Europe and China
Europe in the world 2019
1. China’s power potential and the “Chinese Dream” of a “new era”
China is the rising great power: In 2015 it had a huge population of 1.397 million people with an average annual rate of population change of 0,54% between 2010 and 2015 (United Nations: World Population Prospects 2017 (1)). Its GDP amounts to 12,237 billion US dollar in 2017 (World Bank: GDP (current US$) 2017 (2)) with an annual growth rate of 6,90% in 2017, after a maximum of 14,23% in 2007 and then beginning to fall below the 10% rate (World Bank: GDP growth (annual %) 2017 (3)). Its military expenditures rise to 249,997 billion US dollar in 2018 (SIPRI: Military expenditure by country, in constant (2017) US$ m., 2019 (4)), representing 1,9% of its GDP (SIPRI: Military expenditure by country as percentage of gross domestic product, 2019 (5)). Its nuclear warheads are estimated at a total of 280 in January 2018 (SIPRI Yearbook 2018, 6. World nuclear forces (6)). As for its energy reserves, at the end of 2017 Chinas oil reserves represent 1,5% of world oil reserves and its natural gas reserves 2,8% (BP Statistical Review of World Energy, June 2018 (7)).
Thus, China meets all the prerequisites to be a great power. It has the largest population on the world with the Indian population almost as large as the Chinese one and approaching fast. In comparison to the EU, that’s almost three times as much. Its GDP is a bit lower than that of the US and the EU, but its growth rates, although lower than in the last years, are much higher. Its military expenditures are the second largest on the world, higher than those of the three major military powers in Europe together. Its number of nuclear warheads is low in comparison to the US and Russia, but reaches the level of France and the UK. Its low energy reserves make it dependent on energy supply from abroad.
As for China’s grand strategy that conducts the politics of the country, there is no such strategy but rather many smaller strategies in plural. Starting with the reform and opening-up policies of Deng Xiaoping at the end of the 1970s these strategies focused on the economic development of the country and, to reach this, the opening-up towards foreign relations and multilateral institutions. To not alarm others by China’s rise, Deng advocated to keep a low profile in international affairs. After the Cold War, and in response to a greater US military presence in Asia, a new security concept was introduced in China in 1997 that aimed at undermining this American military presence. Integrating itself increasingly into multilateral institutions, as for example the World Trade Organization (WTO) in 2001, and building relations with neighouring countries, as the Shanghai Cooperation Organization (SCO), also in 2001, China continued to rise economically, politically and militarily. To counter international concerns, in 2003 China stressed its peaceful rise, replacing the word “rise” one year later with “development”.
But with the rise of Xi Jinping, general secretary of the Communist Party since November 2012 and President of the People’s Republic of China since March 2013, this changed abruptly, as he spoke of the „Chinese Dream“ to ‘resurrect’ China’s ancient power. Rivaling with the US for global influence Xi Jinping unveiled in 2013 the „Belt and Road Initiative“ with the aim to revive the land and sea routes of the ancient Silk Road to link China to the European continent (Stanzel, Angela: China Analysis. Grand Designs: Does China Have a ‚Grand Strategy‘?, European Council on Foreign Relations, October 2017 (8)). At the same time China introduced a new geopolitical imperative that focuses on the protection of China's strategic trade routes, resources and markets from foreign interdiction. But with this new imperative it clashes mainly with two of the United States' key imperatives: the control of the world‘s oceans and the US' desire to prevent any potential challengers from rising (Baker, Rodger: Revisiting the Geopolitics of China, Stratfor Worldview, 15.03.2016 (9)).
In May 2015 Chinese Premier Li Keqiang issued the strategic plan “Made in
China 2025” (“Made in China 2025” plan unveiled to boost manufacturing. China
News Service, May 2015 (27)) with the aim “to comprehensively upgrade Chinese industry” by applying
the tools of information technology to production (Kennedy, Scott: Made in
China 2025, CSIS, 01.06.2015 (28)). Furthermore, the program aims to “increase the domestic content of core
materials to 40% by 2020 and 70% by 2025”, thus raising the presently low domestic
content for high-tech goods (Hsu, Sara: Foreign Firms Wary Of 'Made In China
2025,' But It May Be China's Best Chance At Innovation, Forbes, 10.03.2017 (29)). In 2017, at the 19th Chinese Communist Party Congress, where Xi consolidated his power, he showed again that the time of international restraint of Deng Xiaoping was over, stating that China would, at the end of a second development stage from 2035-2050, „become a global leader in terms of composite national strength and international influence.“ (Xi Jinping: Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era, 18.10.2017, p. 25 (10)).
2. The “New Silk Route” and massive investments as a challenge for Europe
As for the EU-China relationship, they are two of the three largest economies and traders in the world, with China being the EU's second-biggest trading partner and the EU being China's biggest one. Thus, in 2017 China imported goods from the EU of a value of 217 billion euro, what is share of 13% of its imports, and exported goods of a value of 332 billion euro to the EU, what represents a share of 16% of its exports. In the same year the EU imported goods of China of a value of 375 billion euro, a share of 20% of its imports, and exported goods of a value of 198 billion euro to the country, a share of 11% of its exports (European Commission and HR/VP: EU-China – A strategic outlook, Strasbourg, 12.03.2019 (11)). There exists a strategic partnership between both sides that is expressed in the EU-China 2020 Strategic Agenda for Cooperation of 2013 (EU-China 2020 Strategic Agenda for Cooperation (12)).
But the Chinese-European relations have changed in the last years as the Chinese foreign direct investment (FDI) in the EU increased by almost 50 times in only eight years, from less than $840 million in 2008 to a record high of $42 billion in 2016. Following a diversified strategy, the Chinese divide Europe into three distinct zones consisting of the west, the south, and the east. While there is a focus on capital investments in the core EU countries, in the periphery they concentrate on large infrastructure development projects. In the west, Chinese investors are interested in strategic assets and research and development networks, with a focus on the largest and wealthiest European countries. Thus, $70 billion were invested in the United Kingdom, $31 billion in Italy, $20 billion in Germany, and $13 billion in France, what is 75 percent of Chinese total investment in the EU market in 2017. In the south Chinese companies exploited the economic crisis and the large-scale privatization process and restructuring for their interests. Thus, in Italy, Chinese FDI has increased since 2014, to $5.7 billion. In Greece, a Chinese state-owned enterprise acquired a 67 percent stake in the port of Piraeus, and Portugal has become, after the financial crisis of 2010, the key recipient of Chinese investments, that is nearly 9 billion euros invested in a broad range of strategic assets. And in Central, Eastern, and Southeastern Europe, China is operating the “16+1” platform within the framework of the Belt and Road Initiative to develop transportation networks (Zeneli, Valbona: Mapping China's Investments in Europe, The Diplomat, 14.03.2019 (15)). Chinese investment peaked in Europe in the first half-year of 2017 at 53,9 billion US dollar, since then it decreased, reaching 9 billion US dollar in the first half-year of 2019. The reason is the “turbulent geopolitical backdrop” (“Chinese FDI into Europe slumps to four-year low, North America sees modest increase in H1 2019”, Baker McKenzie, 11.07.2019 (26)), the trade war with the US. Thus, this decrease of Chinese FDI, that is, buying up of European companies, is not due to a European reaction but could be temporarily.
As for the “Belt and Road Initiative” (BRI), that is also called the „One Belt, One Road Initiative", it is one major source of China’s rising influence within Europe. It comprises the “Silk Road Economic Belt” of six major land corridors across the Eurasian continent and the “21st Century Maritime Silk Road” that refers to a network of maritime trade routes connecting China with Africa and Europe. As European countries with which China cooperates within the framework of the Belt and Road Initiative, the „Belt and Road Portal“ lists the following country profiles: Italy, Malta, Cyprus, Luxembourg, Portugal, Greece, Bosnia and Herzegovina, Latvia, Albania, Estonia, Slovenia, Austria, Montenegro, Lithuania, Croatia, Czech Republic, Belarus, Hungary, Moldova, Macedonia, Bulgaria, Serbia, Slovakia, Poland, Romania and Ukraine (19).
Two of the aims of this initiative are the support of Chinese exports and the control of the logistics chains of China’s trade with Europe. The negotiations between China and Europe primarily occur in a bilateral framework with individual EU Member States instead of negotiations with the EU institutions. Since 2014 some of the member states and a number of Central and Eastern European non-EU countries have signed Memoranda of Understanding with China within the framework of the BRI. Cooperation of the EU with China to address reciprocity, a level-playing field and equal market access, among others, is only slowly emerging. As for the specific initiatives and projects, a European Parliament Study of January 2018 found that Chinese financial support occurs mainly through loans of its national financial institutions and investment in foreign businesses. In the EU „investments […] mainly concern transport nodes and take the form of equity/acquisition of shares in ports, railways and airports.“ Furthermore, „there is a concentration of investments at the borders of the EU, in particular in the Balkans as well as in central and eastern European countries“ (Steer Davies Gleave: The new Silk Route – opportunities and challenges for EU transport, European Parliament, Policy Department for Structural and Cohesion Policies, Brussels, 2018, p.16 (13)).
And it's in these central and eastern European countries where China’s influence is especially apparent as it competes there with EU funding for local projects (MERICS Interview: China’s Influence in Europe, China Digital Times, 06.06.2018 (16)). Thus, 16 Central and Eastern European countries participate in the „16+1 Format“ for the cooperation with China on the BRI: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Montenegro, Poland, Romania, Serbia, Slovakia, and Slovenia, with 11 of them being EU member states, four are EU candidate countries, and one is a potential candidate state. Since Greece’s joining in 2019 the group is the „17+1“ (Greece joins China's 16+1 initiative, Kathimerini English edition, 12.04.2019 (17)). As for the Chinese financial support for projects there, according to MERICS „Beijing has since 2013 (co-)financed now completed infrastructure projects in the 16+1 region to the tune of 715 million USD. More than 3 billion USD of Chinese financing is connected to projects currently under construction. For planned projects, the figure is either below 7 billion USD, or above 10 billion, depending upon what you count and whom you believe.“ (Eder, Thomas S.; Mardell, Jacob: Belt and Road reality check: How to assess China’s investment in Eastern Europe, Mercator Institute for China Studies, 10.07.2018 (18)).
But larger EU states are increasingly skeptical of bilateral negotiations with China, as this allows that country to dominate those negotiations, and prefer a coordinated EU approach, that is, as an equal power. Thus, the French President Emmanuel Macron invited German Chancellor Angela Merkel and European Commission President Jean-Claude Juncker to Paris on occasion of Xi Jinping’s state visit in March 2019. In April, Germany’s Economy Minister told the press from the Belt and Road Forum that large EU member states had “agreed” not to sign deals on a bilateral basis, but as a European bloc. (Le Corre, Philippe: On China's Expanding Influence in Europe and Eurasia, Carnegie Endowment for International Peace, 09.05.2019 (14))
A first reaction to this new European approach was the above-mentioned strategic outlook that the European Commission and the High Representative of the Union for Foreign Affairs and Security Policy presented March 2019. Thus, in this paper they find that „there is a growing appreciation in Europe that the balance of challenges and opportunities presented by China has shifted. In the last decade, China's economic power and political influence have grown with unprecedented scale and speed, reflecting its ambitions to become a leading global power” (p.1) Thus, “China has [...] increasingly become a strategic competitor for the EU while failing to reciprocate market access and maintain a level playing field" (p. 5). Addressing potential security risks for critical infrastructure and the technological base, the paper states: “Foreign investment in strategic sectors, acquisitions of critical assets, technologies and infrastructure in the EU, involvement in EU standard-setting and supply of critical equipment can pose risks to the EU’s security. This is particularly relevant for critical infrastructure, such as 5G networks that will be essential for our future and need to be fully secure” (p. 9).
Another consequence was the introduction of a centralized mechanism of FDI (foreign direct investments) screening and, at an EU-China summit in April 2019, a stern EU position regarding reciprocity with China, Chinese state subsidies and forced technology transfers.
3. Challenging Europe’s trade in the South China Sea
As for China as a challenge for Europe, the focus is on the Chinese investments on the continent and the “New Silk Route”. But an analysis of the CSIS China Power Project shows the importance of the sea: Thus, one third of global shipping transits the South China Sea, a sea that is especially important for the trade of and with China, Taiwan, Japan, and South Korea. In 2016, the value of the trade there was 215 billion US dollar for Germany, 124 billion US dollar for the United Kingdom, 83,5 billion US dollar for France and 70,5 billion US dollar for Italy. (China Power Team. "How much trade transits the South China Sea?" China Power. August 2, 2017. Updated October 27, 2017. Accessed June 16, 2019 (20)).
And it’s there, in the South China Sea where a new great conflict, or even a new cold war, could develop. Thus, China is claiming more than 80% of the resource-rich sea, is building artificial islands and has a strong military presence there. According to its Military Strategy of 2015, China’s military focus is shifting from the land to the sea: “The traditional mentality that land outweighs sea must be abandoned, and great importance has to be attached to managing the seas and oceans and protecting maritime rights and interests. It is necessary for China to develop a modern maritime military force structure commensurate with its national security and development interests, safeguard its national sovereignty and maritime rights and interests, protect the security of strategic SLOCs and overseas interests, and participate in international maritime cooperation, so as to provide strategic support for building itself into a maritime power.” (The State Council Information Office of the People’s Republic of China: China’s Military Strategy (2015), May 2015, p. 16 (23)).
As a consequence, China has modernized its navy what has resulted in a growth in fleet size and capabilities (China Power Team: "How is China modernizing its navy?" China Power. December 17, 2018. Updated January 9, 2019. Accessed June 19, 2019 (24)). All this had led to conflicting territorial claims between China the Philippines, Vietnam, Brunei, Taiwan and Malaysia. But the increasing Chinese military and economic influence in this busy sea route prompted the US to work to contain China’s rise in the region. So, they also send warships to the South China Sea to ensure free commercial activities (Sharma, Shubham: Is a cold war brewing in the South China Sea?, Asia Times, 05.06.2019 (22)).
As China is the EU’s second largest trading partner and the Association of Southeast Asian Nations (ASEAN) its third largest partner, peace, regional stability, and freedom of navigation in the South and East China Seas are of crucial importance for Europe. As the EU, except for the UK and France, lacks military power projection capabilities to safeguard its interest there, it is mainly an economic power that, in the case of the maritime security in East Asia, bases its politics on resolutions and declarations. As for the territorial claims in the South China Sea, the EU maintains a neutral position and supports a peaceful settlement of the maritime disputes in accordance with international law, notably the United Nations Convention on the Law of the Sea (UNCLOS). But there are many EU declarations and resolutions that criticize China´s actions in the South China Sea, above all the building of artificial islands and the militarization of the sea. But it also happens that the EU can’t speak with one voice because some 16+1 members block EU decisions that are critical of China. On the other hand, a positive element in favor of closer Chinese-EU relations can be found in the trade policies of US President Donald Trump: thus, both Brussels and Beijing agree on criticizing them. Besides these EU politics, France and the United Kingdom already have sent warships to the South China Sea to show presence and protect the freedom of navigation there along with the US (Gerstl, Alfred: The EU's interest and policy towards East Asia maritime security, Maritime Issues, 26.10.2018 (21)).
4. Conclusions
The consequences of China’s rise can also be felt in Europe: be it in regard to a level playing field, Chinese state subsidies, limited market access for European companies to the Chinese market and forced technology transfers to Chinese companies, or the fast rising investments in Europe. With these billions of US dollar China can exercise influence on the politics of European countries, above all on poorer countries that are in need of money. Making contracts on a bilateral basis with European countries give the Chinese the advantage: the negotiations take place then between a large China and a relatively small European country. Thus, the idea of some larger states to negotiate only as a European bloc goes in the right direction. Together the European countries are an equal power in comparison with China and thus can achieve better results than alone.
As far as our trade routes are concerned, currently it’s the important sea routes through the South China Sea that could become problematic if the also militarily rising China blocks the freedom of navigation. Here the Europeans are, despite of some British and French military presence, dependent on the US, that are also interested in keeping the sea routes open. To be independent, Europe would need more military power projection capabilities to safeguard its interest in the world. The common aircraft carrier, that the German possible future Chancellor Annegret Kramp-Karrenbauer proposed to French President Emmanuel Macron, could be a good beginning for this purpose (Kramp-Karrenbauer, Annegret: Europa richtig machen, 09.03.2019 (25)).
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