Xiplomacy wins in Europe despite US warnings

Business deals worth more than US$60 billion were arguably the least significant aspects of Chinese President Xi Jinping’s visit to Italy and France during the past five days.

The key moment arrived in Paris on Tuesday when German Chancellor Angela Merkel admitted that the European Union wants “to play an active part” in Xi’s signature Belt and Road Initiative (BRI).

“We, as Europeans, want to play an active part [in the project] and that must lead to a certain reciprocity and we are still wrangling over that a bit,” she said at a media briefing after talks with Xi, French President Emmanuel Macro and EU Commission President Jean-Claude Juncker.

Her comments came despite pressure from the United States to block BRI deals and a recent statement by the EU branding China a “systemic rival.”

Crippling bilateral debt

The BRI has become a controversial program of massive infrastructure projects, linking road, rail and sea routes between Asia and Europe. Critics have derided these new Silk Road superhighways for miring countries such as Pakistan and Sri Lanka with potentially-crippling bilateral debt.

Yet last weekend, Italy broke new ground by becoming the first Western European country and Group of Seven nation to join the BRI.

Agreements were signed after the Five Star Movement overcame concerns from its governing coalition partners about the effects it would have on its close ally, the US.

“On the one side you had the Five Star supporting, on the other a very reluctant League, a position that was mainly down to [League leader] Matteo Salvini being a big admirer of [US President Donald] Trump and the US,” Teresa Coratella, of the European Council in Foreign Relations, said.

Resolving questions over market access saw Macron’s chest-puffing assertion last week that the EU would no longer be naive when it comes to China.

Echoing Trump’s oft-voiced demand for reciprocal trade, Merkel said after meeting Xi that “we are still wrangling over that bit,” while Juncker added that any compromise over the BRI should see European businesses having “the same degree of access” to China as Chinese companies have in Europe.

Whether or not European leaders get what they want remains to be seen.

On March 12 the European Commission published a 10-point plan for the bloc’s headers to discuss at a March 21 heads of government meeting, with the aim of finessing a common China policy. The draft advocated closer scrutiny of Chinese investment and called Beijing “an economic competitor in pursuit of technological leadership.”

While the blueprint was depicted as something of a new departure for the EU – and despite Macron’s insinuation that previous leaders had been callow about China – some on the continent aired misgivings over Chinese investments in eastern Europe, particularly in Greece, which endured crippling EU-imposed austerity after its economy imploded in the wake of the 2008 global crash.

“Many in Europe have not been happy with how China has become more influential in the east,” said Eva Pejsova, an Asia-focused analyst at the European Union Institute for Security Studies.

Vague wording

European businesses in China have also voiced concerns about the perceived lack of a level playing field there, with the European Chamber in Beijing on March 15 criticizing a draft investment law for “vague wording” that “further adds to the legal uncertainty” faced by foreign businesses in China.

In the end, however, the March 21 discussion of arguably the EU’s second most important external relationship was overshadowed by the ongoing saga of the British exit from the EU, the terms and timing of which are still to be resolved.

A “no deal Brexit” could see the UK trading with the EU on World Trade Organization terms. This could be a blow not only for smaller EU neighbors such as Ireland, but in absolute terms potentially even more costly for some sectors on the continent, such as Germany’s export-dependent automobile makers.

Germany could lose up to 15,000 jobs as a result, according to a study published in February by the Halle Institute for Economic Research and the Martin Luther University of Halle-Wittenberg.

At a time when the EU’s second-biggest economy is about to exit the fray and with about 7% of Germany’s exports going to China, according to 2017 figures, it is unlikely that any German leader could be seen to be undermining such a key market, the biggest outside the EU, even if China’s breakneck growth is set to slow in coming years as its population ages.

“Xi could not have picked a better moment to come to Europe, it is a delicate moment,” Coratella said, citing turmoil related to Brexit, May European Parliament elections as well as the looming end of Angela Merkel’s 14-year tenure as German leader.

Xi’s visit to Europe is being watched closely in Washington. In 2018, the International Monetary Fund estimated global GDP to be just under $85 trillion, with the US, EU and China making up $57.2 trillion of the total. According to the EU Commission, China is the EU’s second biggest trade partner after the US, and the EU, measured as a whole, is China’s biggest.

But trade ties across the trio are fraught, with the US and China yet to resolve their ongoing tariff dispute and the Trump administration castigating the EU over what it sees as protectionism in sectors such as agriculture.

On March 14, Trump told visiting Irish Prime Minister Leo Varadkar that “we’re going to tariff a lot of their products coming in because the European Union treats us very, very unfairly.”

Xi’s visit to Europe comes after the US warned allies it would reconsider intelligence sharing if China’s Huawei was hired to help build 5G networks, with the US repeatedly describing Huawei as a virtual backdoor for Beijing’s spooks amid concerns that China was developing an unassailable market lead in the roll-out of the potentially-revolutionary 5G.

The warnings have so far not worked, with Germany demurring and the EU Commission on Tuesday stating that “member states have the right to exclude companies from their markets for national security reasons,” but declining to seek a continent-wide ban.

Chinese deals

In another Old World blow for the US, more than half the value of China’s newly-announced Franco-Italian deals were in the form of an order from Beijing for 300 Airbus airplanes, which comes in the aftermath of Airbus’s long-standing rival Boeing coming under fire after two deadly crashes in Ethiopia and Indonesia.

The deals come after Chinese foreign direct investment into Europe dropped to 17.3 billion euro, a decline of 40% from 2017 levels and more than 50% from the 2016 peak of 37 billion euro, according to the Berlin-based Mercator Institute for China Studies.

And just as the prospect of a common Western front against Huawei appears to be waning, the notion of the EU agreeing to a common China policy ahead of an April 9 EU-China summit seems equally elusive – arguably shattered by Italy joining the BRI in spite of warnings from elsewhere in Europe, a move that in turn presaged Merkel’s Tuesday statement that Europe could sign up to the BRI.

“The visit was definitely a success for Xi, let’s face it, given all the current tensions with the US,” said Pesjova.