China as a Dividing Force in Europe

[This article was first published on Young China Watcher’s blog]


In March this year, Italy became the first G7 nation to sign an official MoU with China in the context of the Belt and Road Initiative (BRI). The move by the Italian government has been interpreted as a sign of increasing divisions within Europe over China; it has also been widely criticised as putting short-term national interests above a common European approach. But to what extent might the Italian example be an indication of a shift or rift in EU-China relations?

Shifting perceptions of China

The situation is complex, pitting national interests against community interests within a shifting geopolitical environment. Even when there is a demonstration of unity in the EU, individual countries still diverge from common positions. For instance, in summer 2018, 27 EU ambassadors signed a statement criticising BRI as mainly beneficial for China, lacking transparency and unsustainable in its debt policies, with Hungary being the only country to break ranks at the time.

News on EU-China relations is dominated by conflicts on specific issues such as trade disputes or human rights, which flare up from time to time. However, even though these have not substantially dampened the overall relationship, and EU-China trade and investment remains robust, the ways of engaging are changing and governments and businesses alike are struggling with the ambiguity of China. This is becoming particularly evident in Germany, China’s largest trade partner within Europe.

Since Donald Trump’s arrival to the Oval Office, the wider global context is shifting as well. With the ongoing trade dispute between the US and China, China has been markedly stepping up its charm offensive towards Europe. China’s investment volumes are now nine-times higher in Europe than in North America due to fewer regulatory hurdles, a predictable policy environment, and high-tech assets, with the largest share going to the UK, Germany and France.

Public perceptions are also shifting. Historically, the US has been the EU’s closest partner. Today, more and more Europeans feel they cannot rely on the US anymore. A recent survey found that over 40 per cent of Germans now place more trust in China than in the US.

Caution around investments and advanced technologies

At the same time the conversation in government and business circles has markedly shifted towards increasing wariness towards China. Foreign companies operating in China are less willing to tolerate the continuing lack of reciprocity and discrimination and are tired of repeated promises of economic reforms and a level playing field in the Chinese market, without substantial changes being put into practice. At the same time, they are torn between taking a more critical stance and their reliance on the Chinese market. For instance, a recent paper by the Federation of German Industries (BDI) acknowledges China as one of the most important markets for German companies but emphasises the challenge of reconciling partnership with systemic competition.

A similar picture is emerging on Chinese inbound investments in Europe. Voices are growing louder criticising technology transfers and China’s growing clout in certain industries, such as electric vehicles, robotics and 5G technology, but the main question remains how to deal with the potential national security implications of Chinese participation in critical European infrastructure.

This spurred the EU and national governments into action, translating these concerns into legislation hindering, if not outright blocking, Chinese investments in certain sectors. On the initiative of Germany, France and Italy, the EU developed a regulation on how to approach investments into critical infrastructure. Still, the European investment screening framework is much less invasive and comprehensive than existing legislation in many countries (such as the more muscular CFIUS mechanism in the US) and does not have any legally binding nature.

The focus of the EU’s investment screening is clear: sharing information among Member States on specific foreign investments that have potential national security impacts. In addition, the European Commission may issue opinions when several Member States may be affected, or it may be in the interest of the EU as a whole. In such a case, Member States are required to justify any divergence from the Commission’s opinion.

While the EU approach addresses the cross-border nature of investments its remit remains limited to creating incentives for Member States to put in place robust FDI monitoring mechanisms. Nevertheless, the first effects of a changing investment environment can already be felt: several Member States are modernising and enhancing their FDI screening regimes in anticipation of Chinese takeovers.

After a record high for Chinese investments in Europe in 2016, Chinese-initiated mergers and acquisitions in Europe slowly declined in 2017, dropping by 21 per cent in 2018; the number of investments in Germany even fell by 60 per cent. Despite this dip, the debate around Chinese influence, technology, and potential national security implications continues unabated.

In focus: Europe’s 5G networks

Risks are perceived as particularly high when it comes to telecommunications, with 5G set to be the new standard of connectivity and the ‘internet of things’. Huawei, one of the leading providers of 5G technology faces suspicion that its equipment may contain backdoors that enable state-backed spying.

The example of Huawei is exemplary of how governments struggle to balance risks and (economic) benefits. While Huawei technology has been recently banned in several countries, the US is putting pressure on Europe to follow suit. But countries such as Germany are looking for a third option that would keep the market open to Chinese companies while at the same time pre-empting concerns about spying. While the principle of engaging with China rather than plainly banning its companies is laudable, there are little indications that a “no spy agreement” such as floated by the German government could effectively address the risks.

These are also not significantly mitigated through the Commission’s approach towards security in Europe’s 5G network, which again focuses more on coordination and information sharing, leaving the onus on national legislation. While both the Commission initiative on investment screening as well as on communication infrastructure are examples of more European approaches, they also demonstrate the limits of the EU’s legislative remit.

Efforts to unify a European stance

Recently, several EU Member States have also increasingly exhibited efforts to take a common stance towards China. In March 2019, for the first time, a country (France) has invited an EU representative as well as another Member State (Germany) to join a meeting with Chinese President Xi Jinping. While sending the message that China needs to take the EU more seriously as an actor, even though it prefers a bilateral approach, it needs to be taken with a grain of salt as an European approach is not favored by all Member States to the same extent.

The meeting between the French president, German chancellor and Commission president took place against the backdrop of Italy’s official endorsement of the BRI. As such, these limited initiatives might also exacerbate pre-existing divisions between Member States. These divisions have become apparent between larger and smaller Member States, between the wealthier Member States in the north and the struggling countries in the south, and between those with a more or less balanced trade balance with China.

While Member States such as Germany are increasingly pushing the European China agenda and the EU bloc is getting a more prominent seat at the table, it is still premature to read these developments as a newfound European unity towards China. If the President-elect of the European Commission, Ursula von der Leyen, who is said to hold more critical views of China and to be diplomatic but assertive, will be able to bring the EU Member States closer together remains to be seen. The oscillation between national interests and clearly demonstrating the potential strengths of a regional approach, finding credible and effective ways of engagement with China that balances business and government interests at home and in the Chinese market, as well as addressing (economic) concerns of individual Member States, will remain challenges for a European China policy in the near future.

The EU’s approach towards China is evidently shifting and the EU and its Member States are willing to take more measures to protect their own interests, despite potential retaliation from China. But as a recent Joint Communication states, Europe’s approach towards China needs to be more realistic, assertive, and multi-faceted to adapt to shifting economic and geopolitical realities.


China’s Foray Into Southeast Asia: Mixed Feelings

[This article was first published on Young China Watcher’s blog] __________________________________________________________________________________

Southeast Asia has become an important region for China’s global ambitions, with increasing economic support and investment provided to Southeast Asian countries under China’s Belt and Road Initiative (BRI). Chinese foreign direct investment (FDI) in Southeast Asia grew by nearly 7 percent from 2004 to 2010, with Malaysia as the fourth-largest recipient of China’s total FDI in 2017. For many economies in the region, China is their biggest trading partner.

Yet while the region as a whole is often perceived as heavily reliant on Chinese money—be it through traditional aid or other financing instruments—the reality among Southeast Asian countries is diverse, and recently several countries are re-evaluating their relationship with China.

Large international financial institutions such as the Asian Development Bank and the IMF have repeatedly voiced concerns over unsustainable debt in the context of the BRI, and several projects have attracted media scrutiny over delays in progress, financial corruption, or concerns over sovereignty.

At the same time, tensions over China’s expanding military presence in the South China Sea persist: Malaysia, Brunei, the Philippines, Taiwan, and Vietnam all have conflicting claims in the area, while Indonesia announced in 2017 that it would rename a part of the South China Sea falling under its claimed exclusive economic zone as the “North Natuna Sea“. Collective action towards China via the Association of Southeast Asian Nations (ASEAN) is often hampered due to these tensions.

Moods across the region

While many countries look towards China to accelerate infrastructure development, this does not mean that they are not wary of economic dependence or potential military conflicts with China. In some cases, particularly for smaller and less developed countries such as Laos, the picture might be rather grim due to a heavy reliance on Chinese financing; China is Laos’ biggest foreign donor, primary investor, and second-largest trade partner. By contrast, recent demonstrations in Vietnam reflect the deep-rooted distrust towards China and a common fear of economic dependence.

Such sentiments are also widespread in Indonesia, where the government, while welcoming Chinese investments in the country to upgrade patchy infrastructure, is cautious to engage in open courtship. The Indonesian government has repeatedly demonstrated its resolve to diversify its economic partners. For instance, while China has won the contract for the troubled Jakarta-Bandung high speed rail, Japan is building the Jakarta-Surabaya line as well as the Jakarta metro. Most recently, Indonesia has granted India access to its Sabang port in Aceh, along the sea route of China’s BRI.

The more economically developed countries are taking stock of their relationship with China and actively seeking alternatives. In Malaysia, recently re-elected Prime Minister Mahathir Mohamad has announced a review of Chinese projects in the country to assess their value and financial conduct in the country.  This review may extend to the strategic partnership formed between Malaysia and Chinese e-commerce company Alibaba, which opened its first Southeast Asia office in Kuala Lumpur in June 2018. Alibaba also established its first Electronic World Trade Platform outside China in Malaysia, functioning as a digital free trade zone for e-commerce.

Thailand, which has also experienced difficulties in the development of a Chinese-built high speed rail, has just announced plans for a regional investment fund managed jointly with Cambodia, Laos, Myanmar and Vietnam to lessen reliance on China and other large Asian powers, such as Japan, Korea, and India, in order to seek financing from sources within the region itself.

The upside of Chinese engagement

These examples demonstrate the differences between Southeast Asian countries in terms of attitudes towards Chinese funding and their ability to reject Chinese propositions. While China will remain a powerful partner and the focus of media on its growing financing in the region, Japan to date remains the largest investor in Southeast Asia.

Across the region, policymakers are increasingly making use of financing alternatives, as well as initiating their own funds. While these options will not be able to match the volume of Chinese funding, competition between Japan and China over infrastructure projects in the region could also have a positive impact on projects if governments expand assessment criteria to include project quality in addition to pricing, which is often perceived as more favorable from China.

While Beijing continues its outreach towards Southeast Asia, it may be increasingly met with resistance from domestic stakeholders in the region. This does not constrain China from trade, investment and the pursuit of its infrastructure drive, but could—in a best-case scenario—result in better and more sustainable projects for the countries involved.


Zwischen Trump und Xi – Chancen für die Deutsch-Chinesische Zusammenarbeit

Innerhalb von einer Woche hat sich das Blatt in der globalen Handelspolitik gewendet. Während der Chinesische Staatspräsident Xi Jinping auf dem Weltwirtschaftsforum in Davos den globalen Freihandel und ökonomische Globalisierung bewirbt, verspricht der neue US Präsident Donald Trump eine protektionistische Wirtschaftspolitik mit höheren Zöllen und dem Rückzug aus dem bereits ausgehandelten Freihandelsabkommen TPP.

Mit dieser Rhetorik gibt die USA ihren ideologischen und wirtschaftlichen Führungsanspruch zugunsten von „America First“ auf. Die chinesische Regierung hat bereits angedeutet, das entstehende Vakuum füllen zu wollen. Dabei kann auch Europa und insbesondere Deutschland eine Rolle spielen und die aktuelle G20 Präsidentschaft nutzen, um gemeinsam für globalen Freihandel einzutreten und das Investitionsklima zu verbessern.

Ob die aktuellen Anzeichen allerdings eine tatsächliche Kehrtwende in der Weltwirtschaftspolitik zur Folge haben werden, bleibt abzuwarten. Auf der einen Seite hat Trump zwar tatsächlich bereits einen Exekutiverlass unterzeichnet, mit dem die USA TPP den Rücken kehren und die Neuverhandlung des nordamerikanischen Freihandelsabkommens mit Kanada und Mexiko, NAFTA, angekündigt.

Auf der anderen Seite widersprechen einige Berater und Kabinettsmitglieder den Ansichten des Präsidenten und unterstützen stattdessen den bisherigen Freihandelskurs der USA. Ebenso äußern sich führende amerikanische Wirtschaftsvertreter besorgt über den neuen Kurs. Letztendlich unterliegt auch Trump einem politischen System, welches jahrzehntelang Globalisierung und Freihandel vorangetrieben hat. So bleibt abzuwarten, ob dieser vermeintlich großangelegte Rückzug aufgrund des politischen Machtgefüges der USA letztlich rhetorischer Natur bleibt.

Auch die chinesische Regierung versteht, dass die von Trump vorgeschlagenen protektionistischen Maßnahmen langfristig der USA wirtschaftlich schaden und amerikanische Unternehmen eng mit der globalen Wertschöpfungskette verknüpft sind. Xi kann jedoch diese Situation geschickt nutzen, um China als neue weltpolitische Führungsmacht in Handelsfragen zu positionieren.

Zeitgleich zu Xi’s glühender Werbung für Globalisierung und Freihandel in Davos, kündigte die Chinesische Regierung an, weitere Sektoren für internationale Investoren, insbesondere im Banken- und Finanzsektor, zu öffnen. Ähnlich wie Trump, scheint es Xi auf den ersten Blick ernst zu meinen. Aber auch im Fall Chinas spricht einiges gegen eine drastische Veränderung.

Ausländische Handelskammern in China, allen voran die der EU, bemängelt seit langem, dass den zahlreichen Ankündigungen Chinas die Wirtschaft zu öffnen und den Einfluss des Marktes zu erhöhen, selten spürbare Veränderungen folgen. Und auch aktuell ist Skepsis angebracht, denn wirtschaftliche Reformen sind für Chinas Machthaber ein sensibles Thema: Sie müssen eine Balance finden, bei der das Wirtschaftswachstum aufrechterhalten werden kann und das soziale Gefüge stabil bleibt. Im kommenden Jahr wird sich zeigen, ob die Regierung es schafft, Überkapazitäten, insbesondere im Kohle- und Stahlsektor, abzubauen, Umweltprobleme in den Griff zu bekommen und ökonomische Ungleichheiten zwischen dem Osten und Westen des Landes auszubalancieren.

Gleichzeitig wird für Xi der Fokus in der Innenpolitik liegen. Im Angang zu und während des 19. Parteikongress im Herbst, muss Xi seine Vertrauten in Schlüsselpositionen in Politik und Wirtschaft platzieren, um seine Machtposition langfristig auszubauen.

Das Momentum der aktuellen Rhetorik Chinas und der USA birgt jedoch auch für Europa eine Chance. So eröffnet sich die Gelegenheit für China und Europa ihre Verbindung zu stärken und ein Zeichen über die reine Rhetorik hinaus zu setzen. Das derzeit verhandelte Investitionsabkommen zwischen der EU und China kann hierzu als Vehikel dienen.

Im europäischen Kontext kann speziell Deutschland die aktuelle G20-Präsidentschaft nutzen, um für Stabilität, freien Handel und ein gesundes, globales Investitionsklima einzutreten – und damit einen weiteren Gegenpol gegen die rhetorische Abschottung der USA zu bilden. Die Bundesregierung kann hier Initiativen der chinesischen G20-Agenda des vergangenen Jahres aufnehmen und gleichzeitig an Lösungen für aktuelle Spannungen in den Beziehungen arbeiten. Im Zuge des G20 Vorsitzes kann Deutschland – in Kombination mit Chinas angekündigtem Willen zur Verbesserung der Investitionsbedingungen und Öffnung der Wirtschaft – Druck auf China ausüben und die Implementierung versprochener Veränderungen, insbesondere eine Verbesserung des Investitionsklimas in China, vorantreiben.

Die deutsch-chinesischen Beziehungen sind jedoch derzeit auch hierzulande angespannt. Unzufriedenheit und Skepsis gegenüber chinesischen Investitionen in Deutschland zeigen sich nicht nur hinter den Kulissen, sondern werden auch zunehmend in der Öffentlichkeit diskutiert.

Trotz ihres noch geringen Anteils an Direktinvestitionen in Deutschland, sind Chinesische Investitionen sprunghaft gestiegen. Insgesamt gaben chinesische Investoren über €35 Milliarden für deutsche Unternehmen aus – mehr als in allen Vorjahren zusammen. Kuka und Aixtron, bei dem die Bundesregierung ihre Unbedenklichkeitsbescheinigung kürzlich zurückzog, sind dabei nur die bekanntesten Fälle. Da nicht alle Transaktionen meldepflichtig sind oder vom BMWI überprüft werden, bleiben viele chinesische Investitionen unter dem Radar. Besorgnis besteht jedoch aufgrund der mangelnden Transparenz chinesischer Unternehmen, vor allem bei Investitionen in sensiblen technologischen Sektoren.

Das Investitionsklima zwischen Deutschland und China zu verbessern und eine Führungsrolle und Vorbildfunktion im internationalen Freihandel einzunehmen sollte daher Leitmotiv des deutschen Vorsitzes werden. Die G20 bieten dabei einen idealen Rahmen, um gemeinsam mit China dort Führung zu übernehmen, wo die Vereinigten Staaten unter Trump kürzer treten werden. Dank der G20 “Troika” wird Kontinuität in der G20-Agenda gewährleistet. Diese Kontinuität bietet gleichzeitig die Chance, gemeinsam globale Lösungen für Probleme zu erarbeiten, die sich auch in den bilateralen Beziehungen widerspiegeln. Mit Hamburg als Austragungsort des G20-Gipfels 2017, mit seiner besonderen Bedeutung für die bilateralen Beziehungen zwischen Deutschland und China, könnte die Kulisse dafür nicht besser sein.

Allgemein, PRIMO

Rising Powers and International Relations in 2017 – Issues on the Horizon

[I curated this piece was curated for the PRIMO blog and contributed to the section on China]

2016 was a tumultuous year across the globe. Political unrest in Turkey and Brazil – one attempted coup, one political “coup” successful in ousting President Dilma; both countries, along with China and Russia, faced increasing economic challenges, albeit in different areas and to different degrees; the World Trade Organization (WTO) remained in dead lock; the UK voted to leave the European Union; and President Trump’s election in November heightened fear of growing protectionism. After all this, what is in store in 2017?

Surely, 2017 will see many of last years’ challenges develop and mature. Brazil and Turkey will have to deal with deteriorating security situations in addition to economic and political challenges. But will 2017 bring more clarity regarding “Brexit”? What will be the impact of Trump’s policies on the Rising Powers, in particular China and Russia? Will the WTO be able to make a comeback as an important forum for global trade negotiations? And who will take leadership in global affairs?

The following contributions by our PRIMO fellows outline the most important domestic and international issues that these countries and organisations face this year. Read on for outlooks for Brazil, China, Russia, Turkey, the UK, and the WTO in 2017.


(by Insa Ewert, Fleur Huijskens, and Mingde Wang)

In China, the 19th Party Congress, progress of economic reforms, as well as China’s response to US policy and its economic diplomacy will shape the Year of the Rooster.

The outcome of the 19th Party Congress, to be held in fall, will determine China’s policy direction for the following five years. Crucial issues are the expected leadership transition, confirmation of the main party line, and introduction of new ideological positions. Having reached the official retirement age of 68, a large part of the 25 members of the Politburo are expected to retire, including five out of seven Politburo Standing Committee (PSC) members, China’s top leadership body. The two leaders President Xi Jinping and Premier Li Keqiang will remain.

Xi’s elevation to ‘core’ leader at the Sixth Plenum of China’s Central Committee in October 2016, an honour previously granted only to Mao Zedong and Deng Xiaoping, enhances Xi’s power and gives him greater room to promote the people of his choosing.

These developments are decisive for China’s direction during Xi’s second term and determining China’s reform progress. While reform-minded appointments could influence Xi, quite a few of the current Politburo members are considered liberal minded, but they have had limited impact in the past five years.

Since President Xi announced supply side reform in early 2016, Beijing outlined five major tasks to tackle the Chinese economy’s structural problems, including overcapacity, overstocked products, and high debt levels. However, overseas commentators lament insufficient improvements due to the lack of clear direction. In contrast, the government affirms substantial progress and further deepening of reform in 2017, with priority given to merging and re-organising “zombie firms” in the steal and coal industries, and “de-stocking” over-supplied properties in the housing market.

Deviant voices point to continued slowdown of the economy and Beijing’s inability to achieve its strategic goals as a result of retreating foreign investment, the investment-driven growth model (particularly through real estate), and the resurgent debt level of state-owned enterprises. However, pro-government voices also predict increased uncertainty about this year’s reform outcome, largely due to challenges arising from US policies under the Trump Administration – one of the priorities for China’s foreign policy in 2017. Contentious issues include the conflict in the South China Sea, questioning the One-China policy, and economic policies.

While policy-makers in both China and the US recognise the dangers of a potential trade war, the US will likely introduce some new economic measures such as increasing tariffs. However, US protectionism presents a chance for China to present itself as the new leader of economic globalization. Negotiations over the RCEP (Regional Comprehensive Economic Partnership) between China and 15 Asian countries are accelerating and, with the US revoking participation in the TPP, possibly drawing (near) to conclusion.

Further Chinese-led initiatives such as “One Belt, One Road” (OBOR) and the Asian Infrastructure Investment Bank (AIIB) will expand: a forum for international cooperation on OBOR will be held in Beijing this May, and 25 new countries from Europe, Africa, and South America plan to join the AIIB later this year. Thus, there is a window of opportunity for China to take a leadership role in the global order, but 2017 will also show how much action will follow the rhetoric.


Allgemein, PRIMO

The US Elections – Views from Rising Powers and Europe

[I edited this project for the PRIMO blog and contributed to the section on China]

PRIMO fellows have spent the last two years trying to make sense of the changes currently taking place in the configuration of the world order. Last week’s election in the United States will most certainly influence these changes — the question arising is: how? For Francis Fukuyama, this election represents a critical juncture: many countries are returning to populist nationalism, because the benefits of the liberal world order with its global value chains — despite fuelling global growth and facilitating movement of goods and people — have not filtered down to everyone.

Indeed, in many of the countries represented by the PRIMO Network, Trump’s victory has been welcomed. In particular, rising powers that have demanded a larger say in the international system may welcome an America led by Trump, as the power of the US is seen to further decline, and as a less interventionist foreign policy strategy may be adopted. Similarly, representatives of right-wing parties and governments in Europe have celebrated Trump’s win. Surprise at the election outcome was most noticeable in Germany and Turkey, but many governments and observers are worried about their own security, global stability, and the possible economic effects that an increase in protectionist policies may bring about.

The following contributions show that most leaders remain cautious, as there is little certainty over Trump’s course of action. Who will take up positions as Trump’s advisers? Which campaign promises will he be able to deliver on? To what extent will Congress, the federal structure of the US, and the courts act as constraining powers? The answers to these questions remain to be seen.

Read on for responses to Trump’s victory and insights from Rising Powers (Brazil, China, Russia, and Turkey), an economic view from the BRICS, as well as views from Europe (Germany, Italy and the Visegrád 4).


(by Insa Ewert and Mingde Wang)

China seemed less surprised by Trumps’s victory than other countries. Commentators contend that the largest challenge for the Chinese government may lie in the uncertainty of Trump’s China policies and possible advisers, and whether Trump can deliver on his campaign promises. For instance, Trump has repeatedly threatened a trade and currency war with China. Fuelled by expectations that TPP will not be ratified, Beijing is moving forward with its plans for an Asian-Pacific Free Trade Area.

While on election day, media coverage was scant, an official commentary appearing on the day after Trump’s victory in People’s Daily, the mouthpiece of the CCP, depicts the results of the US election as confusing and unstable. To its domestic audience, anger, riots, and racial and social divisions in the process are cited as evidence of deep social contradictions in the US as well as the dilemma in and fragility of American democracy. Regarding the implications of Trump’s presidency for US foreign policy, both People’s Daily and Global Times, which often represent hawkish voices within the CCP, perceived changes along with greater uncertainty, and consider the Trump administration a destabilising factor in world politics. According to published media interviews, even though a variety of top analysts from China’s leading IR institutes have generally suggested the unpredictability of the election’s long-term impact on China’s foreign policy interests at the current stage, they are more or less concerned with the “businessman nature” of the President-elect, and an increasing pressure from the US for China to make more economic concessions.

Snapshots of interviews with people in Beijing and Shanghai reflect worries that as a businessman Trump might not understand politics. However, as a businessman, he is also widely admired and his TV show The Apprentice is quite popular in China. A poll by the South China Morning Post revealed that 39% of the respondents favoured Trump – a higher percentage than in other Asian countries, where Trump only scored around 13%. The paper concludes that even though Chinese people are not too keen on Trump either, they also do not approve of Clinton. This Chinese view seems largely consistent with public opinion, media coverage, and other polls.


Allgemein, Young China Watchers

Bridging the Gap – Cooperation on Infrastructure Investment Between Europe and China

“China is spending more on infrastructure than the U.S. and Europe combined,” finds a recent study by McKinsey & Co. At the same time, Europe lags behind in desperately needed investments in its infrastructure, and its “existing asset base is wearing out.” Europe seems distracted by a range of internal problems: an ongoing sovereign debt crisis; “Brexit” highlighting attempts of re-nationalization; and the challenges of a very low interest rate environment.

Economists realize that the long-praised powers of monetary policy alone appear to be unable to kick-start the economy. Monetary policy needs to be accompanied by fiscal policy to achieve long-term growth, and infrastructure investments are a key element of fiscal policy stimuli.

The IMF in particular calls on Europe’s largest economy, Germany, to set an example on structural reforms to boost the fragile economic recovery of the Euro area. Indeed, the German government has presented plans to increase investments in infrastructure, which are sorely needed. For instance, a 2012 report by the Commission on Transport Infrastructure Financing found that 30 percent of German rail bridges are more than 100 years old. However, the current paradigm of balanced budgets as the ultimate goal of successful fiscal policy in many European countries, ignores: a) the need for investment in Europe’s infrastructure, and b) the opportunities of cheap funding for sovereigns in the current low interest rate environment.

In contrast, the Chinese government has put a particular emphasis on infrastructure investments. Although China could face economic challenges for many years, it has long understood the value of infrastructure investments for short-term economic development through significant fiscal spending, as well as a prerequisite for long-term economic prosperity.

From 1992 to 2011, China spent on average 8.5 percent of its GDP on infrastructure projects, overshooting the necessary amount argued by some. For the same period, the EU invested 2.6 percent of GDP, a figure which has since dropped to 0.5 percent of GDP. China’s approach has significantly contributed to the country’s continuous double-digit GDP growth for the past 30 years. The current situation, in which China continuously invests in its own infrastructure and increasingly those of other countries, appears almost comical compared to a European community that – while advising developing nations on economic development – has seemingly forgotten about its own needs.

China’s global infrastructure efforts

Currently, China acts as global promoter of infrastructure developments not only within its own territory, but also the wider APAC region, Central Asia, South America, and on the African continent. The Chinese government has launched initiatives and institutions to this end, such as “One Belt, One Road” (OBOR) and the Asian Infrastructure Investment Bank (AIIB).

In addition, China has started to build strategic partnerships with various European countries. Its strategic vision for OBOR not only entails upgrading the infrastructure of China’s direct neighbours, but also enhanced transportation routes reaching deep into Europe. Whereas last year Shaohua Yan concluded that there was “little serious research in European academia on the OBOR initiative, nor any real discussion at the official level,” today a number of countries, especially in Central and Eastern Europe (CEE), have welcomed Chinese capital as part of the OBOR initiative.

However, the relationships, frameworks, and understanding of China as a strategic partner, remain ambiguous across Europe. With CEE countries, China has engaged in the 16+1 Cooperation Framework, which serves as a platform for fostering Chinese-funded infrastructure projects. While regular multilateral meetings are held, investment deals are signed on a bilateral basis. Several participating countries, such as Hungary and Poland, have signed MoUs with China on its OBOR initiative, although these MoUs seem to lack substance and tangible outcomes.

Under its OBOR initiative, China also engages multinational European institutions such as the EBRD via the AIIB and its Silk Road Fund. The Chinese government has furthermore announced that it will contribute to the European Fund for Strategic Investment (EFSI), designated for projects in the EU. This cooperation between the EU and China is, for instance, coordinated through the Connectivity Platform, launched in 2015.

Bilateral channels of cooperation

In addition to multilateral initiatives, China explores strategic infrastructure partnerships with European countries bilaterally. In 2015, China and the UK signed a “UK China Infrastructure Alliance” memorandum. Several full-time resources on diplomatic level have recently been allocated for this purpose. The UK supports the Infrastructure Alliance by training Chinese infrastructure investors in the UK, organising public-private partnership training programs in China, and facilitating third-country collaboration.

Theresa May’s recent comments on plans to significantly increase the government’s infrastructure spending demonstrates the UK’s strong motivation to foster these investments. Her commitment to Hinkley Point C is another example of such cooperation in energy infrastructure. Overall it can be argued that the UK’s bilateral relationship with China, including the creation of political and business frameworks, serves as a complementary and beneficial channel for cross-border infrastructure investments. Unfortunately, most Western European countries have not engaged with China as proactively as the UK, although this could help bridge their evident infrastructure gap.

To date, the UK attracts the largest share of Chinese FDI in Europe, trailed by Germany, which sits below the European average when it comes to investments in transport and infrastructure. In Germany, several recent projects with Chinese investors, mainly around German airports (Frankfurt-Hahn, Lübeck, and Parchim), have run into difficulties. Whereas Chinese investors had big plans to transform the regional airport of Lübeck into a hub for aviation training, and aimed to use Parchim International as a tourism hub for flights to and from China, after several years the projects failed or struggled to reach the ambitious goals of their investors. In June this year, the government of the German state Rhineland-Palatinate aimed to sell Frankfurt-Hahn airport to a Chinese investor. However, payments were delayed and the deal was ultimately called off.

Besides shortcomings in risk assessment on the German side, another conclusion is that Chinese investors may not be sufficiently well-informed about the German investment and regulatory environment and vice versa. Initiatives such as the UK’s Infrastructure Alliance could prove valuable in this regard. In the German case, a similar framework might be developed with Germany Trade and Invest (GTAI), the national economic development agency.

Coordination across the continent

These bilateral initiatives can only be a start. Investment promotion needs to be better coordinated across all EU member states, in particular for trans-European and cross-border projects. Chinese investments into Europe are growing rapidly, but have shown few concrete outcomes in the infrastructure sector. Especially due to the ongoing privatization trend of infrastructure projects across Europe, including in many Western European countries, the number of private Chinese investors is rapidly increasing.

The significance of high-level political frameworks as a foundation for economic and infrastructure cooperation is not to be underestimated in the Chinese context. Infrastructure projects have long planning phases, and therefore patience and commitment to further framework-building is key. More Western European countries should engage in bilateral talks with China on these issues, taking the UK’s Infrastructure Alliance as a template.

Forums that focus on particular investment environments at a national level can provide Chinese investors with the necessary understanding of local rules, requirements, and regulations, thereby mitigating the danger of setbacks, such as those experienced in Germany. Whereas cooperation on a European level through the above-mentioned multilateral agreements is important, it lacks the granularity and specificity many investors require.

It is therefore paramount that European governments become more proactive in targeting foreign investment, in order to attract and shape valuable investment projects in their countries and to bridge the infrastructure gap in Europe.

Allgemein, PRIMO

PRIMO Life: Working with Jaguar Land Rover

As part of my training within the PRIMO network, I completed a secondment with PRIMO’s private partner Jaguar Land Rover (JLR) from December 2015-February 2016. The study I conducted during this time for JLR looks at regional trade agreements and how these might affect the business strategies of globally operating businesses like JLR. Due to my dissertation topic, which focuses on trade and investment negotiations between the EU and China, I was familiar with the academic literature on trade regimes and had interviewed many policy-makers in order to understand the policy-making processes involved in negotiating trade agreements. To understand and learn about the considerations of and affects on a globally operating business was a great addition.

During the project I was mainly based in Brussels, working closely with JLR’s government affairs department. In Brussels I had the opportunity to meet with representatives from the car industry, business associations, and policy-makers involved in the negotiations of trade agreements. In January, JLR invited us to their headquarters in the UK to meet with different departments and learn more about how the business operates. We thus met with representatives from a variety of business areas, from regulatory and homologation experts over business expansion to economists. Finally, we had the opportunity to present the results of our research to JLR managers. The meetings were tremendously helpful to understand how JLR as a business operates, what information the business actually needs and how it must be presented in order to be understandable and useful– to be sure, very different than in academic settings. We were also invited to tour one of the factory sites. Even though this unfortunately did not include driving one of the new sports cars, we were able watch the whole manufacturing process, which was quite fascinating.

As this was my first experience working with a globally operating business, I was able to gain valuable insights for my professional future. Of course, I learned a lot about the automotive industry in general and JLR in particular. In addition, it was great to see robots building cars, and to learn how and in what ways research skills can be useful for a business, and to understand the difference between how scholars in International Relations discuss trade regimes in contrast to how these trade regimes impact companies in practice.

Allgemein, Young China Watchers

Market Economy Status for China: Arguments from Brussels and Beijing

[This article was first published on Young China Watcher’s blog]

By: Insa Ewert and Jan Philipp Pöter

This past week in July, the 18th EU-China Summit was held in Beijing. The summit convenes biannually, alternating between Brussels and Beijing, and guides the relationship between the EU and China at the highest level. The political event is accompanied by an EU-China Business Summit, underlining the importance of business and economic factors to these summits. Representatives of the EU Institutions as well as the Chinese government, such as Presidents Jean-Claude Juncker and Donald Tusk, as well as Premier Li Keqiang, attended the meeting and discussed issues on the EU-China agenda.

Topics that currently dominate the agenda include the implications of the recent UK referendum on trade and investment relations, as well as the question of whether or not China should be granted Market Economy Status (MES) by the EU. The latter has been the subject of vigorous debates for the past months, with a decision due by the end of the year. As the EU-China Summit shapes further debate on the issue, it is the right time for an analysis of the arguments around MES. Taking into account the differences in trade relations between the individual EU member states and China, we argue that this question is largely a political one, despite being framed as a technical or economic issue.

The significance of this question is undisputed. China is the EU’s second-largest trading partner after the U.S., with a trade volume of €520 billion in 2015. Its share of trade with the EU has more than doubled from 7 percent in 2002 to 15 percent in 2015.

The current debate addresses two points: the definition of MES; and the implications of the expiry of Article 15 (a)(ii) of China’s accession protocol to the World Trade Organization (WTO). On the one hand, no universal definition for MES exists, as the example of Russia shows[i], and China’s accession protocol to the WTO does not explicitly mention MES. On the other hand, the importance of the expiry of this subparagraph lies in the WTO’s treatment of China in anti-dumping investigations after December 2016. Currently, the 52 anti-dumping measures in force cover a number of European industries, in particular steel, ceramics, and aluminum. These measures would have to follow different rules and stricter employment criteria once China is granted MES.

EU decision-makers and institutions, however, are divided on how to cope with these issues. The most salient division can be found between the Member States. However, their positions cannot be explained by a purely economic analysis of their trade relations with China. Rather, the importance of Chinese economic diplomacy and positive long-term relationships need to be considered:

  • For instance, Germany has a very strong manufacturing base and was, next to Finland, the only EU country with a trade surplus with China. Although many of its industries, such as steel, are very vocal in opposing MES for China, Chancellor Angela Merkel publicly positioned herself, in principle, in favor of China’s MES in October 2015.
  • The UK, having a larger trade deficit with China and a focus on Chinese FDI rather than trade, has traditionally been a strong advocate for trade liberalization and a supporter of China within the EU. Despite being in favour of granting China MES, Germany and the UK are potential losers in that scenario, according to a prominent study by the Economic Policy Institute (EPI).
  • France and Italy, also cited as losers in the EPI study and running comparable trade deficits with China in absolute terms to the UK, come to different conclusions. France, with a trade deficit vis-a-vis China of around €10 billion and exporting less than a third of Germany’s volume, has refrained from taking a position on China’s MES.
  • Finally, Italy, running a trade deficit vis-a-vis China of around €18 billion, strongly opposes granting China MES.

Taking into account the EU’s cumulative trade relationships is therefore insufficient. Instead, Germany and the UK’s efforts in promoting a long-term strategy towards China, combining bilateral trade, investments, and long-term positive economic relations, seem to play a significant role.

Jean-Claude Juncker, President of the European Commission; Xi Jinping, President of China;  Donald Tusk, President of the European Council. Credit: The European Union.

Further frictions exist between the European Institutions themselves. There is consensus that China does not fulfill the five relevant EU criteria for MES[i], and by now, there also seems to be a consensus that the expiration of subparagraph (a)(ii) does not result in an automatic granting of MES to China. However, it remains to be seen if and how the EU will: a) grant MES to China; and b) modernize its trade defense legislation in order to protect its industries from Chinese dumping. At the EU-China Summit in Beijing, Juncker explicitly linked China’s overcapacities in steel production to the question of MES. Whereas the Commission’s legal service issued an internal analysis that suggested China should be granted MES, the European Parliament recently issued a non-legislative resolution calling for China to fulfill the five criteria for MES and thereby denying any automatic applicability by December 2016.

China has been pursuing MES predominantly on a legal basis, relying almost exclusively on its WTO accession protocol. Since EU member states are divided, the December 2016 deadline raises the question of what strategies China might pursue.

To date, China has pursued four approaches. Under EU law, China cooperated in investigations that assessed its progress toward obtaining MES in 2004, 2008, 2010, and 2011, after which China ceased to cooperate. Second, Premier Wen Jiabao publicly mentioned in September 2011 that the EU could grant China early MES in exchange for further support in bailing out the European economy. However, President Xi Jinping has been more reserved. Third, at a WTO meeting in late 2015, China warned that it would take WTO action against countries that refuse to acknowledge China as a market economy after December 2016. Finally, in pursuing its goal, the Chinese approach seems to be centered on lobbying rather than a negotiation process.

Some Europeans fear that China will retaliate if it does not get MES. China pledged to contribute to the European Fund for Strategic Investments (EFSI) and is currently deliberating the size of its contribution. It could use this as leverage to pressure the Commission to propose granting MES. Second, China could close further parts of its domestic market to foreign competition or enact anti-competitive measures to the same effect. Third, China could employ selective pressure— against specific industries, individual governments, or by using its investments in European companies—to force targets to lobby on its behalf. Although these are only options, the second and third approaches contradict WTO law and go against the spirit of international economic cooperation.

It is not in China’s interest to retaliate or exert pressure on the EU. Contrary to the infamous solar panels case in 2012, in which China launched investigations into European products, MES concerns many industries and involves the entire EU. Where would it begin or end? Given that 1.38 percent of EU imports from China are subject to anti-dumping, the potential costs of deploying economic pressure across the continent would far outstrip the gains of MES, damaging EU-China relations in the process. Second, since joining the WTO, China’s overall trade has soared despite its non-market economy (NME) status, indicating that MES is not an acute issue for China. Third, retaliatory moves by China would further undermine European investors’ confidence in China in the midst of its economic slowdown.

Considering the above, neither economic nor legal arguments give a clear indication of whether China should be granted MES in December 2016 and the probability of China retaliating—resulting in a ‘trade war’—remains low. Hence, the decision is particularly political when it comes to weighing the possible consequences of the overall relationship of EU states with China and other important partners. After all, economic diplomacy is China’s trademark for engaging with the international community. To what extent the EU understands the importance of this Chinese trait and factors it into its decision-making processes remains to be seen.

There are however several aspects that weigh upon the EU’s decision. First, the indecisiveness of the EU Institutions might have grave consequences for the outcome of the decision. Making use of existing cleavages, China’s lobbying of individual member states is much more effective if there is no clear position from Brussels. Second, the debate reflects more general difficulties in EU decision-making, especially regarding community competences. Third, the decision taken by the EU will send a message about its reliability and legal compliance in international regimes. All of this will inform and impact the relationship of the EU with its partners. While denying China MES may negatively impact the negotiations for the EU-China Bilateral Investment Treaty, granting MES may provoke discontent among other trading partners with whom the EU is currently negotiating agreements, such as the US or Japan. Currently, the Commission is finalizing an impact assessment and expected to present a formal proposal by September 2016. Not long after is the key date of 11 December, with tensions sure to increase ahead of the final decision.

This article is based on “Economics, Law and Politics: The Divisive Question of China’s Market Economy Status” by Insa Ewert, Maurice Fermont, and Jan Philipp Pöter, published in the EU-China Observer 1/2016.

[i] Russia was recognized as a market economy by the EU in 2002. However, at that time Russia was not a member of the WTO. The EU, in parallel to formal recognition as market economy, put in place legal mechanisms to disregard domestic prices and construct the normal value “in particular market situations,” thereby preserving its abilities in trade defense.

[i] The criteria for MES in the EU are: 1) a low degree of government influence in the allocation of resources and in decisions of enterprises; (2) an absence of distortion in the operation of the privatized economy; (3) the effective implementation of company law with adequate corporate governance rules; (4) effective legal framework for the conduct of business and proper functioning of a free-market economy (including intellectual property rights, bankruptcy laws,…); and (5) the existence of a genuine financial sector. In 2011, in the latest review by the European Commission, China only fulfilled one out of the five criteria.

Allgemein, Young China Watchers

Brexit: “Lose-Lose” Outcomes for China’s Relations with the UK and EU

[This article was first published on Young China Watcher’s blog]

By: Insa Ewert and Jan Philipp Pöter

The outcome of the UK referendum on 23 June 2016—a decision to leave the European Union by 51.9 percent to 48.1 percent—not only triggered political turmoil within the UK and the EU, but also had significant effects on financial markets globally. At this point, uncertainties surround the question of whether Article 50 of the Lisbon Treaty, initiating the UK’s exit negotiations, will be invoked, as well as models for a UK/EU trade deal. Besides these considerations, there are significant uncertainties around the UK’s bilateral and multilateral relationships. In this article, we examine the potential impacts of Brexit on UK-China and EU-China relations—assuming significant negative effects on UK’s access to the EU single market.

The forecasted economic impacts for Brexit by organizations like the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) are severe. Especially for the UK-China relationship, a “lose-lose” outcome has been predicted. Hence, Beijing’s political leaders, among them President Xi Jinping and Premier Li Keqiang, have voiced their preference for “Remain.”

In the past decade, the UK and China mutually invested in an ever-closer multidimensional relationship, including strengthened political, economic, and trade ties. Leaders on both sides referred to this special relationship as entering a “golden era,” with now-beleaguered Chancellor George Osborne nominating the UK as China’s “best partner in the West.” The UK successfully focused on attracting investments and developing London’s financial center into the world’s second largest RMB clearing hub. The UK in many ways functions as an entry point and stepping stone for China to the EU, economically and politically. As a strong advocate for China within the EU, it was the first member state to apply for membership in the Asian International Infrastructure Bank (AIIB), despite opposition from the U.S., and it has supported  within the EU.

Prime Minister David Cameron meets with President Xi Jinping on a trade mission in Beijing in 2013. Flickr / Number 10.

Regarding economic relations, it is necessary to distinguish between two components: i) UK-specific investments and trade; and ii) EU-relevant investments and trade, e.g. those relying on access to the European market through the UK. With its 64 million people and $2.8 trillion GDP, the UK is Europe’s second-largest economy, constituting a substantial domestic market for investments. The UK is currently the largest recipient of Chinese foreign direct investment (FDI) in Europe, demonstrated by large Chinese-funded infrastructure projects such as the nuclear power plant Hinkley Point C in Somerset and the HS2 rail link. The relevance of the UK market for Chinese investments has grown and will sustain, although investment flows will strongly depend on the UK’s post-EU economic outlook.

However, investments with a primary focus on the UK are only one part of this story. All trade and investments in the UK that aim to profit from its single-market access are likely to diminish in the short-term, and only regain momentum if a favorable deal with Brussels materializes. Negative consequences will likely impact a number of projects envisaged at the UK-China Economic and Financial Dialogue in September 2015, such as those that address the distribution of financial products in the EU and assume the single market’s “passporting” rights for financial services.

If the UK left the EU, a new UK-China trade agreement may have to be negotiated bilaterally, otherwise the relationship would be governed by the less preferential WTO framework. The timing around this is a huge uncertainty, with an immediate impact on long-term trade and investment decisions. With trade and investment between the UK and the EU likely to decrease, the relative importance of Chinese investment and trade rises. A quick and comprehensive trade agreement shortly after Brexit will therefore be key.

Increasing the UK’s dependence on China might, however, prove dangerous if the Chinese economy has a hard landing ahead, as Damian Tobin asserts in this YCW Conversation. In addition, not everyone in the UK administration has been content with the current strategy towards China. A sea change in public policy—in favor of more nationalistic voters—could imply a more cautious approach.

European Parliament President Martin Schulz meets President Xi Jinping in Beijing in 2014. Flickr / European Union 2014 - European Parliament.

The view from Beijing is of a less important UK, having lost access to the EU’s single market and, concomitantly, its bargaining power for China in EU forums. The threat of secession movements within the UK (e.g. Scotland) sharpens this decline in relative importance—and could trigger significant repercussions from China in light of its own domestic territorial disputes.

Post-Brexit, the EU will also look less muscular to China without the UK as a counterbalance to the U.S. in a multipolar world. Having lost one of its biggest allies around the EU table, it may refocus on other European partners. Due to its historically strong trade relationship with China, Germany (accounting for 40 percent of all EU-China trade) might profit from a weakened UK-China relationship. Alternatively, and in light of China’s ongoing investments in its One Belt One Road (OBOR) initiative in Eastern Europe, China may turn to Eastern European member states instead.

Finally, Brexit also impacts China domestically. One pre-referendum comment indicated that the referendum might undermine Xi’s leadership due to his embrace of the UK. In contrast, it could be grist to the mills of the Chinese Communist Party’s narrative about the inadequacies of the popular vote. In addition, if the RMB emerges relatively stronger than other currencies such as the Euro, this might erode China’s export competitiveness and negatively affect its trade with the EU. While this serves the administration an opportunity to further devaluate the Yuan, it has already reached a six-year low to the dollar, making China’s currency stability a particularly difficult task.

China-watchers should prepare for a noticeable shift in its relations with the UK and the EU. Whereas the UK is destined to be the single biggest loser (economically and politically), should Brexit go ahead then China and the EU will face significant changes to their relative positions. While the UK and the EU would both lose collective bargaining power vis-à-vis China, Beijing will need to rethink its strategic approach and partnerships towards the EU as a whole, as well as determine its key allies going forward. Two weeks after the vote, uncertainties about Brexit remain high, demanding a close eye on developments in the coming months. Once the road ahead becomes clearer, we can reassess the links between Beijing, London, and Brussels.


China’s challenges

China’s biggest challenge is not one of solely domestic challenges or international scope, but one that combines both levels: China’s janus-faced character.

China is made up of contrasts, among them its identity as a developing country versus great power aspirations; keeping a low profile in international relations despite its size, impact and assertiveness; its ‘peaceful rise’ versus status as Middle Kingdom; as well as between its self-description and outside perceptions. With China’s economic growth and progressing integration into the global order, the evolving discrepancies have increased and are now threatening China’s internal stability as well as its international credibility and aspirations. The challenge for the next five years is to bridge the gaps and solve the problems they entail. Two complementary arguments – i) a domestic perspective and ii) international perceptions – support this hypothesis.

On the one hand, numerous domestic challenges – social, demographic, environmental, economic or political – result to a large extent from China’s tremendous growth in the recent past. Despite this growth however, per-capita income and other wealth and status indicators remain low. The current economic downturn, the necessary transition from an export-led growth model to one based on domestic consumption; the rise of a middle-class craving for more than just jobs and calling attention to environmental disasters and repressive policies threaten China’s domestic stability. On the other hand, a number of factors not only facilitate China’s rise in the international world order but give it weight in international relations that can neither be denied by the Chinese nor any other actor in the international sphere. Among these are China’s immense population, its vast territory, its resource consumption, as well as its status as permanent UN Security Council member and nuclear power. However, the geo-political environment is rapidly departing from the previous unipolar order dominated by the influence of the `West’ and accelerated by China’s growing international role, i.e. as the biggest contributor of loans to developing countries and the establishment of new international institutions. As these developments will increase to enfold in the next five years, the described challenge will be crucial for China’s domestic and international role in the near future.

While a challenge of such dimensions will not be completely resolved within five years, certain measures can be taken to support a feasible solution.

First, China has reciprocal relationships with many other (state and non-state) actors in today’s interconnected and interdependent world. Hence, the persistence and reinforcement of existing misperceptions held by China’s counterparts in academia, media and popular opinion are harmful. Therefore, the Chinese government should be as clear and specific on its goals and actions as the respective policy field allows. Second, China’s argument of indigenous thinking can only be valid to a certain extent. Instead of dismissing non-Chinese from the outset as not being able to understand indigenous ideas and mentality, the Chinese government has to increase dialogue to clarify its concepts and ways of thinking and acting. Third, to the extent that China is integrating into the world order, China should clarify its contributions to global public goods and acceptable conduct, thereby providing grounds for constructive negotiations. Finally, these suggestions will only bear fruit, if they are reciprocated and accepted by China’s counterparts. In allowing for greater transparency not only can China be better understood by other actors but it would allow China to focus on its domestic challenges while maintaining its position as ‘great power’ in the global world order.