Gary J. Schmitt: Just before New Year’s, in the last days of Germany’s six-month presidency of the European Council, a major investment agreement was completed between the EU and China. Before we turn to possible problems with the agreement, I think it would be useful, for context, for you to spell out what proponents of the agreement say are the key arguments in its favor.
Reinhard Bütikofer: Proponents argue that this deal, called the Comprehensive Agreement on Investment (CAI), increases market access in China for European companies and creates a somewhat more level playing field for them. The most proudly heralded dimension of the deal concerns market access. European companies from different economic sectors are promised new opportunities, including the automotive industry. German automotive corporations have long sought a bigger role in the new energy vehicle sector. They are a major player in the combustion engine segment of the Chinese market. But in the electric vehicle sector their role is minor so far. As the technological transition is moving forward, it is of great interest to companies like Volkswagen whether they can modernize their foothold in the Chinese market. Additionally, other industries have also been promised more access. Even though these openings consist partly of recycled promises, are often conditional or are being counteracted by other measures of the Chinese government, most observers will concede that the deal will bring modest improvements. According to a new survey, 40 percent of respondents from German businesses expect better market access. In the financial sector European industry would get the same access as U.S. industry got with President Trump’s Phase 1 deal.
The Chinese have also agreed to a ratcheting clause foreclosing unilateral withdrawal from market openings that they had decreed unilaterally in the past. This can be of interest to companies that are wary of the new “dual circulation” strategy of Chinese economic development, through which the People’s Republic intends to reduce its dependence on foreign investment and foreign technology for its own development.
Overall, I would still say that the CAI proponents are putting a lot of lipstick on that pig.
GS: A quick follow up on that last point: What gives European officials confidence that they can actually trust the guarantees the Chinese are making?
RB: That’s a good question. I don’t know. I assume a strong Chinese motive for finally concluding the negotiations, which had lasted for about seven years, and for intensifying the economic relationship with the EU based on the interest in continued access to European technology and capital. For us that comes with the risk that European investors would put even more eggs into the Chinese basket. Dependency on the Chinese market provides Beijing with economic and political leverage. But, against the backdrop of U.S.-China rivalry, why would the Chinese Communist Party (CCP) leadership forgo that opportunity?
Clearly, there is China’s geopolitical strategy of seeking to divide the EU if it can and to drive a wedge between the United States and the EU. This strategy had been helped to some degree by the Trump administration. Its aggressive behavior vis-à-vis the EU created opportunities for China. As the incoming Biden Administration promised to rebuild cooperation and trust with U.S. allies, China decided to move fast in order to strike an EU deal before the transatlantic partners could begin charting a common approach.
EU leaders, in particular the German chancellor, pushed for rapid finalization of the investment negotiations once the Chinese started in December 2020 to make concessions long asked for by the European side. I’d say: Timeo Danaos et dona ferentes. Beware of Greeks bearing gifts. But European leaders argue that President Trump had his Phase 1 deal and now they wanted their deal.
Many examples over the decades do demonstrate that CCP leaders are of the opinion that promises are only binding on those who trust them. When they considered it in China’s interest to renege on a signature, they have done so, be that the case of UNCLOS [the United Nations Convention for the Law of the Sea], of the Sino-British Joint Declaration on Hong Kong, of the WTO, or of their trade agreement with Australia.
Craig Kennedy: Does this agreement represent some kind of change in the European consensus or the European view of China more broadly? Could you give us a sense of who is really supportive of this agreement and who is most critical?
RB: Europe’s China policy has been in transition over the last two years. The change began to show when the German Federation of Industry [BDI] published its mindful China strategy paper in January 2019 focusing on strategic competition with China. This was an opening salvo, which has since been followed by a number of other strategy papers. The European Union published a new strategic outlook in March of 2019. Then, in January of last year, you had a new China strategy from BusinessEurope. Other business organizations followed. Several European parties have been working on revised China strategies. All of these papers struck a much more critical tone toward China. The public opinion on China has soured across the EU.
Most notably, the strategic outlook of March 2019 redefined the EU-China relationship through a new lens. The conventional wisdom had been that China was a partner. Now, it is understood also as a competitor and a systemic rival. This new, revised definition of the EU-China relationship has been endorsed by the European Council just last October. However, it’s not been fully adopted by all EU countries. Most notably, German Chancellor Angela Merkel has never publicly signed on to the idea of systemic rivalry. Official voices from Berlin have reiterated the old mantra of Wandel durch Handel, or “change through trade.” In effect, Handel durch Wandel rhetoric is just a cover-up for the practice of Handel ohne Wandel, “trade without change.”
Some people do still light candles at the altar of the widely discredited theory that there will be a convergence between Western economies and the Chinese economy and that this convergence will have a transformative effect on the Chinese political system. Rather, we see a great divergence. That view has become dominant in the European China debates over the last two years. The aggressive opportunism with which China tried to take advantage of the covid-19 pandemic has also contributed to the negative turn.
This EU-China investment agreement is, I would say, in a way a hangover from the past, when China was viewed more positively. This agreement doesn’t account for the geopolitical context. It doesn’t adequately address the issue of modern slavery or forced labor in China—an issue of paramount concern. China is a member of the International Labor Organization (ILO), but it has not ratified the ILO’s 29th and 105th core conventions against forced labor. (To be precise, the United States hasn’t ratified those conventions either.) The Phase 1 deal didn’t even address that issue nor did Regional Comprehensive Economic Partnership [the free trade deal across fifteen Asian countries], which was also concluded recently. Still, the EU should not have taken those two deals as yardsticks; it should at least have insisted on an implementation plan with a clear timetable for ratifying these core conventions. The EU demanded a roadmap of this kind from Vietnam when concluding our free trade agreement, and Vietnam consented.
In the CAI case we have now an agreement that says China will make, and I quote, “continued and sustainable efforts to pursue ratification” of the “two fundamental ILO conventions.” Really, that is just hot air, a diplomatic way of saying, “get off our back.” Regrettably, the president of the European Commission, Ursula von der Leyen, has been boasting that the agreement gives Europe the leverage to eradicate forced labor in China, which is completely unsubstantiated. On the issue of forced Uighur labor a values-oriented, European external policy should have had to make a difference. And it did not.
It’s very deplorable that the German presidency with support from France and from the Commission pushed so hard for the CAI to be finalized hastily, before the end of 2020. They ignored a resolution adopted by the European Parliament (EP) just before Christmas, which focused on the situation in Xinjiang and the issue of forced labor. It demanded guarantees against forced labor. Six hundred and four members of the European Parliament voted in favor of the resolution, with only 20 votes in opposition.
The battle of orientation over the EU’s China policy is still on. Chancellor Merkel represents the past in this fight, the European Parliament represents the more realistic view.
GS: You brought up the role of the European Parliament. Could you describe the next steps? How does the agreement actually get ratified? Since something like 70 percent or more Europeans have a negative opinion of China, will that fact influence the ratification process?
RB: A lot of water will flow down the Rhine before we get to ratification. The important annexes to the text of the agreement have still to be published. Then, there is a complicated process which trade lawyers call “legal scrubbing,” in which they go through the text to ascertain that all the terms are used in the right way and so forth. That’s a technical exercise, but it will take time, even more so since there’s a suspicion that the Chinese side may try to reintroduce some substantive issues through the back door. After that, the deal, with all the annexes, will have to be translated into all twenty-four official languages of the European Union before it can be dealt with by the European Parliament.
According to the [Commission’s] Directorate General for Trade, that whole process might take eight months or more. So, the European Parliament would probably be dealing with the matter in the autumn, or in early 2022, when the rotating presidency of the Council of Europe would belong to France. Formally, according to the Lisbon Treaty, which governs the workings of the European Union, such a trade or investment deal can come into force only if the European Parliament consents. If the Parliament votes no, the deal is gone.
Not completely resolved yet is the question whether EU member states’ parliaments would have to ratify the deal, too. That depends on the legal substance of the investment agreement. If all the matters covered by the agreement fall within exclusive European Union competencies, member states’ parliaments do not have a role.
It is probable that there won’t be a lot of opposition to the deal in the European Council, even though some member states had misgivings in December. The Poles, for instance, argued that the deal should not be rushed before consultations with the incoming Biden presidency. The Italians complained that they had not seen the final text before they were asked to consent. The Swedes, Luxembourgers, Dutch, and others had misgivings about the slavery issue. The Estonians, Lithuanians, Spanish, and other governments also were not completely happy with the way the negotiations went. It took a lot of pressure from the German chancellor’s office, along with support from President von der Leyen and French President Emmanuel Macron to pull the deal off. Against those three power houses, however, no government stood up and vetoed the deal or protested before it was approved. Would they put up a fight now and risk the combined wrath of Xi Jinping and Angela Merkel?
In the European Parliament, passage will be much more difficult, because, as I said, we have developed a strong political stance on human rights issues, which is shared widely among members of different political group. From the ECR, which is the conservative group, to center-right EPP, center-left Socialists & Democrats, Liberals, and Greens, there’s wide agreement on these issues. Of course, you can imagine that pressure would be brought on parliamentarians from member states or from businesses. But I think it is too early to predict definitively how a vote in the EP would turn out. To some degree that may also depend on how the EU conducts other elements of its China policy. Will it continue to develop unilateral measures to protect European businesses from unfair competition through anti-subsidy regulation or through introducing reciprocity in the realm of procurement? Or will it ban products of forced labor from the EU market? Will it find a way of addressing China together with the Biden Administration? Will it realize that we live in a world where geopolitics drives geo-economics?
GS: Does it make a difference that Angela Merkel will be stepping down as German Chancellor in the fall?
RB: It could make some difference. Merkel, while being behind the curve with regard to Europe’s China policy, is still the most powerful player. When you look at where others within her own party stand, Norbert Röttgen comes into sight, the chair of the Foreign Relations Committee of the Bundestag, whose voice has gained weight over the last months. He is much more critical of China. He’s for instance been pushing for the exclusion of Huawei from the 5G network. Then my party, the Greens, is probably more hawkish on China than others. And we might have a shot at being in the German government after the September elections.
GS: Could you give us a more detailed picture of the internal dynamics within Germany right now when it comes to China?
RB: It’s not easy to paint a good picture, because there are contradictory developments. Merkel has been fighting hard to avoid a clear shut out against Huawei. Action responding to the Hong Kong crackdown has been hesitant at best. No one in the German government has been willing to consider producing a business advisory on investment in Xinjiang like the U.S. State Department did last year. On the other hand, the German presidency helped finalize work on the creation of a European global human rights sanctions mechanism, the functional equivalent of the Magnitsky Act in the United States. The German government and the European Commission are working on human rights due diligence legislation for the European Parliament and the German Bundestag.
When we look more closely at where business stands, I would argue that the majority of small- and medium-size enterprises in Germany, the so-called, Mittelstand, are more on the critical side. They know where their opportunities are, but they have learned to hedge against the risks. In the past, they have pursued a more cautious approach than some of the big corporate players. The BDI’s relatively critical China strategy was supported by the Mittelstand. If it had been up to the likes of the CEO of Siemens, BDI would never have come up with such a paper.
Sectoral business organizations like the machine tool and electrical and electronics industries are also moving in a more cautious direction. But it’s not hard to find business voices insisting that in their particular industrial sectors, 30, 40, or more percent of the growth potential over the next ten years is to be found in the Chinese market.
Then there is a growing understanding that interrelatedness comes with a downside: weaponizing interrelatedness and mutual dependencies is possible, and China has been doing that not just in the pandemic. Our experience with PPE supply early on during the pandemic has taught us lessons on the issue of resilience: we must not be too dependent on one supplier alone.
The fact that China is becoming a more formidable economic competitor is not lost on German industry. Looking back at Germany’s particular economic relationship with China, you cannot avoid noticing a very high level of favorable complementarity: German industry provided China with luxury cars and high-tech products, while China provided our market with cheap commodities that we didn’t care to produce ourselves. So, there was not all that much competition between what we were good at and what they were good at. That this had started to change became apparent in 2015, when China published its “Made in China 2025” strategy, which indicated that Chinese industry was supposed to learn eating the German industry’s lunch.
We’re now confronted with stronger competition. The Germans are not as privileged in China relations as they used to be. This helps create a basis for better European cooperation vis-à-vis China. At the same time, China’s efforts to strike a special relationship with East and Southeast European countries in the so-called 17+1 format has not delivered for those countries as they had hoped. I see, therefore, the prospect of more European coherence in China relations, with Germany less of an outlier than it has been.
This change is being reflected in Germany’s 5G battle over the last two years. The German chancellor, even though she has tried very hard, has not been able to force her coalition, not even her own party, to follow her lead on Huawei. The intelligence services, the national security community, and think tanks have found resonance with their warnings in the SPD, the FDP, the Greens, and in parts of the CDU. The final decision will rest with the Bundestag. I would expect that, in the end, Germany will have a regulation that effectively results in banning Huawei.
CK: Is the difference between the big German companies and the Mittelstand that the big ones have enough leverage so that they can actually force deals with the Chinese, whereas the Mittelstand believe they don’t have enough power? Or is there something else there?
RB: I would describe it differently: The big German corporations had momentous leverage when they first entered China. So, they went all-in. The Mittelstand never harbored illusions about their ability to play hardball with a mighty government, so they were always more on the cautious side. It has now turned out that the cautious approach was smarter. The big corporations have put too many eggs into that one Chinese basket. I don’t know whether you can print such a sentence, but there is this saying: “If you’ve got them by the balls, their hearts and minds will follow.” That’s what’s happening to Volkswagen.
GS: Before we turn to the transatlantic relationship: You’ve been a key player in the promotion and passage within the EU Parliament of the EU investment screening system. How is implementation going? And what else is in the works?
RB: When we started learning from CFIUS [the Committee on Foreign Investment in the United States, the interagency committee that reviews the security implications of foreign investments] not that many years ago, I wasn’t sure this idea would gain traction; but it went very fast. The elapsed time from the European Commission’s introduction of its proposal on investment screening to the conclusion of legal negotiations between the Council and the Parliament was about a year. That is extremely fast by European standards. And now, many EU member states that were reluctant to buy into the approach have hopped on the bandwagon. Traditional free traders, like Sweden, for instance, abhorred the idea at the beginning. Now, they are developing their own national investment screening system. The Luxembourgers are working on a similar project, as are others. The number of countries buying into that approach has been increasing. The European regulation has been in force since last October and already there is talk about strengthening it.
We’re clearly on a positive trajectory here. We’re also on a positive trajectory with regard to other unilateral measures. In 2016, we agreed on new anti-dumping measures. We are now debating new anti-subsidy measures. This past June, the European Commission published a white paper on the topic; later this year we’ll introduce a legal proposal to fight back against illegal Chinese subsidies. We’re also working for the third time on the so-called international procurement instrument, which tries to introduce some reciprocity into the procurement markets, because so far the Chinese procurement market is closed to our companies while our market is wide open. That effort has been frustrated twice by Berlin. At the moment, Berlin continues to put its foot on the brake in this matter. But I’ve been told that the Portuguese presidency of the Council, which began on January 1, will push the agenda forward.
GS: Soon after Christmas, there were pieces quoting the staff of President-elect Biden saying, “The Europeans have heard us loud and clear on the investment agreement, and the Germans have agreed to slow down the approval process.” Then, all of a sudden, the deal goes through. Is it because there was just so much momentum behind it that it couldn’t be stopped, or is it a sign that Europeans and especially the Germans don’t believe there are any consequences for ignoring the incoming American administration?
RB: I haven’t completely figured out what went on. I find it a major mistake that there wasn’t any willingness to postpone the final decision until we had taken advantage of the opportunities of starting cooperation on China with the new U.S. administration. But you can hear people from the Commission and from the German government arguing that President Trump didn’t consult with us, and there was a need to even the score: this was payback time. I don’t consider that particularly sound policy, to say the least. It amounts to geopolitical illiteracy.
Some critics say, “Look, this deal is German automotive foreign policy. That’s all there is to it.” But why at this moment? The Chinese started to move in these CAI negotiations only at a very late stage. The first 34 rounds of negotiations were mostly frustrating. In the 35th round, after November 3, the Chinese suddenly began making offers, realizing that there was going to be a new alignment in the transatlantic relationship that would extend to China policy. My argument has been and continues to be that, if China’s fear of better cooperation between transatlantic partners induced them to make offers, why not ride that wave? We should have insisted on the signal that we will work with our American allies as best we can. I’m not saying that Berlin and Brussels and Paris should have asked Uncle Joe whether he is happy with our deal, but they should at least have sent a strong political message to Beijing and to the rest of the world: transatlantic cooperation will be back.
There’s a broad agenda of what we can and should do on China together with the United States. We should pick up where the dialogue on China that had been agreed to by High Representative/Vice President Josep Borrell and Secretary Mike Pompeo failed to materialize. Helga Schmidt and Steve Biegun were supposed to meet, but never did.
It has been argued that concluding the CAI before Biden was inaugurated demonstrated European “strategic autonomy”. Well, if my friend tells me that I shouldn’t shoot myself in the foot, I’m not demonstrating autonomy by doing it anyway. And why was there a greater urge to demonstrate so-called “strategic autonomy” to the United States than to demonstrate transatlantic revival to Beijing and the international community?
GS: Are European leaders really not afraid that there will be consequences from pursuing this route? Aren’t they concerned that it could set back the chances of a stronger relationship with the United States, now that Trump has gone?
RB: There is a kind of U.S. criticism that does not at all go down well with Europeans. Yesteryear, allies were treated as idiots, or as “foes”, in President Trump’s particular language. Now they are considered as undisciplined if they don’t immediately act upon Jake Sullivan’s single tweet? We should have followed a different course for our own reasons, not because we were told. By the way, President George H.W. Bush’s offer of “partnership in leadership” after the end of the Cold War should possibly be reconsidered by the Biden team.
There is a certain level of U.S. hypocrisy. Europeans have not managed yet to deal with forced labor in China, but Trump didn’t even address that in his trade deal. It just wasn’t on the agenda in the Phase 1 deal between the United States and China. The Phase 1 deal did also not include new disciplines on state-owned enterprises nor new transparency rules for public subsidies in order to create perhaps a little bit more of a level playing field. Remember: He that is without sin among you, let him cast the first stone.
There is a lot of resentment around Europe and particularly in Germany over the way the European Union and Germany have been treated by the United States over the last four years. The image of the United States has never been at a lower ebb. The fact that Biden is now president in and of itself is not healing all transatlantic wounds. Of course, we Europeans must contribute our part and must not just hope for some mystical salvation. We have made our own mistakes, too. But for the first time in many decades, under Donald Trump’s presidency it wasn’t clear whether the United States would continue to support the process of European unification. It seemed as if the Trump Administration was in favor of breaking up our Union. And, obviously, Trumpism isn’t past history. We do look at the election results: eighty-one million voted for Biden, but seventy-four million still voted for Trump. How much can we trust that after four years we won’t experience a kind of second coming of Trump? How many eggs are we going to put into the basket of reinvigorating the relationship?
I don’t share a sense of transatlantic skepticism. The transatlantic relationship cannot be rebuilt from Washington alone. If we Europeans don’t actively build from our side, too, if we don’t invest in it, if we don’t help our friends in the United States who want to invest in that relationship, then, whatever the intention of the Biden Administration, they probably won’t be able to deliver.
To the friends of European strategic autonomy, I would propose not to ignore the advantage of investing in facilitating a stronger, more cooperative, and patient transatlantic relationship. That must be an integral part of a proactive geopolitical role for the European Union.
But let me end this argument on a more positive note. I saw the interview that Jake Sullivan did with Fareed Zakaria on CNN. If I understand what Jake Sullivan said, he signaled, “Look, we don’t like how it went, but we will not take that as an excuse. We won’t desist from trying to cooperate.” And on our side of the Atlantic, the people who believe in strengthening transatlantic relations will not view this hasty deal as the final word, either. We have a much more multifaceted picture, in which a good number of developments really point in a direction in which we can find a lot of common ground.
The battle over whether the European Parliament will ratify the CAI agreement remains. Together with friends from different political groups, we will fight very hard to challenge China and tell them that we will “seek truth from the facts.” The CCP claims that it “leads” everything in China. It they want to, who could stop them from ratifying ILO core norms before the European Parliament is asked to ratify the investment deal? And again, we are working on many fronts to address the China challenge.
CK: We hope your optimistic take is the right one.
RB: Well, you probably know this quote from Antonio Gramsci: “I’m a pessimist of reason, but an optimist of will.”
Reinhard Bütikofer is in his third term as a Member of the European Parliament (Greens/EFA), where he has served since 2009. He sits on the Committee on Foreign Affairs and on the Committee on International Trade. He is chair of the European Parliament’s Delegation for Relations with the People’s Republic of China, a member of the Delegation to the United States, and a substitute member of the ASEAN Delegation.
Gary J. Schmitt, a contributing editor of American Purpose, is resident scholar in strategic studies and American institutions at the American Enterprise Institute.
Craig Kennedy is a senior fellow, member of the editorial board, and trustee at American Purpose. From 1995 to 2014, he was president of the German Marshall Fund of the United States.
American Purpose newsletters
Sign up to get our essays and updates—you pick which ones—right in your inbox.Subscribe