The looming superpower rivalry between the US and China has massive
implications for Germany and its European partners. While Donald Trump is
forcing Europeans to think outside the transatlantic box, it is Xi Jinping who is
posing more fundamental challenges. Time to balance China’s i

Bartsch, Bernhard

English

Archive of European Integration

The looming superpower rivalry between the US and China has massiveimplications for Germany and its European partners. While Donald Trump isforcing Europeans to think outside the transatlantic box, it is Xi Jinping who isposing more fundamental challenges. Time to balance China’s in uence in areasonable way may be running out.Three key areas to watch.Bernhard BartschRelevance03.05.2018, ASIA POLICY BRIEFBalancing China Bertelsmann StiftungThe looming rivalry between the US and China is changing the world order and hasmassive implications for Germany and its European partners. German chancellorAngela Merkel has reportedly named China’s rising in uence a key challenge inglobal affairs. Europe is trying to  nd strategies to balance Beijing’s growing power,without alienating it.FocusChinese investments in Europe have become the primary focus of efforts to controlChina’s in uence. EU-Lawmakers are currently  nalizing legislation that would givenational governments more discretion to review Chinese investments. However, thiscan at best be a defensive strategy and European initiatives to support innovationand a more pro-active industrial policy should be on the agenda as well.ForecastThe more assertive China acts on the world stage, the more pressure the US will feelto counter China’s rise. The Trump administration can be expected to continue irting with the danger of escalating one of the existing tensions, be it North Korea,the South China Sea or a trade war. But for the time being, China will not be provokedinto an open con ict and instead try to push its own agenda.InformationThe relationship between the US and China is an equation with many unknowns.China’s 19. Party Congress has once again demonstrated how little we know aboutthe inner workings of the Communist Party. Increasing restrictions on independentreporting and research in China make it dif cult to assess political, economic andsocial developments. Chaos in the Trump administration is greatly adding to theuncertainties in US-China relations.OptionsEuropean governments and companies need to develop strategies for cultivatinggood relations with the United States on the one side and China on the other – whileretaining strategic neutrality in both directions. The multilateral, rules-based worldorder that Europeans hope for is under pressure. For Europe to play any signi cantrole in the future world order, it has to act as one.Where would Germany stand if forced to choose sides in an open con ictbetween the US and China? This was a question Bertelsmann Stiftungdiscussed in spring 2017 with groups of decision makers from German andEuropean politics, business and think-tanks. Donald Trump had just beeninaugurated and it was easy to imagine how the US and China might steer intoa confrontation, be it political, economic, military or a mix of all.Working through various scenarios left participants alarmed as much asfrustrated. Obviously, any movement in Sino-American relations will alsoimpact Europe. However, there is little that Europe can do to in uence therelationship between the world's two most powerful nations, and it cannot relyon being able to maintain strategic neutrality towards both sides. Whilepolitical decision makers tended to stick to the transatlantic alliance, businessrepresentatives felt a stronger pull towards China with its still high economicgrowth. And while all agreed on a need for greater European unity, few werewilling to put a bet on it. If push comes to shove, will leaders in Europeancapitals be able to agree on a common position? Or will Europe get stuck in themiddle between the two superpowers?A year later, the course of events has shown that - unfortunately - thesequestions were not a vain intellectual exercise. The US and China are currentlygearing up for what could (or could not - who knows, these days?) escalate intoa global trade war, in which economically everyone would lose, even thoughsome may claim political victories.Nevertheless, from a European perspective, the situation looks grim, but nothopeless. For many, this past year of looming crisis has been a wake-up call.Across the board, leaders in politics and business have embarked on a processof reconsidering positions in a rapidly changing global environment. While it iscurrently the US that has its  nger on the trigger of disrupting the global order,China is driving the more fundamental long-term changes. And unlikeWashington, Beijing has recently sent clear signals about its plans for thecoming years.China has used every stage at its disposal to display its growing globalambitions, be it at the 19. Party Congress in late 2017, the National People'sCongress in March 2018, the Belt and Road Summit, the World InternetConference or most recently the Boao Forum. Under Xi Jinping, China  nallyappears to feel self-con dent enough to be a key player in re-de ning spheresof geopolitical in uence and the rules of global governance as well as becominga world leader in strategic industries and technologies.Many in the West see this as an open challenge, made possible sooner thanexpected by the global power vacuum or confusion that is the Trumpadministration. In rhetoric, China maintains its dedication to a multilateralworld order, continued reform and opening up of its markets and a level playing eld for businesses. But many of its actions now point in a different direction,as documented by numerous reports, such as from the European Chamber ofCommerce, various think-tanks and international media. China now seems tobe putting a strong bet on its ability to set its own standards, both economicallyand politically.Surely, China's outside projections may look more impressive than many of itsinternal realities. After all, China's domestic challenges remain enormous, bethey economic, social, environmental or even political. Nevertheless, Germanyand other European countries now acknowledge that a core belief about thedirection in which China is moving can no longer be upheld: China seems tohave left the course towards more openness, market oriented reforms andeventually maybe even some kind of political renewal. (While it may seemabsurd today that this was once expected, let's not forget that until a few yearsago, it was mainstream thinking even in Chinese policy circles. Xi Jinping's newera never was - or is - China's only option.).Instead of waiting for eventual convergence, German policy makers are nowgearing up for what some have begun to call a "competition of systems". Theterm may be overblown. After all, China is not exporting a political system, butbusiness opportunities and real-political options, many of which appearparticularly attractive to populist or autocratic leaders. But the challenge isobvious: Europe will have to  nd a way to balance China's in uence.Balancing China does not at all mean containing China, as some in Beijing fearand claim. China cannot and should not be contained. Building a strongpartnership with China and supporting the country's increasing integration intothe global system - both economically and politically - remains the primaryobjective. But Europe has a strong interest in  ghting against the erosion ofopen markets, a level playing  eld for businesses and a multilateral, rules-based global order. Without signi cant counter weight in the form of alliances,regulations and political or economic initiatives, it would be naïve to expectthat Germany or other European countries could remain at eye-level with anincreasingly assertive China. From a European perspective, balancing Chinamust be an attempt to keep the playing  eld as level as possible, with China asone of its most important players.German Chancellor Angela Merkel is reported to have named China's risingin uence as the key challenge in global affairs for her  nal years in of ce. It willbe a rough ride, with uncertain outcomes. But some contours how Germany andother European governments are trying to balance China are already emerging.Three areas that will be at the centre of attention are Chinese investments,China's cyber security policies and the Belt and Road Initiative. In any of theseareas, the time to come up with reasonable policies and agreements is limited.Chinese investmentsChinese investments in Europe have become the primary focus of efforts tocontrol China's in uence. Supporters of stricter investment screening claimthat the EU is currently allowing China to take its liberal system for a ride.Concerns include that Chinese investors may bene t from Chinese subsidiesthat put them at an unfair advantage, or that they may be acting on behalf ofBeijing to seek control of strategic technologies, such as the ten areas de nedin its "Made in China 2025" strategy. Adding to the tensions is a striking lack ofreciprocity, with China keeping many key sectors off limits for foreigninvestors.Mostly at the initiative of the German, French and Italian governments,lawmakers in Brussels are currently  nalizing legislation that will give nationalgovernments more discretion to review and authorize Chinese investments.Speci c measures, their effectiveness and broader implications are currentlytopic of heated debates.Whatever the technicalities designed to control investments, they will have tocater to differing political realities. Countries like Germany want to have thepossibility to protect Germany's high-tech industries from takeovers that seemto undermine the strength of the overall economy, while other countries, inparticular in Eastern Europe, are much keener to attract Chinese investment.In any case, investment controls can at best be a defensive strategy. After all,any investment regulation runs counter to European beliefs in free and openmarkets. Sceptics warn that attempts to "out-Chinese the Chinese" are doomedto fail. Monitoring Chinese investment  ows may be able to protect some keyindustries for a certain time. But it does little to reverse the trend that themost dynamic markets for many European companies are increasingly in Asia.Likewise, investment controls do not help much in promoting innovation.To actually balance China's - legitimate! - attempts at becoming a world leaderin strategic industries and controlling important value chains, Europeangovernments will therefore have to do much more in terms of supportinginnovation and possibly come up with a more pro-active industrial policy.Cyber SecurityXi Jinping has spent much of his  rst term as President (and General Secretaryof the Communist Party, arguably the more in uential of his positions) with re-af rming the power of the Communist Party. This included ensuring control ofall information  ows on the internet. New laws on what China calls "cybersecurity" now demand that foreign enterprises store all data from theiractivities in China on Chinese servers, where protection of sensitive datacannot be taken for granted.It were not the laws alone that concerned many European companies anddiplomats, but also the lack of transparency with which the new guidelineswere implemented. On April 1. China was set to enforce rules that forbid theuse of unregistered VPNs, a technology that allows users to access sites thatare blocked in China. VPNs are a means for many foreign companies in China tocommunicate with their headquarters without making it too easy for outsidersto hack into the conversation. They are also a way for foreigners (and manyChinese) to access services such as Google, Facebook, Twitter, Youtube orWhatsapp. Foreign companies complained that enacting these rules woulddramatically hurt their business. Despite months of intense diplomatic effortsto  nd a solution, China didn't offer much beyond VPN services from China'sstate owned telecom operators. These would be much more expensive thanexisting services by international providers and allow authorities to monitor alldata  ows.A month later, the VPN ban still remains to be fully enforced. For the time being,many of the channels that companies previously used remain accessible. Butmuch trust has been lost - and concerns are rising about Chinas next, evenbroader policy for enforcing the Party's control over its people. It has beenannounced that in 2020, the so-called social credit score system will be rolledout nationwide. While details of the system are still subject to muchspeculation, it can be expected to be dystopian by the standards of Westernsocieties that attribute high value to the rights of individuals. The reach of thesystem may extend well beyond China's borders.Whatever the limitations of China's control mechanisms, they probably won'tbe of technical nature. China appears to be on the forefront of developingdigital technologies and arti cial intelligence. European policy makers are onlybeginning to acknowledge that the regulatory challenges posed by the internetera come from China as much as from Silicon Valley. Europe's new laws on dataprotection are a positive  rst step (and in light of the latest data securityscandals not as bad an idea as its critics claim). Rewriting competition laws forthe digital age will be a next and even more ambitious initiative. With respectto China's ICT giants such as Huawei, Alibaba or Tencent, a next step might beto establish a rule of reciprocity, demanding that similar cyber security rules asin China might apply in Europe.Belt and Road InitiativeThe Belt and Road Initiative (BRI) is Xi Jinping's strategy for de ning China'srole on the global stage, promising investment and economic cooperation tobasically any country willing to subscribe to Beijing's grand vision. Over thelast years, winning support for BRI has been a main task for Chinese diplomatsaround the world.Despite initial support, European governments have growing reservations. InApril, a leaked report by European ambassadors in Beijing delivered a scathingcriticism of BRI. All European ambassadors - with the notable exception ofHungary - had signed the report. While acknowledging that the initiative hadthe potential to spread growth and prosperity, in reality it mainly servesChina's geopolitical interests.Germany's new coalition agreement therefore explicitly calls for a "Europeananswer" to China's so-called New Silkroad. This may include stronger Europeaninvestment and forming new alliances to counter China's geopolitical advances.At the same time, Germany will have to maintain a constructive dialogue withBeijing and avoid outright confrontation. After all, major German companieswith high stakes in the Chinese market are eager to demonstrate their supportfor Belt and Road (In fact, they have no other choice but to do so if they want tostay in business.).European diplomats will therefore have to perform the balancing act of takingChina up on its rhetoric to make the BRI a truly multilateral initiative and atthe same time establishing alternative alliances. One option could be reachingout to the so-called QUAD countries Japan, US, Australia and India. Similarly,the Japanese concept of a "Free and Open Indo-Paci c" could serve as acounter narrative to BRI by offering developing countries in Asia infrastructureand  nancing at better conditions. Forming such an alliance will not be easy, andfor the time being, Beijing has a long head start. But only with a crediblealternative may China be persuaded to level the playing  eld along the Beltand Road.Time for reasonable solutions may berunning outGermany and many other European economies have been major bene ciariesof China's economic rise. But the relationship is set to become more complex. Alot is at stake - for all sides.A look at the relationship between the US and China may give us someindication what may be coming. For American politicians, Republicans andDemocrats alike, China has become a key adversary. Using China as ascapegoat for America's woes has worked all too well.In Germany and most other European countries, the discussion is still muchmore sober. This is a good thing because it gives policy makers a chance tocome up with strategies and policies without the need to constantly signal howthey are being "tough on China". It would be desirable for things to stay thisway, but we shouldn't rely on it. Discussions will heat up. Concerns aboutChina's political in uence and so-called "sharp power", that have received a lotof attention in Australia and the US, are reaching Europe. They lead to anecessary, but also much more public and confrontational discourse.Likewise, high-pro le investments by Chinese companies in prominentEuropean companies may also have the potential to tip the scale. In Germany,the Chinese carmaker Geely recently made headlines by becoming the largestshareholder in Daimler. The announcement came as a surprise and kicked offspeculations about Geely's intentions. It is easy to make the case why it mightmake sense for Geely to take control of Daimler: getting access to all itstechnologies, know-how and one of the most valuable brands in the world.What would happen, if one of the brands that is a symbol of Germany'seconomic strength (and often enough: Germany's superiority complex) whereto become Chinese? In any case, it wouldn't make efforts to  nd reasonablesolutions for bringing the Chinese-German partnership back on track anyeasier.But even though bilateral partnerships will remain important: In the long run,European countries will only be able to balance China's in uence by actingtogether. Among the many good reasons for strengthening the EU, theimminent shifts in the global order may be among the most compelling. As awhole, Europe still is the world's largest economy and enjoys some of thehighest living standards on the planet. This makes for collective bargainingpower and attractiveness that no single country could bring to the table on itsown.China is well aware of this and tries to play European countries against eachother, e.g. by launching the 16+1 format. European diplomats have reacted bydemanding that China respect the "One Europe Principle" as much as it expectsother countries to respect the "One China Principle". This has raised eyebrowsin Beijing. It is up to Europe to show that this was not only a rhetorical move,but that its unity can be reckoned with.PROJECTSGermany and Asia

Balancing China. Bertelsmann Asia Policy Brief 03.05.2019

http://aei.pitt.edu/102420/1/ST_DA_Asia_Policy_Brief_Balancing_China_052018.pdf

Balancing China. Bertelsmann Asia Policy Brief 03.05.2019

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