The article appeared in translation and in a modified version in Aspenia winter 2014

China’s pivot to Europe and what it means for the EU

The US has recently launched a technologically innovative 13 billion dollar nuclear aircraft carrier. This 100.000 tones super ship is destined to join its Pacific fleet and it will enter service in two years. The much talked about pivot to Pacific, repackaged as rebalancing, is happening regardless of its various difficulties.

For over a decade China has been reacting to US foreign policy with a mix of regional and global actions. Security concerns and resource competition are certainly shaping its options but so are global trade and investment patterns.

China’s choices reflect the dual relationship between one of the oldest civilisations and most populous country on Earth and the mightiest economic and military power of today. This unique paradigm of interdependence and strategic competition with the US has shaped Chinese policies toward Southeast Asia for the past two decades.

It is worth analysing what impact it has on China’s Eurasian and West Asian policies as well. Three areas in particular are relevant: China’s relations with the European Union, the Levant and Central Asia. All these regions are witnessing increased Chinese interest and opening.

Today no power comes close to the military spending power of the US. On the long run this will not remain unchallenged but for now militarily it reigns supreme. Even with its striking policy and politics lapses the US remains essential. The charade of the government shutdown over the financing of its debt in the protracted and ultra partisan Congress row has proven that beyond dispute. China was not a bit amused.

Chinese comments made during the US government shutdown have shown its annoyance with American antics that threaten the stability of financial markets and world economy. They also show how China’s is using any opportunity to improve its international standing. China is as worried about its competitor’s weaknesses as it is about its regional policies while also using them as a measure for how much “respect” it is given.

China is reacting actively to pre-empt and counter US policies but is also ready to exploit its perceived weaknesses. Unlike Russia, China is not sponsoring an aggressive, grandiloquent media channel like Russia Today. Instead it prefers the myriad of Confucius Centres all across the world. While its officials are waxing poetic about the role of classical Chinese philosophy in its economic and foreign policy China is systematically expanding its influence using very conventional instruments. Increasingly it’s playing a great power game.

The American Asia Pacific pivot is designed to insure the US remains the leading economic and military power for quite some time. It is not as much a containment strategy as it is an insurance policy. US policy in Asia Pacific is designed with China in mind but not exclusively. The US has been too deeply captive in its unnecessary conflict in the Middle East and the resources sapping, mismanaged occupation of Afghanistan to pivot to Asia earlier. Both civilian and military voices were planning for this prior September 11, 2001.

Simply too much of the global trade, investment and energy flows passes through the South China Seas and western Pacific for the US not to be actively present. This becomes critical in the context of emerging and increasingly relevant and influential regional players.

Many countries in the region are “emerging” but none has the ambitions of China. Its size and power make it equally a compelling partner and a competent bully. As a NYT article[1] on South Pacific sovereignty and territorial disputes China is using “its big belly while putting its hands behind its back” and is pushing out the competition without swinging punches.

China obsesses about the American increasing presence in Asia. It sees the pivot essentially as a containment strategy for China’s legitimate return to the world stage as a superpower. At the same time China’s leadership does not wait for its power to match that of its American competitor in order to act. Thirteen billion for building a carrier with a 7 million per day cost of operating and maintaining is a high price for any defence budget. The US has several Nimitz class carriers planed for the next three decades mostly replacing existing assets. Even China’s rapidly expanding military spending is no match.

In part this is why it is businessmen and engineers more than diplomats and soldiers that are carrying the baton of Chinese policy around the world. What China does is responding with its own pivot using its incredible assets. This is China’s strategy of avoiding a strategic encirclement and a potential strangling of its vital energy supply routes. This scenario would threaten its global manufacturing dominance.

This is also why Beijing carefully follows Transatlantic Trade and Investment Partnership and Trans Pacific Partnership negotiations. These are seen by China as tools in the US arsenal designed to keep Chinese products and investments at bay and thus perceived as extremely hindering Chinese economic and strategic interests.

The following exchange took place at the Washington Ideas Forum mid November between Michael Froman and the The Atlantic’s James Fallows. “What does the U.S. want, and what will it get, out of trade agreements today? Froman: “These trade agreements … paint a very bullish picture going forward. Once agreements are wrapped across the Pacific and Atlantic, we will have free trade with 65 to 70 percent of the world, which makes the U.S. the leading global platform for manufacturing—and consequently the world’s leading exporter. … China is the elephant in the TPP room: It’s not included, and it’s upset about it. But Froman insists TPP isn’t a swipe at China—it’s a parallel process”

But what can China do to mitigate the potential impact of these free trade agreements? A lot in fact and it is already well on target. The pivot towards Eurasia is an essential part of China’s foreign and strategic policy.

Based on the overarching “New Power Relations” policy that defines its new leadership worldview, China’s pivot is defined as a “march westwards”. It takes its inspiration from the Chinese preference for stability and it uses multilateral settings for bilateral deals rather than building comprehensive regional organisations. Even the advances and relatively sophisticated Shanghai Cooperation Organisation is more of a staging ground than an actual multilateral instrument.

China wants a much greater role in global affairs. Its “new power relations” policy is as much about getting respect as about securing access. And access goes through securing good will from transit and partner countries. Its “westward march” is reflected by a Chinese New Silk Road Policy. The middle corridor that connects China to Central Asia, the Caucasus and further with Europe and the Levant is an essential party of China’s logic of strategic networks.

Today China’s strategy is to match its opening and charm offensive towards the countries of ASEAN with a new dynamism in Central Asia and an opening towards Europe and West Asia. Only few months in its post, President Xi Jinping has concluded a tour of four countries in central Asia. On offer were investment and trade partnerships, infrastructure development and financial assistance. In exchange China gets energy deals and access to trade routes.

China is sensing the strategic void that the US and its allies’ withdrawal from Afghanistan will create in Central Asia. This is why China crafted and adapted its own New Silk Road policy using economic rather than military means. China is filling this void that exposes its long frontier in the region with India, Pakistan and Kazakhstan and its own restive Xinjiang region. At the same time China is building and developing a sustainable, resilient and modern infrastructure corridor that allows its goods to flow westward towards the Caspian, Black and Adriatic Sea. Its partnership with Turkey and good relationship with Iran is opening access to Eastern Mediterranean as well.

In parallel China is rekindling its relation with Russia, Moscow was the first foreign capital Xi Jinping visited. But new China is no pushover. In September at the G20 meeting in Saint Petersburg Russia got a sour deal. It was forced to accept a much lower price for its gas exports than it gets from its EU customers. Further west China is building strategic relationship with Saudi Arabia and Qatar. It is also notable that Sudan is becoming a major energy exporter to China.

China’s Syria and Middle East policy is tied into that. China is quickly becoming the world’s largest oil and gas importer. Its policy relies on several supply sources and routes. One is with Russia towards North and East, another is median with Central Asia, Saudi and increasingly Qatari and Sudanese oil and finally Myanmar. Its quietly preparing for a possible Chinese shale gas revolutions and its eyeballing, in an increasingly tense staring match, the territory and the resources of South China Sea.

These are as important as its continuous hold on reliable export markets, its ability to influence world currency markets. Its lesson form the 2007-2008 crisis was that if it wants stability it cannot only control domestic markets but it needs to get involved. It is equally a sign of its new assertiveness and its quest for respect as it is a pragmatic move.

To lesser degree the same is true with regards what China calls Western Asia: the Levant and the Greater Middle East. There China has played a slow pace strategic game. Its trade and investment take sometime unexpected turns when it comes for example to supplying Turkey with antiaircraft missile systems. This was a move that was bound to irk Turkey’s NATO allies and in particular the US its major military hardware supplier.

China’s pivot to Europe started over a decade ago. And it was a calculated strategic step.  Its policy vis-à-vis Europe has been transformed both by European realities and by China’s own security and economic needs. Again stability, energy and access are the key words and investment the main tool.

China lacks now and will in the near future the real projection capabilities to allow it to play a muscled global strategic power game. Not for the lack of trying. Beijing is heavily investing in military capabilities especially naval it says are needed to protect increasingly global Chinese economic interests. In fact its officials are pretty straightforward to say they mean trade and energy routes.  However its preferred strategic means for its expansionist foreign and strategic policy take the form of investment.

China has also decided some time ago that the EU is not a strategic player in the classical sense. It is a trading partner and increasingly an investment target for Chinese companies. One may add that Europe’s recent conundrums make it hard to argue with the Chinese.

The UE has become China’s biggest trading partner. DG trade reports China’s trade relations with Europe in 2011 as in excess of half a trillion annually. Out of this about 55 billion dollars is with Central and Eastern European countries close to 10% of total China EU trade. China registers close to 150 billion US dollars trade surplus with the EU. The trade deficit of CEE with China was roughly 30 billion. However the trade deficit is slowly shrinking for both EU as a whole and for CEE.

China’s total trade that year was about 3 and a half trillion and the EU represents roughly 15% of that. 1,5% is with CEE. Comparatively China’s trade with the US was half a trillion and with ASEAN countries was about 360 billion USD in 2011. US deficit with China was around 300 billion in 2011 and is essentially growing annually.

These figures show without any doubt the importance Europe and accesses to its markets plays for the Chinese economy.

Before China’s EU accession Hungary, despite having accepted to open a Taiwanese logistics hub in Budapest, was China’s biggest trading partner in the region. Today it was largely replaced by Poland. This is in line with the Chinese investments and transport deals that facilitate access to Poland via Russia.

Chinese total FDI to Europe in 2010 were close to 6 billion US dollars. 400 million USD about 7% of it went to CEE. Following CEE’s accession to the EU Chinese investments have been constantly growing and they stood at 15% of China’s FDI in the EU prior the financial crisis. They are now rapidly rebounding.

Today China operates trade distributions centres in Hungary, Poland and Romania. Unlike in other parts of the world where mining and commodities are the main investment target for Chinese companies, in CEE China is investing heavily in manufacturing. Key areas are electronics, IT and automotive. Increasingly China is active in the privatisation of state owned enterprises in CEE countries. Essentially it is adapting to local value chains and starts acting like an economic power.

We see a rapid trend of growth in Chinese investments in the energy sector including renewables in Europe including CEE. Similarly, Chinese companies are highly active in infrastructure developments in the CEE.

China’s specific use of multilateral settings as a tool for its foreign policy is evident in its relationship with the EU as a whole and in particular with CEE. Following its successful WTO membership China is working towards trading and investment agreements and it enters negotiations with the EU but it puts enormous emphasis on its bilateral relations with key countries like Germany, France, Italy and Spain.

This is indicative of the Chinese approach that uses multilateral settings for bilateral deals. Brussels officials frown upon EU member states accepting and encouraging this. With heavy weights like Germany’s Angela Merkel and UK’s David Cameron playing the Chinese game, the EU Commissions and EEAS’s warnings largely fall on deaf ears.

China also gives a particular political attention to CEE. Its bilateral agenda with the countries of the region is extremely busy. Just after the EU-China summit in Beijing Prime Minster Li Keqiang has joined 16 other Prime Ministers in Bucharest to discuss China’s relations with CEE countries.

The meeting in Bucharest like the preceding one in 2012 in Warsaw, Poland was about investment, trade, economic stability and development. Nothing overtly strategic in the proper sense was on the agenda. Only for China few things are more strategic today than investment.

Chinese development is investment driven more than anything else. China has become the huge export superpower partly because of its systematic investment in domestic development. Today it is the world’s manufacturer of choice and that is also triggering huge if relative trade surpluses with many but not all developed and developing economies.

Increasingly China is using its capital not only domestically but also abroad. Chinese companies, both state owned and private, can access financing for huge projects at incredible low rates. Using this cheep and relatively stable financing they are out-competing other bidders in tenders for projects in fields like energy, infrastructure, civilian constructions etc.

Some of this is a business in itself and is a lucrative one for Chinese companies. It also provides jobs though in many areas like Africa, Latina America, even Eastern Europe and Central Asia, as the rising cost of Chinese labour has made local workers cheaper. Western companies have often adapted to this and increasingly they enter in consortiums with Chinese companies to insure they are not cut out of lucrative deals.

These Chinese investments and the projects they deliver are seen equally as a blessing and a curse. While many applaud their efficiency and adaptability, others are complying they distort competitive markets, negatively impact labour markets and cut out local workers and overall that they lack the conditionality that other investments bring with their capital. In a nutshell the argument goes like this; unlike western capital that requires a certain level of good governance and transparency Chinese companies are far more tolerant to lapses in governance. This leads to less concern for social and environmental issues, overall less care in with due diligence and project finance, a tolerance if not a cosiness to corruption. In this sense as the argument goes Chinese investment may deliver infrastructure, hospitals, airports, railroads, factories but they not only do not improve but in fact worsen economic governance and accountability issues.

A lot of attention was given to the impact of Chinese aid policies vis-à-vis the developing world and Chinese aid was much maligned as tolerating human rights violations, corruption and overall bad governance in exchange for row materials and lucrative investment deals. This is partly hypocritical given the very western preference for development aid directed to former colonies and trading partners. However the governance conditionality in EU driven investments and aid is important.

Chinese investments in CEE are strategic both as lucrative business expanding Chinese foothold but also as part of it European projection of it “westward march”. Depending on country they take the form of trade deals, investment in national infrastructure and, increasingly, in cross-regional interconnecting infrastructures.

As mentioned, China is investing heavily in interconnections with Europe. CEE plays a great role as the Gateway for China’s trade with Europe. It’s already a logistic hub but it needs further connecting with Eurasia. The current Chinese approach is developing along the old TAR project as the Silk Road of China. This program originally initiated by the UN Economic and Social Commission for Asia and the Pacific in the 60’s was supposed to link Singapore and Istanbul.

Today the Northern Corridor covers route via Kazakhstan, Russia, Belarus and Poland. The first container train from China arrived in Poland after travelling 10.000 km in fifteen days. This involved deals between Chinese, Russian and Polish rail companies operating various stretches of the network. This freight rail road significantly cuts the duration of maritime transport and reducing cost by millions of US dollars.

The Southern corridor is currently unclear due to the international sanctions affecting Iran. However, the former North-South corridor also dependent on Iran is being built by Chinese companies via the Caucasus. Chinese companies are currently building a railroad along the Baku Tbilisi Ceyhan pipeline using Chinese sovereign funding.

These investments dovetail with existing Chinese investments in CEE and the Black Sea, Mediterranean and Adriatic area.  Chinese money and companies have doubled the capacity of Piraeus and are heavily involved in developing capacities in Izmir.

All this is as important for Europe and for CEE as it is for China. There is in fact an incredible opportunity for Europe to use China’s willingness in order to create a continuous space for trade, investment and stability in Eurasia. For this Europe needs to be more strategic in its actions.

The lack of conditionality of the Chinese investment is a serious issue in particular in non-EU countries in the region. Not only because it’s creating a less than level playing field but also because it is increasing political instability. Despite China’s obsession with economic growth and development, these are not enough to stop political violence, separatism and internal conflicts in the region. Its lack for interest in good governance issue needs to change. Working with the EU in this sense could provide real opportunities for a meaningful Chinese contribution to regional stability.

This shapes China’s EU policy and it should shape EU’s. Interested in not paying a huge price for TTIP and being twice locked out via TTIP and TPPTI China is actively engaging Brussels. It is increasingly if hesitantly playing a role in the Middle East and it is investing heavily in its beachhead in central Europe from Greece to Turkey and Israel and north to Poland via Romania and Hungary.

Fearing legal, political and strategic encirclement China is investing in gateways and bridges. This may be a good thing for all. Ultimately this is exactly why the ancient Silk Road made east and west rich for centuries.

Europe can use the Chinese preference for bilateral and sub-regional deals as well as its appetite for large-scale investment only if it stands firm and united on core issues.

Europe needs to move beyond the trade spats like the one around solar panels and address serious issues. Some of these relate to old sores like agriculture, intellectual property, others relate to the rude competition with state supported Chinese companies. The EU and the member states should no accept deals that fall short of that standard.

Also Europe should work more strategically with the Chinese government and companies to develop the eastern part of the New Silk Road. Linking Central Asia to the shores of the Black Sea and the Levant investments provides both China and Europe with instruments in stabilizing a critical region. In the meanwhile the New Silk Road approach is building a powerful trade and investment corridor and a strategic narrative for southern Eurasia.

Western Asia is also an area for China Europe cooperation. From Turkey to Syria and Lebanon to Israel there is room for closer collaboration between Chinese and European companies in developing projects instrumental in stabilizing and securing the region. With energy becoming a part of the Eastern Mediterranean strategic game China is moving beyond trade and it slowly completes its pivot.

Few players except the US can impact China’s strategic game directly. India, a natural competitor and Russia, China’s “most important partner” but also another competitor, play a cautious role in the Pacific. Strategically none of America’s allies present too much of a worry for China with the notable exception of Japan. Europe is caught in its own political and economic quagmire that saps its energy and forbid it from playing a greater role in global strategic affairs including Asia. This was noticed by China and makes for an uneven relationship. This can only be addressed at strategic level.

The time is ripe for a serious EU wide China policy to match the opening shown by individual member states. It is also time to change the nature of the game from a bilateral dominated by one on one deals with China. We need to move to a more ambitious, integrated and mutually beneficial agenda. As mentioned here there are plenty of opportunities for EU-China cooperation

As its Transatlantic ally is pivoting to the Pacific, Europe should meet these dual strategic challenges by joining the American pivot towards Asia.  In parallel it should meet China’s own pivot towards the west. This is new territory for China and the EU can help steer this towards a mutually beneficial partnership.

[1] http://www.nytimes.com/newsgraphics/2013/10/27/south-china-sea/