Abacus | In Europe, China’s economic cold war with the West is over before it’s begun

THERE HAS BEEN an enormous amount of nonsense reported in the last couple of months about the state of economic relations between the European Union and China. First we heard that the EU was adopting an altogether more assertive, even confrontational, stance towards Beijing. Brussels had declared China to be a “systemic rival”, European politicians were slamming the Chinese government’s protectionist industrial policies, and the EU was vowing to stop the Chinese from obtaining cutting edge technologies by acquiring European companies. Relations, it seemed were rapidly deteriorating. Then, miraculously, the skies cleared, with much of the international media proclaiming “a breakthrough” trade and investment agreement at last week’s meeting between Chinese premier Li Keqiang and the EU’s top bureaucrats. Well, if diplomatic platitudes to deepen partnerships, strengthen cooperation, and “to work together for peace, prosperity and sustainable development” can be considered a breakthrough, then perhaps the Brussels get-together really was a game-changer. But a close reading of the joint statement released last Tuesday reveals no hard and fast commitments at all. The closest either side came was the vaguely-worded intention to reach a mutual investment agreement some time next year. Big deal. But if the achievements of the Brussels “breakthrough” were grossly exaggerated, so were the stories about the EU’s new aggressive approach to its economic relations with China. The truth is Europe is too exposed, has too much to lose, and is too fragmented to present an effectively assertive front to China over bilateral economic affairs. It is true that the EU’s March 12 strategy document described China as a “a systemic rival promoting alternative models of governance”. But considering that the EU’s member countries are liberal democracies, and China is a communist dictatorship, that is nothing more than a statement of the bleeding obvious. And given that the paper also gushed about the two sides’ “enduring relationship” and hailed China as “a cooperation partner” and “a strategic partner”, we probably shouldn’t read too much by way of future intentions into the “systemic rival” bit. Yes, the EU’s document did gripe about China’s subsidies for favoured industries, and grumbled about the restricted access Beijing allows European companies to China’s domestic markets. As China-EU summit ends, Premier Li Keqiang vows reforms: ‘When we say it, we have got to do it’ But these are long-standing complaints, and beyond calling on China to work “to develop a more balanced and reciprocal economic relationship” it set out no proposals to resolve them. Indeed, the paper’s 10 action points were almost laughably insubstantial. The only one that appeared to have any teeth was the last, which called for the early implementation of the EU’s framework for screening foreign investments in European infrastructure and technology. However, jurisdiction over inward investments remains at the level of the EU’s member states, not with Brussels, and many EU members have good reason to welcome inward investment from China. Hopes high that EU-China joint statement on opening up is more than just words The truth is that Europe is too exposed, has too much to lose, and is too fragmented to present an effectively assertive front to China over bilateral economic affairs. With the EU’s largest economies prevented by the strictures of euro zone membership from juicing up their domestic demand with tax cuts or additional government spending, in recent years the EU has been heavily reliant on exports to Asia, and China in particular, to prop up its growth. As a result, China’s slowdown has hit Europe hard, with Italy in recession, Germany on the brink, and euro zone growth forecast barely to exceed 1 per cent this year. With Beijing’s policy easing now beginning to stabilise Chinese growth, European policymakers are anxious to do nothing that might jeopardise exports to their most promising market. Meanwhile, European companies stand to benefit greatly from China’s latest incremental measures to open its domestic markets, for example by easing or dropping joint venture requirements in sectors such as car manufacturing, chemicals, and financial services. Beijing is not opening up because of foreign pressure, but because it suits its own domestic economic policy aims. EU calls out Beijing on human rights but activists want harder line against China’s Xinjiang and Tibet policy That much is obvious from the way it is only opening market access in areas where foreign investments will not appreciably threaten domestic Chinese competitors. Either domestic companies are so entrenched that foreign investors present no challenge, or local companies have failed to develop the products needed to support China’s downstream industries, meaning foreign investments raise the value of China’s own production. Investments like BMW’s 3 billion euros (US$3.4 billion) to raise its stake in its Shenyang joint venture to 75 per cent, or BASF’s US$10 billion in a new 100-per-cent owned chemicals plant in Guangdong, suit Beijing’s domestic purposes admirably. But they yield another benefit too: they buy Beijing valuable corporate influence over European policymakers – influence which helps to ensure European officials will not be too assertive in their relations with China. China’s investments in European infrastructure are similarly useful. The fiscal straitjacket imposed on European governments by membership of the euro means that for much of the last 10 years, southern European countries have been unable to invest in their infrastructure. In Italy, for example, net investment in infrastructure has turned negative since 2012, to the tune of around 10 billion a year. In other words, Italy is now investing 10 billion euros less a year than it needs simply to offset the depreciation of its existing infrastructure It is no wonder the country’s bridges are crumbling, and no surprise that Rome was so keen to sign up for investment from China under the Belt and Road Initiative. With Spain, Portugal and Greece in similar, if less extreme positions, and much of eastern Europe also eager for inward investment, China has found little difficulty recruiting allies at the EU decision-making table – allies who will ensure that Brussels will never walk the walk when it comes to confronting China over its naked economic nationalism. So, on closer examination, the EU’s more assertive stance towards China largely evaporates. Yes, China will face greater difficulty in future acquiring high technology companies in some European countries, principally Germany. But then, in the past it faced no restrictions at all, much to the amazement of Chinese officials. However, the chances that the EU will present a strong and united front to bring effective pressure to bear on China to force Beijing to play by international free market rules are close to zero. In Europe, the economic cold war between the West and China is over almost before it has begun. Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 25 years