Europe Reaches a Tipping Point Over China’s Hong Kong Gamble

(Bloomberg) -- Europe's relations with China are going from bad to worse.

Beijing's decision to force national security laws on Hong Kong has outraged many in the European Union for what they see as an attack on democracy. It places EU governments on the horns of a dilemma over how to respond as they shift from battling the coronavirus to economic recovery, where trade with China is likely to play a big part.

That is set to leave Europe somewhere in the middle as the U.S. weighs a range of penalties on China for encroaching further on Hong Kong's freedoms. The EU's chief foreign envoy, Josep Borrell, said that sanctions were not the solution “to our problems with China.” The bloc's foreign ministers instead voiced “grave concern” at China's moves in a joint statement issued after they met by video conference on Friday.

Yet European anger is palpable, and there are signs that China's moves could have ramifications further down the line, by speeding European efforts to adopt a more unified industrial policy and influencing decisions on the role of Huawei Technologies Co. in 5G networks. A post-pandemic rescue plan presented by German Chancellor Angela Merkel and French President Emmanuel Macron last week aims to fortify Europe internally, but also contains measures to equip it to better face outside threats.

Diplomacy is meanwhile at a low ebb, with China provoking European governments through aggressive social media posts over their handling of the Covid-19 pandemic, and some European officials criticizing Beijing in turn for its early response to the outbreak. While preparations officially continue for the first-ever summit of the EU's 27 leaders and President Xi Jinping this fall, China watchers from academia to industry say they doubt the event billed as the highlight of a year of China-Europe engagement will even take place.

The upshot is a collection of friction points that may tip European leaders further toward a reassessment of China as more of a threat to Europe than viewing it as an ally against the Trump administration's anti-globalization tendencies.

“Things are changing,” said Jean-Maurice Ripert, who was France's ambassador to China until late 2019. The pandemic led to “an awakening toward China's expansionist ambitions,” he said. “The Covid crisis and what's going on in Hong Kong are opening the eyes of those who didn't believe it.”

It's an assessment shared by some leading politicians. Norbert Roettgen, chair of the Bundestag foreign affairs committee and an outside contender to succeed Merkel as chancellor, says that Europe's credibility is on the line over its response to China.

Germany's position in shaping Europe's response will be key, both as the EU's biggest economy and since it will assume the bloc's rotating presidency on July 1. EU relations with China were supposed to be the centerpiece of Germany's presidency, but the pandemic has shifted priorities.

The Chinese move against Hong Kong caught everyone off guard, according to a German government official with knowledge of the thinking in the Chancellery. That contributes to the dilemma Germany finds itself in. Merkel isn't willing to join Donald Trump's attacks, which include repeated references to Covid-19 as a “Chinese virus,” but she is aware the security situation in Hong Kong could deteriorate rapidly. Nobody wants a new Cold War, said the official, asking not to be named discussing internal strategy.

“China is not merely a partner and competitor, but a country with which we have profound differences with respect to the rule of law, freedom, democracy and human rights,” Merkel said in a speech Wednesday. While she referred to the “one country, two systems” principle for Hong Kong, the chancellor said that even such fundamental divisions shouldn't prevent dialogue and cooperation.

Merkel's high-wire balancing act has its critics. Nils Schmid, a senior lawmaker with her Social Democratic Party coalition partner, accused the chancellor this week of having an outdated idea of China as an economic partner above all, and of underestimating the “systemic challenges” posed by Beijing. Merkel has resisted a blanket ban on Huawei from 5G networks, a step favored by Roettgen among others.

‘Schizophrenic'

Europe should have leverage over China given Beijing's need for allies in its deepening standoff with the U.S. In reality, the bloc is divided between those such as Italy and Hungary, enthusiastic backers of Xi's trademark Belt and Road investment and infrastructure program, and others including France and Germany, which are more wary in their dealings with Beijing.

One EU diplomat who asked not to be named described the bloc's approach to China as “schizophrenic,” saying that it can't decide if China is a strategic partner or an aggressive rival.

Still, in their joint plan, Merkel and Macron are pushing for stronger European industrial defenses and a reduced dependence on China. With its references to European champions -- Macron spoke of “technological sovereignty” -- a bloc-wide strategic health care industry and a focus on green and digital transitions, it represents much more than just the headline 500 billion-euro ($554 billion) rescue fund, said Erik Nielsen, chief economist at UniCredit.

For Janka Oertel, director of the Asia program at the European Council on Foreign Relations in Berlin, the Merkel-Macron proposal, which still needs the agreement of the bloc's members, “was all about China without talking about China.”

Strategic Reassessment

“This is exactly where we are in the conversation, a European strategic reassessment of the relationship with China, and the challenges that China poses not globally but quite directly to the European economy,” she said.

In Paris, the official emphasis is on “rebalancing” European-Chinese relations toward greater reciprocal market access and the shared fight against climate change. Questions about Chinese interference in Hong Kong put to the French foreign ministry were directed to a tepid EU statement from this week in which the bloc said it attached “great importance” to the preservation of the territory's autonomy, but fell short of criticizing China.

Even such declarations matter, and work will still be underway to forge a common European position, said Ripert, the French diplomat. “The situation is potentially explosive so it's not unusual that Europe is taking its time,” he said. “Combative speeches are useless.”

Chinese officials have sought to downplay the potential impact of the national security legislation in Hong Kong, saying it will only affect a small number of people who helped foment violent protests last year. In an open letter to the city's residents, Hong Kong leader Carrie Lam said “the overwhelming majority of citizens” would continue to enjoy the freedoms such as speech, the press and assembly under laws now being drafted by the National People's Congress, China's legislature.

5G Networks

“The EU will just say something for political reasons but it's really more concerned about the recession,” said Wang Yiwei, a former Chinese diplomat at the Chinese embassy in Brussels. “They always talk about the rule of law but actually this is the rule of law. Since Hong Kong is part of China, of course its future will be decided by the NPC. The EU should support this decision but some lobbyists may be against it.”

Xi might have miscalculated by sanctioning an attack on Hong Kong's democracy, said Reinhard Buetikofer, a German Green lawmaker who chairs the EU Parliament's delegation for China relations.

If Beijing decides to pursue its course in Hong Kong, no one has the leverage to stop it, so the message must be “that it will come with a cost,” he said in a Bloomberg Television interview. “And I would assume that some of the issues that have been contentious around Europe, like the issue of are we going to allow Huawei to participate in building of the 5G networks, may look differently under the auspices of recent Chinese actions.”

The U.K. has proposed forming an alliance of 10 democratic countries to reduce their reliance on China for crucial 5G wireless technology, the Times of London reported on Friday. The U.K. government has approached Washington about creating a club of nations that would include the G-7 plus Australia, South Korea and India, the Times reported, without saying where it got the information.

The U.K. has meanwhile opened a fresh review of Huawei's role in its networks after the U.S. moved to shut down the Chinese company's access to American technology. Those actions will influence German decision-making, said the ECFR's Oertel.

In Berlin, legislation is still being drawn up on 5G networks as part of an IT security law, with negotiations on Huawei's involvement likely in the coming weeks before a draft goes to cabinet, possibly before the summer break. The debate over China more broadly has hardened, according to a German lawmaker familiar with the drafting.

On Sunday, as Foreign Minister Wang Yi warned the U.S. against starting a “new Cold War” with China, the ministry posted a series of tweets in English calling for solidarity with Europe. The pandemic requires both sides to “rise above ideological differences” and China and the EU should be “comprehensive strategic partners.”

For Friedolin Strack, managing director of the Asia-Pacific Committee of German Business, dialogue is essential and “decoupling” from China is not an option. But he too favors a stronger, more united Europe to better protect against issues like the distortion of competition by state-owned enterprises.

Strack's committee helped shape an influential paper by the German BDI industry lobby last year that caused ripples across Europe and in Beijing by arguing for a more clear-eyed stance toward China. Two months later, the EU labeled China a systemic rival. He now sees an opportunity for Europe as “a strong middle partner,” sharing U.S. values while cooperating with China on multilateral solutions. “There is a huge potential in positioning the EU as a stronger global player,” he said.