation, regulatory hurdles, and underinvestment in scalable tech businesses. When it comes to research and innovation with China, a risk-based approach is needed to prevent unwanted tech transfers. On standardization, EU actors need to coordinate their lobbying efforts in China, especially in the context of China Standards 2035. Brussels and member states should insist on digital reciprocity as a new principle in bilateral relations. In navigating China´s emerging data regulations, the EU should monitor competition distortions arising from unequal access to data in the Chinese market. The EU will need to join forces with partners around the world to confront Chinese challenges from forced technology transfers to digital protectionism.
• To advance liberal multilateralism globally, the overarching logic of European responses and initiatives toward China must be significantly more competitive, accepting the systemic rivalry that China’s leaders take for granted. China’s selective adherence to essential international obligations puts into question Beijing’s trustworthiness as a partner more broadly. Beijing’s current trade policy profile does not lend itself to joint rulemaking. On human rights, concrete measures will have to move beyond the failed quiet diplomacy approach of the past. As a major donor and actor in the development sphere, the EU should make more strategic use of its capacities to engage China to promote greater transparency and sustainability. In the digital arena, there are still a few opportunities to shape China’s approach to improving data security and facilitating cross-border data flows. These issues constitute an integral and interlocking system of liberal multilateralism. Non-action or silence on one of them will damage Europe’s long-term capacity to compete and deliver in adjacent arenas.

Global presence and power projection

European China policy will succeed or fail on the global stage, too. Europe’s action on China needs to factor in that countries and institutions across the globe are equally affected by China’s behavior, conduct and normative impact as well as the resulting global strategic landscape. In theory, this creates massive new opportunities for developing and deepening Europe’s global partnerships to create leverage and alternative alignments beyond the US-China conflict. In practice, Europe will face a series of critical China-tests in advancing the effective provision of global public goods and in prevailing in geopolitical contestation in arenas of European interest.

• To make progress on urgent global health and climate issues, the EU will have to pursue more conditional cooperation in order to engage China and shape its behavior, while competing in delivering these global public goods with the aim of creating pressure for upward convergence. EU engagement with China on climate change discussions might have to be made contingent on other issues China deems important, including trade, science and technology cooperation, investment, and finance. The EU should enlist global partners for bolder standards regarding international energy projects and green finance. The connectivity strategy and its commitments to “sustainable” connectivity remains the single best framework for pushing China toward higher standards and supporting EU firms that abide by these too. On global health, the EU must act more often as a counterweight – member states should use their financial and diplomatic weight to push through much needed reforms within the WHO. China’s Health Silk Road presents the EU with multiple new policy challenges. On the one hand, the EU should unite with like-minded countries to push back against Beijing’s Covid-19 propaganda and disinformation campaigns. On the other hand, the EU should continue to actively engage and cooperate with China on targeted global health projects and research.
• China’s actions in the Western Balkans, the MENA region, the Indo-Pacific, and “new geographies” of geopolitical competition, like the Arctic, are among the most pressing geopolitical challenges the EU currently faces. These call for both containment and also guarded cooperation in specific cases. To contain China’s actions in the Western Balkans the EU must provide a more credible path to EU accession for countries in the region and more actively promote access to EU investment and financing sources. The EU should also support relevant actors in the Western Balkans to adequately assess Chinese loans and investments before they are accepted. Where China’s investments and projects align with EU norms and standards, cooperation should be considered. This might apply in particular for the MENA region. Limiting and resisting China’s behavior in the Indo-Pacific will require, first and foremost, cooperation with like-minded states. This should not be limited to the United States but also include other countries in the region whose values and interests in this space converge with the EU’s, such as Japan, Australia, South Korea, Taiwan, India, or Vietnam. With a view to China’s evolving role in the Arctic, EU member states should urgently establish close coordination and possibly even a working group that can help to coordinate EU measures aimed at containing China’s role, where necessary.

For the EU to succeed in the pursuance of greater resilience with regard to China, the promotion of competitive liberalism at home and abroad and the development of new global partnerships will require doubling down on key principles of domestic governance that have underpinned and accompanied European integration in the past. That means strengthening transparency and rule of law and defending robust openness and fair competition. In developing China policy, Europe would be ill advised to copy China, restrict societal engagement with China, or engage in more state dirigisme and protectionism.

The EU must also continue to find common ground with the US when it comes to the formulation of future China policies – be it from November onwards or in four years’ time. Such efforts should revolve around agreeing on mechanisms for damage control and avoiding greater dealignment as a baseline. A more ambitious transatlantic agenda could build on recent moves towards a transatlantic trade rapprochement, with the formation of a transatlantic trade and technology council as a key institutional building block for facilitating transatlantic conversations and cooperation on critical China challenges. EU member states and the US should also aim to further deepen security and intelligence partnerships, which would allow them to prepare more effectively for future security escalations in relation to China.

Ensuring that the trajectory of EU-China relations meets with European interests, the EU will also have to change its inner workings and embrace a greater degree of pragmatism than has been the case in the past. It is rather telling that the latest EU-China summit in June was considered a success in Brussels, if not because of the nature of interactions with China but because of the relative unity the EU displayed vis-à-vis China. The fact that the EU assertively conveyed to China its positions and expectations on a full range of issues is indeed no mean feat, given that creating alignment on China matters in Brussels and across the EU remains challenging business.

Conveying largely aligned messages will not be enough. Ultimately, better China policy is probably one of the most important reasons for a reform of the way foreign policy is done in the EU, with stronger elements of majority decision-making. However, effective EU China policy will require swifter and more decisive leadership, and the emergence of ad-hoc coalitions able to advance and coordinate decisions quickly. This will require EU member states and EU institutions to have all relevant government and institutional players adopt and embrace a joint perspective on China which is rooted in a principles-first approach, centered on competition.

Developing China policy rarely leaves time for long reflection or extensive assessment, as these are often outdated by the time they appear. Indeed, EU China policy will in many respects have to be provisional by default, as constant adaptation and changes in relation to developments in China and emanating from China will be required. Europe needs to be prepared for all eventualities, including disruption, deterioration, and landslide change in the relations with China in the years ahead. Finding a response to these eventualities will require flexibility without compromising on European interests and principles.

This is the introduction of the MERICS Paper on China "Towards Principled Competition in Europe's China Policy: Drawing lessons from the Covid-19 crisis." Continue with our chapter on "Key graphics: Mapping EU-China interdependencies" or go back to the table of contents.