How can the EU influence China?

Written by Charles Grant [1], 07 January 2013

For the EU, China matters more than any other emerging power. Two-way trade in goods between them amounted to €429 billion in 2011. Diplomatically, the Europeans and the Chinese meet in scores of summits, dialogues and working groups. Yet the EU and its member-states have a poor record of getting China to do what they want.

Most notably, China has resisted European pressure to open its markets. Chinese protectionism is one factor behind both the EU's €156 billion trade deficit in goods in 2011, and the meagre level of trade in services (€43 billion) – a European strength – in the same year. China has done much less than the Europeans would have hoped to enforce intellectual property rights: 73 per cent of all fake goods seized at EU borders in 2011 were from China. And when it comes to traditional diplomacy, whether the EU asks the Chinese to act on a human rights case or to recalibrate their policy on Syria, they often stonewall.

Why does the world's biggest economic bloc have such little sway in China? The problem is not so much that EU governments are disunited over China policy, though sometimes they are. It is rather that they fail to understand that pooling their efforts through the EU would give them more clout. Furthermore, the EU fails to take a 'strategic' approach to China, in the sense of focusing on a small number of key objectives.

The Chinese are skilled at using their commercial leverage to dissuade particular member-states from criticising them or welcoming the Dalai Lama. But while Chinese diplomacy sometimes divides the Europeans, they also do a good job of dividing themselves. The southern Europeans are the most reluctant to make human rights an important part of the EU-China relationship. And the northerners are the most unwilling to support protectionism against Chinese imports. The 'big three' – Britain, France and Germany – dominate EU foreign policy, but are inclined to do their own thing on China. They share the same goals, such as supporting liberal economic and political reform in the country. But viewing each other – some of the time – as competitors for the best contracts and contacts in Beijing, they prioritise bilateral ties.

The Germans tend to focus on their commercial relationship with China. They would like the EU to lever open Chinese markets. But some Germans are sceptical that the EU can do that effectively, given that few of its member-states have much manufacturing industry. German officials point out that 47 per cent of EU merchandise exports to China are German.

Yet surprisingly, when the European Council discusses China, Chancellor Angela Merkel does not attempt to lead EU policy and often says very little. She did not do much for European solidarity when in Beijing last August on a trade mission: perhaps hoping for commercial gain, she urged the European Commission not to start an anti-dumping action against Chinese solar-panel manufacturers for allegedly unfair pricing (ironically, the Commission had taken up the matter in response to complaints by German firms, and it opened a case against China in September).

The French, too, tend to be commercially focused and, like the Germans, reluctant to work through the European External Action Service (EEAS). They have urged the EU to apply 'reciprocity' to the Chinese, meaning that it should close some of its markets until the Chinese open more of theirs. The British are quite 'European' on China. They see the value of the member-states concerting their efforts and working with the EEAS. But some EU governments think the British are too willing to follow an American agenda in East Asia.

A new division may be emerging, between the Central Europeans and the rest of the EU. Last April, Donald Tusk, the Polish prime minister, hosted a summit of ten leaders from Central European member-states, six from the Balkans and Wen Jiabao, the Chinese prime minister. Wen met all the leaders bilaterally and offered €10 billion of cheap credits for infrastructure projects. Everyone at the summit pledged to keep their markets open. This 16+1 summit is likely to become an annual event, and there are parallel meetings at official level. The Chinese foreign ministry has established a secretariat to co-ordinate this group, under Vice Foreign Minister Song Tao.

That Poland, an increasingly influential EU country, should wish to take the lead on an important area of foreign policy – in response to a Chinese initiative – is neither alarming nor surprising. Having faced criticism for focusing too intensively on its own region, Poland wants to show that the big three are not the only member-states capable of thinking globally. Nevertheless, some EU officials worry about the consequences of the 16+1 process. What if Beijing’s price for investing in infrastructure is that the host government promise to thwart European criticism of its human rights record, or push for scrapping the EU’s arms embargo on China?

It is too soon to judge whether China may gain such benefits. The Poles have an honourable tradition of standing up for liberty in communist-run countries and would probably not kowtow to Beijing on human rights issues. But the Chinese could win some new friends through the 16+1 meetings. They already have several in Europe: Hungary, having benefited hugely from Chinese investment in its chemicals industry, and Greece, which has welcomed Chinese investment in ports and shipping, are inclined to speak softly about China. Cyprus has never been known to criticise China on anything.

Though Poland has helped to create one sub-group of member-states, it has been excluded from another. The US has convened informal meetings of senior officials from the US, Britain, France, Germany and Italy to discuss East Asian security. It hopes to influence EU policy on Asia through this ‘Quint’. US officials sometimes criticise the EEAS – which is not invited to the Quint – for lacking expertise on the region and they urge the EU to think about security issues as well as commerce.

Despite all the sub-groups and divisions, the 27 member-states often agree on China policy. They maintain the arms embargo and refuse to give China 'market economy status'. They delegate EEAS officials to speak to the Chinese about human rights (Britain and Germany are among the member-states that also have their own human rights dialogues with China, though France does not). They all want the Chinese to remove restrictions on foreign investment, better respect intellectual property and give foreign firms 'equal treatment'. The EU representation in Beijing is co-ordinating the embassies of the 27, for example when they collectively draft reports for the EEAS on events in China.

The current atmosphere in EU-China relations is quite positive. The Chinese are glad that the EU has backed down over its efforts to force Chinese airlines into its carbon emissions trading scheme. And EU officials are grateful for China’s help on the euro. They say it has bought "significant" amounts of sovereign bonds issued by southern eurozone states. There are reports that China has purchased about 30 per cent of the bonds issued by the European Financial Stability Facility, the EU’s bail-out fund, and that a quarter of its $3.3 trillion foreign currency reserves are in euros. China has contributed $43 billion to a new IMF facility that could be used to help distressed eurozone countries, which the US has shunned.

The long-running talks between Beijing and Brussels over a new partnership and co-operation agreement have stalled, partly because of China's reluctance to open its markets. As an alternative, the EU and China now hope to negotiate a more modest investment agreement. This would protect the rapidly growing Chinese investments in Europe, while the Europeans would gain better market access, including to public procurement, and equal treatment for their firms in China. Negotiations could start in the spring, after the formation of a new Chinese government.

The Europeans sometimes work with the Americans on economic issues. They made joint representations to the Chinese government on its 'indigenous innovation' law that could have forced foreign firms to hand over intellectual property – and achieved some results. They have also made several joint complaints to the World Trade Organisation, including one over China's ban on rare earth exports.

The US would also like to work with the Europeans on broader issues of Asian security. It points out that although the EU and its member-states provide more development aid to Asia than either the US or China, they have gained very little diplomatic leverage in return. For example, the annual East Asia Summit will not allow in the EU.

The Americans are glad that Catherine Ashton, the EU's High Representative, has taken part in an annual 'strategic dialogue' with State Councillor Dai Bingguo, the senior Chinese official for foreign policy, even if its substance has been limited; and also that she meets the Chinese defence minister regularly. They encouraged Ashton to sign an EU-US statement on the Asia-Pacific region when she met Hillary Clinton in Phnom Penh in July. This referred to their common commitment to promote democracy and human rights in the region. In the South China Sea they urged ASEAN and China "to advance a Code of Conduct and to resolve territorial and maritime disputes through peaceful, diplomatic and co-operative solutions." Those anodyne words were enough to upset some South East Asian governments, which grumbled about the EU sticking its nose into their affairs.

Some European diplomats do not want transatlantic collaboration to become too concrete: if the EU is perceived as being in the Americans' camp in their great game against the Chinese, its own brand and credibility may suffer – particularly in the many Asian countries that want to avoid taking sides.

The US does not expect Europeans to play a military role in the region, but hopes they will deploy their soft power. For example, the EU could use its expertise on regional governance to help East Asians build their own regional bodies; it could offer its good offices for resolving territorial disputes and promoting freedom of navigation; it could prepare economic aid for North Korea if that country embraced reform; and it could explain the benefits of stronger global governance in areas such as weapons proliferation.

The Americans are right that the EU could and should take a more strategic approach to the region as a whole and to China in particular. With China it should focus on a small number of key objectives. One should be securing better market access – including in services – and protection of intellectual property. A second should be urging the Chinese to strive harder to counter the diffusion of dangerous weapons, and in particular to persuade Iran to curb its nuclear ambitions. A third should be encouraging the transfer of the energy-efficiency technologies that the carbon-belching Chinese economy sorely needs. The big three and the EEAS should seek to line up all 27 governments behind these priorities. A united and focused EU would be more influential in China and more respected by other powers in the region.

Charles Grant [1] is director of the Centre for European Reform.