Two speeches by the EU Commission President, Ursula Von de Leyen in March and April 2023, set out the EU’s policy towards China. In late April, the UK Foreign Secretary set out the UK’s emerging strategy and on the same day earlier this month, a UK Government Committee released a report which heavily criticized the UK’s dealings with China and the German Government released its long-awaited (and much-redrafted) China Strategy.
This blog looks at similarities between the three approaches and what conclusions we might draw about the implications.
EU China Strategy
The EU first labelled China a systemic rival in 2019. Since then, the European Commission has promoted the idea of “de-risking” the bloc’s most sensitive economic sectors to limit their dependence on China.
In a powerful speech in March 2023 Commission President Ursula Von der Leyen set out the need for the EU to develop its China Strategy. The new strategy was needed because of what she described as the hardening of China’s overall strategic posture, matched by human rights abuses at home and an increasingly assertive stance in Asia. She was careful to note that the EU’s position on China would depend on how China interacts with ‘Putin’s war’ and how China meets international human rights obligations. President Von der Leyen labelled as deliberate Chinese policies of disinformation and economic and trade coercion, saying they were used to target ‘countries to ensure they comply and conform’.
The tone of President Von der Leyen’s speech was set against the EU’s assessment that a newly assertive China was moving from an era of ‘reform and opening’ to one of ‘security and control’ whose purpose was ‘a systemic change of the international order [to place] China at its centre’. In her speech, The Commission President noted that ‘all companies in China…are…obliged … to assist state intelligence-gathering operations and to keep it secret’. President Von der Leyen concluded that Chinese focus on military, tech and economic security would increasingly trump the appeal of free markets and open trade.
However, President Von de Leyen made clear that the EU did not seek to ‘cut economic, societal, political or scientific ties’, but rather to ‘rebalance the relationship on the basis of transparency, predictability and reciprocity.’ Using language reminiscent of President Macron’s call for the EU to seek greater ‘strategic autonomy’, President Von der Leyen argued that the new relationship would require the EU’s economy and industry to be more competitive and resilient in the cyber and maritime, space and digital, defence, innovation, health, digital and clean-tech sectors. President Von der Leyen pointed to the Net-Zero Industry and the Critical Raw Materials Acts as examples of the EU’s determination to respond to Chinese domination of these critical sectors.
President Von de Leyen noted that the EU already had significant trade policy tools at its disposal – including on 5G, Foreign Direct Investment, export controls or Foreign Subsidies Regulation – but she argued that the risks posed by China meant the EU needed to make bolder, faster and more effective use of these measures. And that, in her view, the EU should be ready to consider new and more aggressive trade policies (for example, a targeted instrument on outbound investment) if they were necessary to protect critical sensitive high-tech areas sectors – including microelectronics, quantum computing, robotics, artificial intelligence and biotech.
Noting that the Commission will publish its Economic Security Strategy later this year, President Von der Leyen commented that the EU needed clear guidelines which would place the security interests of investments or exports above trade and economic exchange benefits and suggested the EU would consider mechanisms to prevent the use of European IP being used ‘to enhance the military and intelligence capabilities of systemic rivals’.
President Von de Leyen concluded with a call for collective action: ‘A strong European China policy relies on strong coordination between Member States and EU institutions and a willingness to avoid divide and conquer tactics’.
The Government knows it needs work out more clearly how to deal with China. PM Sunak defined China as an “epoch-defining challenge” and the Foreign Secretary Cleverly attempted to set out the basis of the UK’s China policy in his 25 April 2023 Mansion House Speech which focused on three broad themes:
- ‘engaging robustly and constructively’ with China to ‘manage risks and produce results’
- noting the UK would ‘ be unflinchingly realistic about its authoritarianism’; and
- underlining that the UK ‘ will always put our national security first’ .
Despite these attempts to elaborate a strategic response to China, the ISC Report characterized the last three decades of the UK’s policy towards China as short-termist and inconsistent, in stark contrast to China’s long-term strategic, whole-of-government, global approach (in some sectors, China’s strategic plan plots a path out to 2049). The report concluded that the speed of the transformation of China’s economic power and global presence had left the UK attempting to deal with China as an international partner and source of prosperity, when it should have been focused on the rise of China as an economic and security threat.
The Cameron-Osborne ‘Golden Era’ of UK-China cooperation reached its apogee with the 2015 State Visit as the UK sought to strengthen financial ties with China; sign up to China’s new infrastructure investment bank as a founding member; encourage Chinese investment in tertiary education; and encourage Chinese investment in the next generation of civil nuclear power plants in the UK. Since then the bilateral relationship has slowly gone into reverse and the Government has begun to prioritise security interests over economic ones. The 2021 National Security and Investment Act is part of the UK’s policy response – being used in 2022 to call in eight transactions involving Chinese-linked inward investment.
More broadly, the UK Government is beginning to recognize that Chinese investment in UK infrastructure, research, technology and academia has allowed China to gain technological dominance and to acquire intellectual property and data in the UK’s specialised industrial sectors, and there is currently no UK policy covering UK companies transferring technology to counterparts in China. These flaws in the UK policy response led the ISC to state “Without swift and decisive action, we are on a trajectory for the nightmare scenario where China steals blueprints, sets standards, and builds products, exerting political and economic influence at every step.”
Germany’s China Strategy
On the same day as the ISC released its report, the German Foreign Minister unveiled the country’s China Strategy. FM Baerbock noted that, while China remained a partner for Germany, its role as “systemic rival” was beginning to “dominate” as it became “more repressive internally and more aggressive externally”, adding “Germany has changed and so we have to change our China policy too.” Like the UK, the German Strategy notes the increasing Chinese influence in academic institutions; its cyber and espionage threat; and the efforts deployed by China to influence international relations to the benefit of its own interests and the interests of the Chinese Communist Party, with growing disregard for human rights.
The Strategy uses similar language to the UK Foreign Secretary in focusing on ‘de-risking’, rather than ‘de-coupling’. The emphasis the Strategy places on the aggressive diversification of supply chain in raw materials, suggests that the German government has learnt the lessons of the war in Ukraine which illustrated the dangers of over-dependence on foreign supply chains. This is particularly the case with regards to rare earth minerals (vital for construction of electric cars) where 98% of all European imports come from China.
The German Strategy imposes tight restrictions on investment and trade in a small number of technologies linked to national security (semiconductors; AI; green technologies; telecoms infrastructure; critical national infrastructure; and 5G mobile networks – although, given the grey area of dual-use goods, this may be difficult to police in practice). However, there is no indication that Germany will strengthen export controls or tighten outbound investment screening, preferring instead to warn German companies that, if they choose to depend heavily on the Chinese market, they must assume the financial risk themselves, rather than looking to the State to bail them out. Importantly, Germany commits to coordinating its China relationship more closely with the EU.
As with the UK, the difficulty will be in putting the Strategy into practice, not least given how interdependent the German and Chinese economies are – with bilateral trade reaching a new record of nearly €300 billion in 2022.
The similarity of the language used by the UK, the EU and Germany with its focus on de-risking, rather than de-coupling and calls for international coordination suggests some degree of alignment between the three.
All three strategies use language that signals a markedly hardened stance towards China based on the perception of China more as a threat and no longer as an untrammeled opportunity. All three place an increased emphasis in future dealings with China on national security, rather than economic benefit. And all three strategies place ‘strategic autonomy’ at their core with calls to diversify away from over-dependence on Chinese supply chains, amidst a recognition that China has deliberately built that reliance as a tool of international influence.
China is now too big to ignore, but as security and political tensions between China and Europe continue to increase, European nations are wrestling with the question of how best to strike a policy balance between protecting vital sectors and infrastructure and keeping trade and commercial relations flowing. As is often the case, how the policy intent translates into commercial practice remains to be seen – as it does, the relationship may become more volatile and the policy backdrop more dynamic.
It is, however, clear that, in considering inward and outward investment with China, European Governments will increasingly focus on (broadly-defined) national security considerations, rather than narrow economic benefit. A shift that companies will need to take into account as they evaluate economic exchange with China.