POLICY PAPER

China's influence in Europe

Further authors: Benjamin Herscovitch, Dániel Mikecz, Filip Šebok, Sascha Tamm, Plamen Tonchev, Renaldas Vaisbrodas, Jan Weidenfeld

The beginning of Russia's invasion of Ukraine on the 24th of February marked a deep break for the EU. Questions concerning Europe‘s self-image as a voluntary alliance of nation states, its ability to defend itself and the protection though NATO as well as the values for which it stands are further tested by refugees coming to Europe from Ukraine.  The democracies of the European Union are vulnerable and their reaction to Putins war are carefully watched. Authoritarian states, such as China, predict Europe’s decline and emphasise their own superiority over the "Western systems". However, forms of influence and violence stemming from systemic rivals  vary.

This policy paper takes a look at the means that China uses to weaken the ability of individual states and thus the EU as a whole to act. At the same time, it evaluates various strategies used in dealing with economic or political coercion exerted by China. It is aimed at readers who follow China's multifaceted engagement from the perspective of academia. The selection of countries looks beyond Europe: the USA, Australia and Taiwan all have their own stories to tell with regard to influence from China. Policy recommendations provide suggestions on how the EU can behave in its greatest crisis. The Chinese strategist Sun Tsu (544 - 496 BC) stated in his reflections on the art of war: "The art of war teaches us to rely not on the likelihood of the enemy not coming, but on our readiness to receive him.

Introduction – Xi has a Dream: China‘s Rise as a Geopolitical Power

It was in late 2012, when the then newly instated Secretary General of the Chinese Communist Party, Xi Jinping, coined the phrase of the “Chinese Dream” as the slogan for his upcoming time as leader of the PRC: “The Chinese Dream is the great rejuvenation of the Chinese nation”.

With this sentence, Xi links up to several narratives: there is the magic of the American Dream, the promise (and often the illusion) that everyone can get rich if only they work hard. Wealth and better living conditions – this is also what the CCP is promising their citizens. A promise upon which they are building their legitimacy, and on which they have delive- red: since Deng Xiaoping has started his Reform and Opening Policy, about 800 million people in China are no longer considered to be “extremely poor”, an unprecedented feat.

But the more relevant, and more illuminating link is this one: the phrase “Chinese Dream” links to a classic poem from the time of the Southern Song Dynasty (1127-1279), in which the Poet Zheng Sixiao mourns the weakness and ultimate demise of this particular imperial dynasty, as it was overrun by foreign (Mongolian) forces. He writes of his heart that is full of the “China Dream” of recapturing lost national greatness, prospe- rity, and stability.

China had once been a great power and a leader in science and technology as well as culture and discovery. The Chinese empire had developed the magnetic compass, gunpowder or paper hundreds and hundreds of years before Europe did. And even though this period of imperial splendour had passed long ago, it is still vivid in the collective Chinese memory. And it is being kept alive by Xi and the CPP, who are both often using “historical arguments”, particularly when it comes to issues of territory: Tibet and Taiwan for example are claimed on the basis of having been part of the Chinese empire before the “Century of Humiliation”, where foreign forces had occupied and colonised parts of China, such as Hong Kong and Qingdao by western powers, and Manchuria by the Japanese Empire.

And so Xi dreams of making China great again. When the People’s Republic was founded in 1949, what the CCP refers to as the „Century of Humiliation” came to an end. Since then, the PRC has – according to CCP’s narrative – been rising: it took over the Chinese seat in the United Nations and its Security Council in 19712, it has become an economic powerhouse, and has been updating its military capabilities since then. According to Xi’s plans, history should come “full circle” in 2049 when China is once again a formidable world power, a “rejuvenated nation”, with restored territorial integrity (Hongkong, Macao, Taiwan all parts of the PRC).

The CCP has been framing the PRC’s trajectory to Superpower status as benign and quintessentially peaceful, pointing out it’s doctrine of non-interference and pressing the point that the PRC never colonised any country.

But China’s non-interference is only true in the military sphere – if we don’t take into account its militia of fishing vessels, that are privately owned but are organized as a PLA auxiliary force and that have been known to occupy disputed reefs, e.g. in the Philippines. China’s rise has created a growing unease in many parts of the world – not just it’s direct neigh- bours. Chinese Military spending has almost doubled bet- ween 2011 and 2019, according to estimations of the Stockholm International Peace Research Institute SIPRI. In the same time, tensions in the South China Sea and across the Taiwan Strait have been increasing. Despite promises to the contrary, China has been militarizing the artificial islands they have created in the South China Sea. Beijing has built a military base in Djibouti in 2017 after denying such plans beforehand. The latest security agreement with the Solomon Islands give rise to speculation, that China might have similar plans here. But there have also been other developments, that gave rise to concern: large-scale infrastructure projects such as the Belt and Road Initiative and the Maritime Silkroad that have left countries in strategic locations, such as Pakistan (access to the Gulf of Oman) or Sri Lanka (position in the Indian Ocean) in considerable debt to China. The headquarter of the African Union in Addis Ababa – a gift of the PRC to the AU – was found to have been bugged by China and to be sending large volumes of data to Shanghai every night. Several countries in the EU have received significant Chinese investment, e.g. Hungary or Greece – and have since blocked measures on the EU level that would ne- gatively impact China.

While China has not been using traditional military force to expand its power, we can see clear instances where China uses political and economic coercion to reach its goals. This has led many counties to label China as a “systemic rival”. And that begs the question: what does China’s rise mean for the world? To that end, we have assembled a selection of case studies that examine instances of economic and poli- tical coercion, namely in Hungary, Greece, Germany, Czech Republic, Lithuania, Taiwan, Australia, USA and the EU.

And while all case studies come to their own specific conclusion, these two over-arching points that should be kept in mind when discussing the issue of China’s rise:

(1) Interest-driven politics is nothing per se reprehensible, but rather a normal political reality. All countries have interests that they pursue, and to claim otherwise would simply be naive. The critique is not about Chinese power extension itself, but rather about the way that China is using that power and the methods it employs to expand it. Because from an international perspective it IS relevant, whether a rising state is autocratic or if it is democratic, with a functioning system of checks and balances, rule of law and reasonable protection of human rights.

(2) While Chinese involvement is often opaque, the guiding strategy of this involvement is often very transparent and can be seen from the official documents, albeit in Chinese. The projects that are being carried out and what is happening, is often very intransparent and it is not clear what is happening and who is doing what. But what is usually very clear, is the goal behind it. There are enough documents in Chinese outlining the goal and strategy of a project, but they are written in Chinese because they are aimed at the Chinese bureaucracy and nomenclatura. It is vital that decisionmakers are aware of this, pay attention, take China by its word – and act accordingly.

Xi Jinping dreams the “China Dream” of prosperity, power and greatness. To achieve this, the PRC is looking to convert economic strength into political influence and military power, and in turn to become once again the centre of global and geopolitical power.

Anna Marti

Germany

China as Germany’s biggest trading partner but also as a competitor and rival

Over the course of four decades, close economic relations have become the defining feature of Germany-China relations. Ever since China opened up during the 1980s, German businesses have invested heavily in production facilities in China and in building market presence there, regularly making Germany a bigger provider of foreign direct investment (FDI) to China than all EU member states and even the United States. In light of deepening economic relations with China but persisting political differences, the notion of Wandel durch Handel became a lowest common denominator principle of German China policy during the administrations of Helmut Kohl (1982-1998), Gerhard Schröder (1998-2005), and (much of that of) Angela Merkel (2005-2021). A core tenet of this policy is that economic cooperation inevitably leads to political and economic liberalisation in China.

As Xi Jinping became leader of the Chinese Communist Party (CCP) in 2013 and political and economic reforms began to stall, most – but not all – senior government officials abandoned the notion that trade results in change. Nevertheless, well until the end of the 2010s, the Merkel adminis- tration continued to frame relations with China in predominately economic and industrial interest terms. This stance has been driven not least by the fact that China has been Germany’s biggest trading partner since 2015, with a total trade volume of EUR 245bn in 2021, and that the Chinese market has been vital to some key German industries, like automotive or chemicals.

China’s domestic political hardening and its more assertive geopolitical and geo-economic policies under Xi Jinping have prompted Germany to reevaluate its political and economic relations with China. China’s pursuit of ambitious outbound industrial policies from the mid-2010s onwards marked the starting point of Germany’s reappraisal of the relationship with China. High-profile cases of Chinese FDI, like the takeover of German robotics company KUKA, prompted public concern about the loss of German innovative technologies, knowledge, and talent to Chinese competitors. As China began to roll out its infrastructure foreign economic policy, the Belt and Road Initiative, German businesses and policy makers also became increasingly wary about (unfair) Chinese competition in third markets and waning Western global political influence.

The mighty German industry federation Bund der Industrie (BDI) galvanised the rethink in German China policy in January 2019 when it suggested that Germany should no longer see China as a partner first and foremost but also as a competitor and even as a systemic rival. As this tripartite approach also became the main building block of the EU’s new China policy in March 2019, it also became the principal framework for the conduct of German China policy. Framing China as a competitor and rival has aligned with the more critical stance towards China the wider German public has embraced in recent years. Specifically, Beijing’s infringement on the autonomy of Hong Kong and its human rights abuses in Xinjiang contributed to a considerable worsening of China’s public perception in Germany. Shortages of personal protective equipment and critical medical supplies during the Covid-19 pandemic also gave rise to a public debate in Germany about supply chain and economic dependencies on China. Germany’s more critical public sentiment towards China is likely to be further spurred by China’s strategic part- nership with Russia and its support for the Russian war in Ukraine.31

A picture of Chinese influencing in Germany

While Germany has remained largely untouched by ‘official episodes’ of Chinese economic coercion, the threat of Chi- nese economic punishment has shaped German businesses' conduct for some time. Beijing sent a chilling signal during the second half of the 2010s when German corporates

with long-standing business track records in China, such as Audi (2017), Daimler (2018), or Leica (2019), became the targets of significant Chinese political and economic pressures over communication missteps in relation to issues sensitive to the CCP, like Taiwan, Tibet, or the Tiananmen protests. Anxious about similar negative repercussions that could affect their China business, German companies have tended to tread more carefully in relation to the CCP and Chinese core interests. With them generating an average 16 percent of their annual revenue in China, DAX companies have even cautioned the German government to voice public criticism regarding Hong Kong or Xinjiang.

On the back of more difficult political relations, China has gradually stepped up the threat of economic coercion against Germany. In late 2019, China’s ambassador to Germany, Wu Ken, threatened retaliation against Germany’s automotive industry, if Germany were to decide against allowing a bid by Huawei to build the country’s 5G infrastructure. In March 2021, Beijing orchestrated a targeted and impactful Chinese consumer boycott of European companies after the EU had sanctioned four Chinese local officials over human rights violations in Xinjiang. The boycott also affected German multinational Adidas. Adidas products disappeared from major Chinese e-commerce apps, and the company saw a considerable drop in its sales in China.

In late 2021, China stepped up economic coercion of German companies in an unprecedented way by not only targeting their China operations but also their third market business links. To punish EU member Lithuania for allowing Taiwan to upgrade its representation in Vilnius, China did not only restrict trade with Lithuania. More than a dozen German com- panies, mainly from the automotive and agricultural sectors and including major players like Continental, were threatened that they would lose access to the Chinese market if they continued trading with Lithuanian firms. Setting a worrisome precedent, the blackmailing over Lithuania seems to have confirmed a longheld fear of German companies that in the future Beijing might seek ways to force German corporates to stop dealing with entities in other countries whose relations with China deteriorate.

China’s growing exertion of economic pressure against German businesses is part of a wider picture of Chinese political influencing in Germany that has emerged in recent years. Like other EU member states, Germany has been exposed to the full spectrum of established Chinese political influencing activities in Europe. This has involved the capture of political and business elites, including former German minis- ters; shaping media coverage of China and public opinion through paid-for content in mainstream media; attempts to put German journalists on the payroll of the Chinese embassy; and the pressuring of civil society representatives and academics, including through imposing sanctions. Lately, Chinese political coercion on the sub-national level has also attracted greater scrutin as has China’s evolving role in spreading disinformation through social media.

The EU’s anti-coercion instrument and difficulties in its introduction

Despite increased threats of falling victim to episodes of Chinese economic coercion, German multinationals have doubled down on what they consider unparalleled growth and innovation opportunities in the Chinese market. Rising political risks in Germany-China relations, global decoupling dynamics, and Chinese policies aimed at increasing economic self-reliance are likely to further complicate the business environment for German companies in China. They will also be exposed to more competition from Chinese companies both in China and in global markets. Over the last two years, these developments have prompted many German businesses to reassess their China strategies, and some have sought to diversify their markets and supply chains. However, the ma- jority of German multinationals are not reconsidering their presence in China but are doubling down on investments and R&D in China, localising entire production and value chains to bulletproof their continued presence.

Concerns over economic overdependence on China have become commonplace in Germany’s policy debates on China, but tangible action has been limited. Several German ministries have encouraged German businesses to diversify markets and supply chains. Even the powerful Asia-Pacific Committee of German Businesses (APA) has called on German companies to diversify supply chains. The 2020 Asia-Pacific guidelines of the German Foreign Office call for the creation of framework conditions that give German companies better access to Indo-Pacific markets other than China. However, in practice, the German government has done little to support German companies in this endeavour. It remains to be seen whether this will change under the new German government headed by Olaf Scholz, which has launched a national security strategy process that will be followed by the formulation of a new China strategy. Recent non-public Foreign Office input into the new China strategy, the drafting of which will also be led by the Foreign Office, suggests that Germany might critically reassess policies geared at promoting closer economic cooperation between Germany and China.

In the meantime, Germany supports the expansion of the EU’s toolbox against economic coercion and specifically the introduction of the EU’s anti-coercion instrument (ACI). Presented by the European Commission in December 2021 and currently subject to legislative negotiations among EU member states, the ACI is meant to give the EU the legal tools necessary to respond to Chinese and other third-country economic coercion, including by imposing restrictions on financial services, trade, and investments. However, at least initially, the ACI is unlikely to deter Chinese coercive behaviour, especially in response to actions that are perceived by Beijing as threatening core interests, as the EU will first need to build up a track record of applying the tool and hence making it a credible deterrent. Also, the ACI will do little to mitigate the impact that coercive economic measures could have on businesses in Europe, as it offers no concrete support mechanisms to date. Given German corporate’s strong exposure to China this raises questions concerning the use- fulness of the tool to protect their interests.

Germany’s compartmentalising China policy

The absence of any major episodes of Chinese economic coercion against Germany to date is a result of past strategies to remove friction from political relations as well as Chinese dependence on Germany. As Germany has always had a marginal security profile in the Asia-pacific region, security considerations had little inhibitive effects on the evolution of German economic relations with China. At the same time the economic relationship was bolstered by densely institutionalised political relations between Berlin and Beijing, with Chi- na being one of a few countries in the world Germany has established regular cabinet-level government consultations with. Germany has also compartmentalised its China policy, shifting difficult issues from direct government interactions to the roughly 80 institutionalised dialogue formats, which Berlin and Beijing have established along the full spectrum of bilateral relations over time. On top of that, Berlin has long pursued a policy of raising difficult political and human rights in private. Instances of German public rebukes of China, like Angela Merkel welcoming the Dalai Lama in 2007 or former Foreign Minister Heiko Mass meeting with Joshua Wong in 2019, have been the exception rather than the norm.

Germany’s past ability to avoid episodes of Chinese economic coercion is also a result of China’s own dependence on Germany. The roughly 5,000 German companies that currently operate in China make an important contribution to Chinese economic growth, employing more than one million staff. While they are heavily concentrated on China’s booming east coast, they also create economic stimulus in struggling Chinese provinces, such as Liaoning and Jilin.51 German investments in China also often align with core Chinese policies on industrial upgrading, specifically regarding hightech manufacturing and R&D. China’s government also still views Germany as a partner that can aid technical governance reforms and institution building. Germany’s Industrie 4.0 industrial policy has served as a blueprint for the conception of China’s own industrial innovation strategies, like “Made in China 2025”, and China has started to emulate Germany’s SME landscape.

As Germany is in the process of developing and pursuing a more robust approach towards China, the litmus test for Germany in dealing with Chinese coercion is yet to come. For other EU member states, exposure to more substantial and frequent Chinese coercive economic episodes has already been a reality, as other contributions to this volume under- score. Given the political hardening in Beijing, even if puniti- ve economic measures also damage China’s own economy, the EU and Germany are likely to be increasingly exposed to a new quality of Chinese coercive measures. In light of the growing challenges on the horizon, shoring up the EU’s economic security toolbox and helping German companies di- versifying markets and supply chains must remain a priority. At the same time, the new German government must invest in more seamless institutional coordination around the economic security policy nexus among relevant ministries, the chancellery, and sub-national administrations, following the example of Japan, and in building economic security coalitions with like-minded countries.

Jan Weidenfeld

All sources can be found in the publication.