Europe Gets Its Competition With China All Wrong

Protecting the liberal order won’t be enough. The EU will also have to challenge China for influence around the world.

German Chancellor Angela Merkel stands among flags as she attends a signing ceremony after consultations between China and Germany in Berlin on July 9, 2018. (Sean Gallup/Getty Images)
German Chancellor Angela Merkel stands among flags as she attends a signing ceremony after consultations between China and Germany in Berlin on July 9, 2018. (Sean Gallup/Getty Images)

China, it seems, has big plans in Europe. After a six-day jaunt through Italy, Monaco, and France, Chinese President Xi Jinping walked away with an agreement from the Italian government to join China’s massive global economic project, the Belt and Road Initiative.

Washington and Brussels were furious. Earlier that month, the European Union had published its new China strategy, which characterized China as a “systemic rival.” At an EU-China summit scheduled for April 9, all these tensions may come to a head.

If they do, it will mark a real change in the nature of Europe’s relationship with China. Back in 2014, the year after Belt and Road was launched, the EU inaugurated its own infrastructure stimulus plan and was courting Beijing to join the project. Today, the notion that Brussels would welcome Chinese investment seems laughable. In fact, it is doing nearly everything it can to keep the money out; just a few months ago, the EU even shoved through a new, tougher screening mechanism to make it harder for Chinese investment to flow in.

What happened? For the most part, the change came from Germany. As late as 2016, German officials were still sticking to the standard talking point: Globalization works, and Germany is particularly good at it. Starting around 2004, economic links between Germany and China had helped propel the German economy through one of its best periods in living memory, building a more stable international order in the process.

A year later, the mood had already changed. Politicians and officials were starting to hear alarm bells coming from German industry. Those actually dealing with Chinese companies could see the writing on the wall: China had used trade and economic links with Western partners to upgrade its own manufacturing processes. German companies were starting to feel the heat as their technological edge evaporated and they lost contracts to major Chinese competitors. The China shock was real.

There was another issue, too. China might be adopting Western technology, but it was not becoming more Western. The state was still the prime economic agent. The Communist Party was never far from Chinese companies, helping them along with subsidies, cheap credit, and other assistance. Competition would never be fair as long as private German companies were up against the Chinese state. The solution? If China could not play by the rules of the liberal Western order, then perhaps it should not be allowed to play at all.

Over the past two years, that basic idea has wormed its way through the German government and up to the European Commission in Brussels—hence the commission’s description of China as a “systemic rival” that promotes “alternative models of governance.” And according to a recent policy paper from the Federation of German Industries, if the state is indeed behind every Chinese company, then Chinese companies cannot be treated like others.

Instead, the commission suggests, Europe should take a differentiated approach. In every area where China is playing by the rules, it can continue to do so. In those cases, its economic interests should be aligned with the existing system. Where China continues to ignore the rules, its behavior should be addressed. That might include applying the rules that govern state aid to Chinese-subsidized takeovers of European companies. Europe might also stop China from using its Belt and Road Initiative to develop production capacity in non-EU member countries, circumventing EU trade defense mechanisms.

Europe could also hit back through its public procurement processes. A new policy would work as follows. In cases of alleged discriminatory practices against EU companies in Chinese public procurement markets, the European Commission can initiate an investigation and, potentially, restrict Chinese companies’ access to European goods, thereby leveling the playing field. Although European procurement processes are accessible to Chinese bidders, China often discriminates against European companies in its own. This is no small matter. The EU Chamber of Commerce in China has estimated that public procurement accounts for roughly 20 percent of Chinese GDP.

A differentiated approach to China would allow for more flexibility. Europe would be able to more easily respond to different types of behavior. But there is still a danger: Just because the rules of the game would be clearer, that doesn’t mean Europe would come out the winner.

For the European Commission, everything is decided along the axis of openness versus protectionism. If China becomes more open, it can have full access to European markets. If it continues to discriminate against foreign economies, it will find that the Europeans are ready to retaliate.

Yet it is entirely possible for Europe to protect itself from Chinese interference while losing global presence and influence. Something similar happened to China’s Qing dynasty. It kept Western powers out, but in the process, it managed to close itself off to the world, accelerating its final demise. More recently, one of the main causes of Japan’s economic stagnation has been the widespread development of very specialized technology that makes products uniquely adapted to the domestic market but unsuccessful abroad. When a species evolves independently from the rest of the world, it may find it more rather than less difficult to survive.

It makes sense for the European Commission to think about ways to protect the integrity of the liberal order governing Western societies. But it should also begin to pay attention to ways to ensure that it can survive and thrive against fierce competition from opposing models. In other words, although the EU seems to be embracing a decidedly more political outlook—it is ready to apply and enforce stricter rules—it is not yet embracing geopolitics.

There is nothing in the new strategic outlook about the need to compete with China for influence in critical geographies or over resources. It ignores the projection of power outside the EU’s borders. The struggle to control global infrastructure is never addressed and the EU’s sources of power or leverage over Chinese conduct disregarded.

Relations between Europe and China have reached a critical new juncture, but we’re still having the same old discussion about globalization and openness, in which globalization is seen as the opposite of economic nationalism. The real revolution, though, will take place when the two are combined and we enter a world in which nations are both deeply integrated and compete for power and influence.

In that world, state competition may come to resemble market competition today. Think of the way companies are embedded in joined production networks while also competing for market share. Nations will increasingly fight for sovereignty share against rivals, and the game may well extend to economic and political interests outside their borders. China’s Belt and Road Initiative is one example.

Is Europe ready? Nothing in the recent debate taking place in Brussels indicates that it is.

Bruno Maçães is a senior fellow at the Hudson Institute and a former Europe minister of Portugal. He is the author of The Dawn of Eurasia and Belt and Road. His new book History Has Begun will be published in the United States in September.

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