EU-China Briefing - 3 August 2020
YOUR WEEKLY SHOT OF EU-CHINA NEWS
BY FLAVIAN BERNEAGĂ AND GRZEGORZ STEC
1. EU-China High-Level Trade and Economic Dialogue - Make it or Break it for CAI 2020
Amid the corona-crisis and growing political tensions in the relations, EU-China economic links are entering a juncture which will determine whether concluding the Comprehensive Agreement on Investments (CAI) in 2020 is still possible.
► To that end, the most recent round of negotiations on the CAI saw some fruitful discussions on the level playing field and on sustainable development;
► However, in the 8th EU-China High Level Trade and Economic Dialogue, the EU side highlighted its growing impatience with level playing field and market reforms in China;
► In the background of the talks the EU is gearing for economic contraction, and China seems to be turning to centralizing its economy amid the crisis.
Progress Made on the CAI
Between July 20-24, the EU and China held their 31st round of negotiations on the CAI.
The Commission reported that “significant progress” was made on matters relating to state-owned enterprises, transparency rules on subsidies, and rules on forced technology transfers.
The two also highlighted “constructive exchanges on sustainable development, notably on the mechanism for addressing the differences”.
Growing Impatience
In spite of these developments, the EU is far from being satisfied with China’s plans for market reforms.
During the 8th High Level Trade and Economic Dialogue (HED) on July 29, Commission VP Valdis Dombrovskis and Trade Commissioner Phil Hogan exchanged views over a video call with Vice-Premier Liu He (China’s key trade official).
While welcoming recent progress on CAI, the EU highlighted that China still has to provide market access in telecom and computer sectors, health, biotechnology, and new energy vehicles. Similarly, the EU presented its concerns on the unjustified inspections and restrictions imposed by China on the EU’s food exports.
In terms of sustainable development, the EU insisted that China must make more meaningful commitments, as its current engagement is not ambitious enough.
Interestingly, one day before the HED, three anonymous EU diplomats indicated that the EU decided to link the successful completion of CAI negotiations to its agreement on the EU-China 2025 Agenda. This is a clear push on the EU side to get leverage on CAI, by linking it to a policy that Beijing is invested in.
The general mood was summed up in a blog post on July 31 by HR Josep Borrell, who said that “[EU] impatience is growing” with China on the uneven playing field, on the effects of industrial subsidies, and on the lack of reciprocity in procurement.
Turning Inward?
As the EU and China reach a critical point in their economic relations, it is worth taking note of the recent domestic economic developments in the two camps.
As China’s economic recovery persisted in July, the dependence on heavy industry, big infrastructure projects, and low-end exports is prominent. The recovery was powered up by state investment and debt in cherry-picked sectors.
The shaky status of global trade and wider economy encourages China to seek to become more self-reliant. This approach (dubbed as “dual circulation”) was endorsed by Xi Jinping on July 21, when he argued China “must give full play to the advantages of the domestic super-large market” in order to cope with the global economic downturn.
At the same time, the Eurozone economy (amounting to 85% of the EU’s GDP) experienced a year-on-year contraction of 15% in Q2 2020.
Talk of ‘open strategic autonomy’ in Brussels circles shows that the EU is also becoming more assertive in protecting its economic interests and vision of international economics, while remaining committed to an open global economy.
In our podcast interview, MEP Iuliu Winkler referred to open strategic autonomy, as the EU’s attempt to ensure that the common market is protected from distortive forces (e.g. by diversifying trade partners and supply chains, boosting defensive measures of the single market, etc.), at that same time keeping the EU's status of a promoter of multilateralism.
TAKEAWAYS
TAKEAWAYS:
► COMPREHENSIVE STANDOFF
As HR Borrell pointed out in his blog post, the EU is impatient to see whether China is serious about its commitments to market reforms, particularly as China has been reluctant to deliver on its promises in the past. The best proof that patience is really running low is the fact that Brussels reportedly tied the EU-China Agenda 2025 with the finalization of negotiations on the CAI. The Agenda is important for China, because it would act as a commitment by the EU to a constructive relationship with China.
The timing here is important. As Washington is mounting pressure on Beijing, China is doing its best to ensure Europe does not choose to side with the US (we dive deeper into this in news bite 4). This increases the EU’s leverage in CAI negotiations, though it should also become clear that if China does not budge now, it is hard to imagine it will any time soon.
Whether Brussels’ pressure will work, is a make it or break it for completing CAI in 2020. The results will be clear by September 14 latest, when Charles Michel, Ursula von der Leyen, and Angela Merkel are scheduled to have a high level video conference with Xi Jinping.
READ MORE
EU and China discuss trade and economic relations - European External Action Service - Delegation of the European Union to China, Jul 29
POLITICO Brussels Playbook: Berlaymont’s corona task force - China calling - Second wave - Politico (Florian Eder), Jul 28
China taps old growth model for recovery, as EU and US economies flounder - South China Morning Post (Finbarr Bermingham, Amanda Lee), Jul 31
IULIU WINKLER: Open Strategic Autonomy and EU-China Relations - Is Trade a Panacea? - EU-China Podcast, Jul 19
2. EU Releases Response Package on Hong Kong
On July 24, the Foreign Affairs Council (FAC) - which comprises HR Josep Borrel and the EU27 foreign ministers - endorsed a coordinated response to the Hong Kong national security law.
► The most important aspect is the ban on exports of technologies that could be used to suppress protests in Hong Kong;
► China retorted by urging the EU to “to stop meddling in Hong Kong affairs and China’s internal affairs in any way” , but did not outline plans for any harsher responses;
► Nonetheless, the issue is about to snowball, as the authorities moved to impose the national security law and Chief Executive Carrie Lam announced Hong Kong Legislative elections will be postponed for a year.
The Response Package
After about a month of discussions, EU foreign ministers reached a common ground on Hong Kong. The package is to be implemented at the EU or member state level, as it covers some actions which require member state competences.
The critical element of the package is the limit on exports of “sensitive equipment and technologies” that could be used for “internal repression, the interception of internal communications or cyber-surveillance”.
The ministers also agreed to reconsider their respective asylum policy, and to grant fleeing Hong Kong students scholarships. Finally, the package pledges to monitor the effects of the law outside of Hong Kong as well as to observe the trials of pro-democracy activists in Hong Kong.
The package is a significant development as it marks a step forward in creating a common China policy across all member states. It also proves that Franco-German cooperation can indeed spur foreign policy at the EU level in the context of China.
China’s Response
On July 29, China’s Foreign Ministry Spokesperson Wang Wenbin said the EU’s response interfered in China’s internal affair.
Wang said the decision undermines Hong Kong’s prosperity and stability, and urged the EU to “focus on maintaining the sound development of China-EU relations.”
Similarly, in its own press brief, the China Mission to the EU labelled the package a “wrong move”, and urged the EU to not meddle in China’s internal affairs.
Despite the harsher language, China did not indicate any plans to retaliate with concrete measures.
This Is Only the Beginning
Hong Kong is bound to become an even more complex issue, after Chief Executive Carrie Lam announced on July 31 that Legislative Elections will be postponed for a year.
Lam argued the virus makes it impossible to hold elections on September 6, and declared the State Council (China’s main legislative body) will sort out any legal issues until September 5th, 2021, so the date of the rescheduled elections.
Her decision was confronted by pro-democracy advocates, who were expected to score important electoral victories as a response to the national security law.
Lam’s announcement also came in a sensitive context:
On July 29, 4 pro-independence student activists (aged 16-21) advocating were arrested for subversion, terrorism, and collussion with foreign forces.
On July 30 - 12 high-profile pro-democracy candidates (including Joshua Wong and Dennis Kwok) were banned from running in the elections.
On July 31 - Hong Kong authorities issued arrest warrants for - among others - US citizen Samual Chu providing an example how the infamous article 38 will be interpreted.
All these decisions drew international criticism. The US, UK, Australia, and the EU had vowed to monitor whether the September elections will be free and fair, and lawmakers from 12 legislatures decried the banning of candidates as an “obstruction of the democratic process”.
Importantly, the German Foreign Ministry announced on July 31 it will suspend its extradition treaty with Hong Kong, as a result of the postponement of elections.
TAKEAWAYS
► MORE TO COME
While the EU’s coordinated response on Hong Kong is a positive development, the “systemic rivalry” challenges stemming from the national security law are only starting to emerge. The wide breadth of the legislation was demonstrated in the banning of 12 candidates, extraterritorial interpretation of article 38, and the arresting of 4 protesters. This means that “response on Hong Kong” will inevitably make its way back on the FAC agenda.
That being said, China is not likely to be overly aggressive (to a point) in its retaliations to the EU, as it would undermine its efforts to avoid US-led international containment. Beijing is definitely concerned with the worsening of relations with Washington, which means it will tread carefully not to enter a full-scale confrontation with Brussels at the same time.
READ MORE
Council Conclusions on Hong Kong - Council of the European Union, Jul 24
Hong Kong leader delays elections, asks Beijing to resolve legal questions - South China Morning Post (Tony Cheung, Natalie Wong, Kimmy Chung), Jul 31
Hong Kong elections: candidate disqualification faces international criticism - South China Morning Post (Stuart Lau), Jul 31
3. Cybersecurity, Back in the Spotlight - EU’s First-Ever Cyber-Sanctions
On July 30, the EU imposed cyber-sanctions for the first time in its history, marking an important response against disinformation.
► The sanctions were also applied against Cloud Hopper, a cyber-attack in 2018 linked to the Chinese Ministry of State Security;
► The decision comes amidst a general trend of strategic securitization within the EU, as we explained last month;
► Adjacently, news emerged on July 29 that a cyberattack was staged on the Vatican by Chinese hackers, targeting communication between the Church and the Hong Kong diocese.
EU’s First-Ever Cyber-Sanctions
On July 30, the EU imposed its first-ever cyber-sanctions, which constituted a mixture of travel bans and asset freezes on 6 individuals and 3 entities responsible for past cyberattacks.
Included in these sanctions is the attempted attack on the Organisation for the Prohibition of Chemical Weapons, but also the attacks known to the public as ‘WannaCry’, ‘NotPetya’, and ‘Operation Cloud Hopper’.
The sanctions also forbid individuals and entities from making funds available to the listed entities.
Particularly important for the EU-China relation are the sanctions applied to ‘Cloud Hopper’ - a case of 2 Chinese hackers working with the Chinese Ministry of State Security.
Some of ‘Cloud Hopper’s’ victims were Ericsson, IBM, and HP. The hacker also got access to commercial secrets of aviation companies, pharmaceutical firms, and some industrial giants in the West between 2014 and 2017.
Security Union Strategy Taking Shape
Following cases of cyberattacks during the pandemic, the EU vowed on July 24 to provide a policy response that would build a “real security ecosystem”.
The response is called the strategy for a Security Union. Its goals are to prioritize policymaking on hybrid threats, to tighten coordination on security, and to propose the building of new digital and physical infrastructure.
The EEAS would be in charge of creating a platform on hybrid threats where member states could coordinate their responses, while a new Joint Cyber Unit would allow the EU27 to coordinate defense against cyber threats.
This comes in the context of the EU's moves on the cybersecurity topics last month.
Recall that during the 22nd EU-China Summit, Ursula von der Leyen complained to Xi Jinping and Li Keqiang that China had staged cyberattacks on hospitals and has promoted disinformation in Europe during the pandemic.
The push for a Security Union also falls in line with the Commission’s joint communication on disinformation from June 10.
Hackers and the Holy See
Recorded Future, a US private cybersecurity company, alleged on July 29 that hackers working for the Chinese government orchestrated a series of intrusions on the Vatican computer network that started in May.
The company was able to trace the attacks, as the hackers employed tactics used in the past by state-backed Chinese hackers.
Foreign Minister Spokesperson Wang Wenbin denied the accusations, but there have been previous documented instances of similar attacks meant to gather information on Buddhist Tibetans, Muslim Uyghurs, or Falun Gong practitioners.
No official statement came from the Vatican, but the timing is particular. The Catholic Church had managed to improve relations with Beijing starting in 2018 - when the two sides began negotiations over the appointment of bishops.
In 2018, the two sides agreed for Beijing to name bishop candidates, but the Pope remained the final decision-maker over their appointments.
TAKEAWAYS
► CYBER ALLIANCE?
As pointed out by Carnegie Endowment tech analyst Nathalie Thompson, “several of the targets listed [in the EU cyber-sanctions] have already been sanctioned by the United States (e.g. Minin, Morenets, Serebriakov, Sotnikov)”. It shows that cybersecurity could indeed become an area of cooperation within a transatlantic format.
This would fit in line with NATO’s Secretary General Jens Stoltenberg’s vision for 2030 and Margrethe Vestager’s remarks at the Brussels Forum. What’s more, some of the sanctions imposed by the EU, unlike the ones of the US, did tackle cyber-enabled economic espionage.
The big problem here is the approach - while the EU would rather prefer to keep it purely technical (at least in terms of the rhetoric applied), the US is more inclined to make the sanctions a political affair linked to broader relations with selected countries. This is, indeed, a wider problem underpinning much of the potential cooperation on China that could exist on the Brussels-Washington axis.
READ MORE
EU imposes the first ever sanctions against cyber-attacks - European Council Council of the European Union, Jul 30
EU Security Union Strategy: a new security ecosystem - European Commission, Jul 24
Delivering on a Security Union: Questions and Answers - European Commission, Jul 24
The Vatican Is Said to Be Hacked From China Before Talks With Beijing - New York Times (Angelo Carconi), Jul 28
4. China’s Diplomatic Push - Beijing Seeks to Prevent US-led Containment
Faced with an increasingly hawkish administration in Washington, China launched a swift diplomatic offensive to convince its major European partners not to support American “Cold War-minded” containment initiative.
► To that end, Foreign Minister Wang Yi held phone calls with German, French, and Italian counterparts, urging them to reject Mike Pompeo’s calls for a common “free world” front against China;
► In an effort to reframe the narrative surrounding the EU-China relations, the Chinese MFA praised the intensity of dialogue and comprehensiveness of the cooperation between the two sides;
► The new diplomatic push also warned Britain of the dangers associated with decoupling, after London moved to ban Huawei by 2027 and is regarded as alligining with the US on China.
Wang Wants You to Resist the Hawks
On July 25, 29, and 30, respectively, Chinese Foreign Minister Wang Yi called his German, French, and Italian counterparts, in efforts to ensure that they don’t band with the US against China.
One day after Pompeo’s speech at the Richard Nixon Library, Wang Yi warned German FM Heiko Maas that “some anti-China forces in America have deliberately created ideological confrontation and openly threatened other countries to take a side."
Maas responded by stressing the importance of upholding “One Country, Two Systems” in Hong Kong, and reiterated the EU policy that sees China as a partner, competitor, and rival.
In a call with French FM Jean-Yves Le Drian, Wang restated China’s efforts to prevent a descent into a new Cold War, and called on France to “resist” following in the US footsteps.
On July 30, Wang phoned Italian FM Luigi Di Maio, whom he also warned of the division sowed by “particular countries”. Wang further remarked that he “hopes that the European side will adhere to strategic autonomy and proceed from its own fundamental, long-term interest and uphold an objective, fair and positive attitude in handling relations with China”.
EU’s Position
On July 31, in a blog post seen as a response to Pompeo, HR Josep Borrell reiterated the EU needs to craft its own strategy on China, regardless of who emerges victorious in the US presidential elections in November.
He argued US-China strategic rivalry is bound to become the “dominant organising principle for global politics”, which forces the EU to seek to take a path that is coherent with its values and interests.
This means that the EU shouldn’t align itself with either Washington, or Beijing. However, Borrell did highlight that the US and Europe are “political cousins”, both bred from the Enlightenment, both with commitments to pluralism and individual rights.
Nonetheless, HR further argued that China cannot be left out of problems that are “planet-size problems like tackling the COVID-19 pandemic or mitigating climate change”.
Finally, he stated the EU does not want to follow in the footsteps of the White House's current policy on waging a new Cold War on China. He expressed his hopes that the US will give up unilateralism and work hand-to-hand with other democracies, such as Australia, South Korea, or Japan, on China.
UK In the Crosshairs
In contrast to the reconciliatory stance taken on the EU, China took a harsh stance on the UK, and argued that, in aligning itself with the US, London has “poisoned” relations with China.
The drastic statements came in an opinion piece by Chinese ambassador to the UK Liu Xiaoming. This came in the context of the UK’s announcement of a detailed plan to phase out Huawei from 5G equipment by 2027, but also in the context of Pompeo’s speech at the Richard Nixon Library.
Liu stated the UK-China relation is at a “historic political juncture” and threatened that Britain will “pay the price” if it chooses to view China as a hostile nation.
In a similar vein as Wang Yi, Liu accused “some British politicians” of having a Cold War mentality and of being influenced by Washington.
TAKEAWAYS
► TRANSATLANTIC PROSPECTS
Mike Pompeo’s speech at the Richard Nixon Library was definitely received with concern in Beijing. A transatlantic alliance under a banner of the “free world” would create further challenges for China that has been increasingly becoming isolated compared to pre-pandemic reality.
To alter things, though, the Chinese Ministry of Foreign Affairs must not only appeal to diplomatic partners to “keep the business as usual” despite changing political and economic realities, but also to provide alternative proposals for reinventing the relations.
Still, the EU’s position is relatively clear - it does want to become less “naive” on China (as HR Josep Borrell suggested on multiple occasions) and it does see China - among other things - as a systemic rival. However, the EU starkly disagrees with what the White House currently brands as ‘China policy’.
As such, while there is acknowledgement that Brussels and Washington can only influence Beijing’s actions through collaboration, much needs to be done to facilitate this. Furthermore, not even a change of president in November may fully alter the outlook, as hawkish views on China appear to increasingly become a bipartisan trait.
READ MORE
Italy urged to treat China fairly as Beijing escalates charm offensive - South China Morning Post (Keegan Elmer), Jul 30
Foreign Ministry Spokesperson Wang Wenbin's Regular Press Conference on July 30, 2020 - Ministry of Foreign Affairs, the People's Republic of China, Jul 30
By banning Huawei, Britain is turning its back on the future - South China Morning Post (Liu Xiaoming), Jul 29
5. Estonia Rejects China-backed Infrastructure Plan
On July 31, the Estonian government announced it will reject plans to build a tunnel under the Baltic Sea connecting Tallinn and Helsinki.
► The private investment plan, which would have been funded with Chinese money, was cited to present environmental, economic, and security concerns;
► The deeper underlying concerns stem rather from poorly drawn financing and feasibility plans, but also from fears that Estonia would become dependent on China, as a result.
Minister of Public Administration Jaak Aab announced Estonia will not go through with the plan to build a 100-kilometer rail and road that also implied building a tunnel under the Baltic Sea.
While he did not go into detail on the reasoning, Aab said “in the light of the information known to the state authorities today, we have reason to doubt that the given project can be put into practice”.
China Railway International Group, China Railway Engineering Company and the China Communications Construction Company were bound to have contracts from the project.
The decision may not be final. FinEst Bay Area Development, the project developer, submitted 1500 pages to settle concerns, in the hope that Estonian authorities will override Aab’s decision.
Diving Deeper
Among others, the motivations relate to lack of proper planning, as well as national security concerns for a NATO member that is very fond of its ties with Washington.
Estonia’s foreign intelligence service stated back in February that Chinese FDI represents a security threat due to “the potential use of China’s foreign investment for political purposes and the possible development of technological dependency.”
Additionally, the service feared that financing drawn by raising capital on a stock exchange would end up involving Chinese SOEs in the project.
The project, which has been pushed by influential Finnish entrepreneur and former executive of Rovio (Angry Birds) Peter Vesterbacka, has been lacking progress. According to Aab the plans contained environmental, economic, and security deficiencies, thus making the entire project unfeasible.
Instead, Aab said that the tunnel should be built solely by Estonian and Finish authorities, with the final goal of connecting it with the Rail Baltica - an EU-funded project that links the Baltics with Poland with a high-speed rail connection.
TAKEAWAYS
► BELT AND TUNNEL
There is also a wider geopolitical angle to the FinEst Bay/Tallinn-Helsinki project. If completed, the project would become a part of the Polar Silk Road - part of the Belt and Road initiative connecting China and Europe via the Arctic.
The Silk Road would consist of both laying undersea fibre-optic cables and opening new sea routes between China and Europe. On the European end, the ships sent from China would arrive at a Norwegian port of Kirkenes from where the goods could be transported by rail through Finland and Estonia to the EU-funded Rail Baltica. But currently, “the Arctic Corridor appears to be the Schrodinger’s Cat of regional infrastructure plans.”
The logistics value of this trade route at this stage is still limited. Transport via Arctic Corridor entails dealing with challenging conditions that present an even greater challenge given a limited number of ice-breakers within Chinese fleet. Also the limited number of ports along the way makes it less economically attractive. On top of that come construction set-backs such as protests of Finland’s Sámi people against rail construction in the north parts of the country or Estonian authorities concerns discussed in the news bite.
READ MORE
Estonia to reject China-backed Baltic tunnel plan over security fears - Politico (Joshua Posaner), Jul 31
$17 Billion China-Backed Subsea Baltic Tunnel Is Set Back - Bloomberg (Ott Ummelas), Jul 31
Transport ministry denies public alternative to private Tallinn tunnel plan - Yle, Jul 31