© REUTERS/Thomas Peter

It has been a year since US Vice President Mike Pence, speaking at the Hudson Institute in Washington, laid out the Trump administration’s case against China in unusually stark terms, triggering fears of a new Cold War. But across Europe, countries are still struggling to understand what this new world of “great power competition,” as it has come to be known within the Beltway, means for them—and there is nothing resembling a consensus on this crucial question.

Poland has cozied up to the United States. France dreams of strategic autonomy for Europe. Britain is consumed by Brexit chaos. And Germany seems to believe it can navigate this new landscape in the same way it did the old—looking out for its short-term economic interests without making hard choices or choosing a camp. The events of the past few months have shown that this approach is becoming increasingly untenable.

Beneath Donald Trump’s erratic, scandal-ridden presidency lurks a well-organized “whole of government” effort by senior officials within his administration to push back against China on many levels, and to nudge, coax, or pressure allies, if necessary, to join the US campaign.

This has been most obvious on the issue of 5G mobile networks, where Washington has mounted a forceful—if not entirely successful—campaign to convince its partners to reject Chinese suppliers like Huawei and ZTE. But the debate over 5G is just the beginning. Europe is likely to be confronted with a host of similarly difficult choices in the months and years to come. And it needs to think hard, at the national level and collectively, about where it wants to end up.

Black Lists and Surveillance

Earlier this month, the United States blacklisted 28 Chinese organizations, including Hikvision and Dahua Technology, two leading makers of video surveillance products. It accused them of being complicit in human rights abuses in Xinjiang, the western Chinese region where over a million Uighurs and other predominantly Muslim minorities have been detained in re-education camps.

Placing these organizations on the so-called entity list essentially bars US companies from selling them technology without the prior consent of the government. Whether the US move was motivated by altruistic concerns about human rights or a desire to raise pressure on China to make concessions in long-running trade talks is irrelevant. The move shines a spotlight on Europe’s slow-moving effort to revamp its own rules on the export of cyber surveillance technologies, raising pressure on the European Commission, the European Parliament, and member states to overcome their differences and clinch a deal.

In the coming months, the US Department of Commerce is expected to publish new rules limiting the export of emerging technologies, such as artificial intelligence, quantum computing, and 3-D printing, to China. These new policies could have profound implications for European governments and companies, potentially exposing them to extra-territorial US sanctions if they do not follow Washington’s lead. It is unclear whether Europe is prepared for this escalation, which will once again put it in a position of having to choose between the United States and China.

An Impossible Position

“No matter what European countries decide on 5G, there are bigger questions lurking around the corner,” Jan-Peter Kleinhans of the Stiftung Neue Verantwortung, a Berlin think tank focused on technology and society, told Berlin Policy Journal. “Hard choices are looming on artificial intelligence, the Internet of Things, and quantum computing, with China in similarly dominant positions.”

This will put countries like Germany, whose big manufacturers rely heavily on the Chinese market, and the United Kingdom, which post-Brexit will be keen to bolster its economic ties to China, in an impossible position. But if they think they can carry on with business as usual, as their current approach to 5G suggests, they are deluding themselves.

Washington’s threats to rein in intelligence sharing with allies if they allow Huawei into their 5G networks have been brushed off by some in Europe as Trumpian bluster. Perhaps there is an element of truth to that. But it would be wrong for European countries to believe they can continue down this path without eventually suffering a real backlash from Washington, regardless of whether Trump or a Democrat is sitting in the White House in 2021.

A speech given in September by US Assistant Secretary of State Christopher Ford offers important insight into the American approach. Ford, speaking to the US Defense Threat Reduction Agency in Fort Belvoir, Virginia, argued that a “concerted, system-wide effort to erase barriers between the military and civilian sectors of the Chinese economy” has rendered the traditional distinction between the two obsolete. From now on, he appeared to be saying, the US will be considering virtually all Chinese companies a national security threat.

Ford, who passed through Europe in early October with a delegation of officials from the Pentagon and the National Security Council, also spoke of a growing international consensus that the “non-Chinese world” needs to work more closely together to guard against Chinese abuses.

Behind the Curve

Would European capitals agree? That is not entirely clear. Put simply, the US is arguing that the geo-economic threat from China requires responses on two different levels: first, defensive measures like investment screening and procurement policies that protect vital technology and critical infrastructure like 5G networks; and second, policies that ensure Western countries are not unwittingly contributing to Chinese military advances and human rights violations through exports, corporate R&D cooperation, or scientific collaboration. So far, Europe seems only partially on board with the first category and unconvinced, or at the very least well behind the curve, on the second.

After a year in which Europe adopted a tougher stance toward China, introducing its own investment screening mechanism, labeling China a “systemic rival,” and eliciting pledges from Beijing to open up its economy at an EU-China summit back in April, 2020 will be a crucial year in determining whether the pushback will continue.

If Beijing fails to deliver on its pledges from April 2019, will European capitals and the newly “geopolitical” European Commission have the will and wherewithal to muster a forceful response? And when Chancellor Angela Merkel says that she wants to make EU-China relations a focus of Germany’s EU presidency next year, as she did this month in a speech to parliament, is this a sign that she is serious about standing up to China, or an indication that she wants to preserve ties at all costs, heralding more division within Europe? Her readiness to give Huawei a role in the German 5G network due to fears of a Chinese backlash—a position parliamentarians in her own party are trying to overturn—suggests it may be the latter. Either way, Washington will be watching closely.

The post Hard Choices on China appeared first on Berlin Policy Journal - Blog.

© REUTERS/Andrea Verdelli/Pool

Near the end of her speech at the Munich Security Conference in February, Chancellor Angela Merkel struck a resigned, almost plaintive note about Germany’s place in a world dominated by a more hostile United States and China.

Germans could work day and night to be the best, she told her audience, but they would still come up short against the Americans, with their massive economy and all-powerful dollar, and the rising Chinese, with a population more than 16 times the size of Germany’s.

“The odds look pretty bad for us,” Merkel concluded in a remarkable admission of frailty.

That moment in Munich is instructive when trying to understand Merkel’s trip to China last week, her twelfth in 14 years as chancellor and perhaps the most challenging of all her visits, amid violent protests in Hong Kong, an escalating trade war between Washington and Beijing, and nascent European attempts to push back against the master plans of Chinese President Xi Jinping.

Constant Criticism from Trump

Germany is feeling especially vulnerable these days. Its economy, held up for the past decade as the growth locomotive of Europe, is heading into recession, buffeted by the decline in international trade and investment, Brexit, and a struggle by its industrial champions to adapt to a digital future.

The United States, guarantor of Germany’s security since World War II, has turned into its biggest critic. Hardly a day goes by when US President Donald Trump or one of his allies doesn’t lob a verbal grenade at Germany, for its lack of defense spending, its outsized trade surplus, or its addiction to Russian gas.

Against this gloomy backdrop, China looms with open arms. It believes in climate change. It pays lip service to the idea of a free, multilateral trading system. Despite recent signs of weakness, it remains a vast, growing market for German firms. And it doesn’t engage in Germany-bashing. On the contrary: at a time when the Trump administration is gearing up for a new Cold War, Beijing is doing all in its power to lure Europe’s largest economy into its camp.

But there is a price for doing business with China, and Merkel paid it during her two-day visit to Beijing and Wuhan. Not once did she utter the word “Xinjiang,” the western Chinese province where more than a million members of the Muslim minority have been detained in reeducation camps. And not once did she criticize Beijing for its handling of the protests in Hong Kong, limiting herself to calls for dialogue and de-escalation.

Open for Business

At her news conference with Chinese Premier Li Keqiang, Merkel sounded almost apologetic about her government’s moves to shield German companies from the opportunistic embrace of state-backed Chinese rivals, reassuring her hosts that the German market remained open for acquisitive Chinese firms. And she praised Beijing for granting German companies like Allianz, BASF, and BMW opportunities in China that have been denied to other Western firms—moves that skeptics dismiss as symbolic gifts designed to soften up the Germans.

Merkel’s trip came after a year in which Europe, in the words of French President Emmanuel Macron, overcame its “naivety” vis-à-vis China, erecting its own barriers to Chinese investments in its critical infrastructure and declaring the rising Asian superpower to be a “strategic rival.”

In January, the Federation of German Industries, an influential business lobby, issued a toughly worded paper that questioned whether China would ever fully open up its market to foreign investment and urged European countries to work closely together, and with like-minded partners including the United States, to coordinate their response.

European Shift

Spooked by China’s economic ambitions, a new European Commission is expected to explore changes to the bloc’s industrial, competition and procurement policies when it takes over later this year.

Yet there was little evidence of this European shift during Merkel’s visit. And her partners, in Paris, Brussels, and other capitals, may be alarmed by its “back to business” tone.

Merkel travelled with a large delegation of German CEOs, the most prominent of whom was Siemens boss Joe Kaeser, who once referred to China’s controversial Belt and Road Initiative as “the new WTO.” Also along for the ride was Volkswagen’s chairman, Herbert Diess, who only a few months ago caused outrage when he denied knowing anything about the mass detentions in Xinjiang, where VW has a plant, despite months of front-page stories about the plight of the Uighurs.

The Trump administration, which has been piling pressure on Germany and other European countries to follow its lead and decouple from China, will also be alarmed. A transatlantic split over the inclusion of Chinese telecommunications supplier Huawei in next-generation 5G networksis looming. And that may provide just a taste of the tensions to come.

At a time when Washington is eyeing new export controls against China, Germany is doubling down on research collaboration with the Chinese and pressing Beijing to clinch an elusive investment agreement with Europe in time for an EU-China summit that Merkel will host in the eastern city of Leipzig in September 2020. If the deal comes together, two months before the US presidential election, it would mark the death knell of Trump’s clumsy attempt to pry the Europeans away from China.

Antithesis to German Values

The Americans must see this. On the same day that Merkel was meeting with Li in Beijing, US Defense Secretary Mark Esper was in London warning Europe to be wary of China.

“The more dependent a country becomes on Chinese investment and trade, the more susceptible they are to coercion and retribution when they act outside of Beijing’s wishes,” Esper told the Royal United Services Institute, a think tank.

Merkel is not naive. As Hong Kong pro-democracy activist Joshua Wong pointed out in an open letter to the German leader before her trip, she grew up under authoritarian rule in communist East Germany. She sees what is happening in China, from the rollout of a Social Credit System grounded in big-data surveillance, to Beijing’s attempts to chip away at democratic freedoms in Hong Kong and its crackdown in Xinjiang.

All this is antithetical to German values. And yet, unable to count on the support of the United States, Merkel seems to feel she has no choice but to cozy up to Beijing.

The post A Vulnerable Germany Finds it Hard to Say No to China appeared first on Berlin Policy Journal - Blog.

© REUTERS/Thilo Schmuelgen

In early November, weeks before the debate erupted in Germany over whether China’s Huawei should be allowed to participate in the country’s next-generation mobile network, I asked a senior Australian official which way he expected Berlin to lean on this critical question.

Australia had already taken the decision to ban Huawei and other Chinese suppliers from its 5G network on national security grounds. The United States, embroiled in an escalating trade war with China, was doing the same. And New Zealand, a small country with close economic ties to China, would soon follow suit, despite fears of a backlash from Beijing.

But in Germany, Europe’s economic powerhouse, there was little or no debate about the security risks associated with Huawei, the Shenzhen-based company that is now the world’s biggest supplier of telecommunications equipment. And the clock was ticking down. Germany’s 5G auctions were scheduled to begin in the spring of 2019.

The Australian official, speaking on condition of anonymity, recalled how Canberra’s decision to ban Chinese suppliers had taken a huge amount of political guts. It had required close collaboration and trust between the Australian government and the country’s intelligence agencies. And it had meant accepting that Australia would suffer short-term―and perhaps longer term―political and economic consequences for angering the Chinese.

“A Systemic Competitor”

In Germany, the official pointed out, the political backdrop looked quite different. The election campaign in 2017 brought no serious debate over the big foreign policy questions facing Germany. Then came the failed coalition talks between Chancellor Angela Merkel’s conservatives, the Greens, and the Free Democrats. Next, the reeling Social Democrats (SPD) had reluctantly stepped into the breach, keeping Merkel and her weary grand coalition in power. But the chancellor had emerged battered and bruised. German politics was consumed by questions about Merkel’s future and distracted by a tedious months-long debate over the fate of Hans-Georg Maassen, the soon-to-be ousted head of Germany’s domestic intelligence agency. Public trust in the intelligence community, never high in Germany, had hit a new low.

“German politics has been preoccupied with itself for over a year,” the Australian official told me at the time. “The strong leadership and political stability required to take big decisions on issues like 5G does not appear to be there.”

Much has changed in the three months since. Merkel staved off a brewing internal revolt by stepping aside as leader of her CDU party, restoring a fragile calm to German politics. Germany’s leading industry lobby made headlines in January with a surprisingly critical paper on China, in which Berlin’s top trading partner was described as a “systemic competitor.”

And finally, the debate over Huawei and 5G has taken off, animated by the early-December arrest in Vancouver of Meng Wanzhou, the Chinese company’s Chief Financial Officer and the daughter of its founder. Barely a day goes by in Berlin now without a conference or closed-door government meeting on the issue.

The Government is Split

But while Germany’s political class has woken from its slumber, it still feels paralyzed. The decision whether to follow the lead of Canberra and Washington and ban Huawei as a supplier for its 5G infrastructure is the first big strategic decision that Berlin will have to take since the dawn of a new era: that of Donald Trump, Xi Jinping, and big data. The experience is deeply unsettling for a country that is not used to making big national security choices of its own, and which is struggling to define its role and interests in a more Hobbesian world of big power competition.

Germany’s leadership would have preferred—as it initially tried to do in the debate over the Nord Stream 2 pipeline—to label the 5G issue an Unternehmenssache, or issue for companies like Deutsche Telekom to decide.  Another favored option would have been to take the heat off the politicians by assigning a ministry, or perhaps Germany’s cyber security authority, the BSI, responsibility for the decision-making process.

Instead a fight has broken out within the government, with China skeptics in the SPD-led foreign ministry pushing for an outright ban of Huawei, and the CDU-led economy ministry pushing back out of concern such a ban would delay the rollout of 5G across Germany, push up cost, and put the suddenly slowing German economy at a competitive disadvantage.

More recently, members of the Bundestag have demanded a say in the matter. Whispering in everyone’s ear are German companies, led by big automakers who have become entirely dependent on the Chinese market. They fear that if Huawei is excluded, their businesses will feel the wrath of the Chinese state.

The Dangers of China‘s Intelligence Law

It is slowly becoming clear that this is a political decision that may have to be made by the chancellor herself. Merkel, known for sitting out contentious debates like this until the direction of travel is clear, has offered few clues about her thinking. On a visit to Japan in early February, she suggested China would have to provide no-spying guarantees if home-grown companies like Huawei were allowed to participate in Germany’s 5G rollout—a statement that even close allies of the chancellor laughed off as horribly naive.

Merkel is a physicist who likes to focus on facts. But the facts are no savior here. Yes, Huawei has been deeply entrenched in the German telecommunications market for years. It has a longtime partnership with Deutsche Telekom, which vouches for its products and professionalism. Huawei is a private, not a state-owned company. And neither the US nor any other government has produced a “smoking gun” that proves Huawei is an espionage risk because of its Chinese roots. The company vigorously denies that it has ever passed on information to the Chinese state or ever would.

And yet, China’s intelligence law from 2017 obliges all Chinese citizens and organizations to support and cooperate with the state in intelligence gathering. If Beijing came knocking, would Huawei really have a choice in the matter?

A confidential paper from the Mercator Institute for Chinese Studies (MERICS) that was circulated to top German government officials in mid-February is clear on this matter. “In light of the overall political and legal environment in China, trusting the Chinese party-state and Chinese companies with not abusing their access to critical infrastructure is unwarranted,” the paper reads.

Can You Trust in a Trust Clause?

Complicating the calculus for Berlin and other European capitals is the complexity of 5G, a transformational leap forward in technology, that will allow data to be streamed about a hundred times faster than 4G and make driverless cars, smart cities, and other large-scale applications of connected devices feasible on a commercial scale. In a November note entitled “The Geopolitics of 5G,” analysts at political risk consultancy Eurasia Group argued that this complexity raised the potential for malicious cyber-attacks exponentially.

Still, Germany’s BSI cyber security watchdog believes the risks of using a Chinese supplier like Huawei for 5G can be managed by introducing tougher vetting procedures, including a certification process for all hardware and software updates. Germany’s interior ministry, which oversees the BSI, wants to add a “trust clause” to Germany’s telecommunications law. Another idea is to keep Huawei out of the core 5G network without excluding them completely―an approach favored by France.

But some German politicians dismiss these ideas as a grey solution to a black-and-white-problem. “In the end, no matter how many technical fixes and no-spy deals the government dreams up, there are no weaselly ways to resolve this,” Reinhard Buetikofer, a Greens member of the European Parliament, told me.

A Call for Courage

Public pressure from the Trump administration is not making it easier on the Europeans, who are desperate to avoid the impression that they are kowtowing to Washington. Late last year, US officials came through Berlin to present their argument against Huawei behind closed doors. But lately, they have abandoned any semblance of discretion, going public with their campaign. Both Vice President Mike Pence and Secretary of State Mike Pompeo have both issued open warnings to Europe about using Huawei in recent weeks.

Iranian Foreign Minister Mohammad Javad Zarif summed up the dilemma for Berlin and other European capitals in his speech at the Munich Security Conference. “If the United States were to come in the course of their fight with China and tell Europe to stop dealing with China, what would you do? Whatever you want to do then, do now, in order to prevent that eventuality. Because a bully will get bully-er if you succumb,” he said.

In an ideal world, Europe’s big countries could agree on a common 5G approach. That would give each of them a degree of cover. Informal talks have been taking place between the Germans, French, and British in recent months in the hopes of aligning their positions, one European diplomat told me. The European Commission is also scrambling after staying silent for months.

“Germany does not want to take a big decision like this on its own,” the diplomat said. “But you can’t delay forever. At some point the courage must be found.”

The post The Huawei Conundrum appeared first on Berlin Policy Journal - Blog.

© REUTERS/Fabrizio Bensch/Pool

For years, corporate Germany has gone out of its way to avoid public criticism of China. It was too important a market for big industrial firms like Daimler and Siemens. Complaining openly about restrictions on foreign investment or intellectual property theft might have triggered a backlash from Chinese authorities that would dent revenues and profits. It simply wasn’t worth the risk.

Now this caution is evaporating. German grumbling over the Communist Party’s tightening grip on the Chinese economy under President Xi Jinping has been growing steadily louder. And last week, the Federation of German Industries (BDI), the leading lobby group for German manufacturers, put down on paper what many companies have been complaining about in private.

In a 23-page Grundsatzpapier that had been in the works for months, the BDI threw caution to the wind, describing the relationship with China as a “systemic competition.” It formally buried the “Wandel durch Handel” notion that China is destined to converge with the open market economies of the West. And it warned German companies about putting too many eggs in the China basket, urging them to “keep an eye on the possible risks of a commitment in China” and to think about diversifying where they produce and sell their wares. The BDI’s new language—and its public release in an official policy paper—represents a major shift, even if it has been several years in the making.

New level of Angst

Why now? One reason is Donald Trump. The US president’s confrontational stance toward China has given Germany and Europe cover to take a more critical line with Beijing. China simply cannot afford to pick a fight with Germany or Europe in the current environment. On the contrary, it has gone out of its way—so far with little success—to pry the Europeans away from the Americans.

But the BDI paper also reflects a new level of angst in the German corporate world about China’s economic ambitions and Europe’s ability (or inability) to respond. One of the most interesting messages in the BDI paper was the one sent to German and European policymakers. China, the industry group pointed out, has developed ambitious long-term goals, whereas divided politicians in Berlin and Brussels have no discernible strategy at all. In the new world of Xi and Trump, that political inertia represents a growing threat to the competitiveness of European companies.

For over a year, German politics has been consumed by tiresome coalition clashes, leadership debates, and a seemingly never-ending scandal over the head of the country’s domestic intelligence service. Brussels, meanwhile, has been bogged down with Brexit negotiations and internal EU battles over budgets (Italy) and values (Hungary and Poland).  European policymakers, the BDI noted, need to move beyond navel-gazing and develop “visions and moon missions.”

Specifically, Germany’s manufacturers urged their own government and the EU to invest significantly more resources in research, development, education, infrastructure, and innovative technologies. And it called for an ambitious industrial policy for Europe.

No More Lucrative “Have-Your-Cake-and-Eat-It” Policies

Interestingly, the BDI is also urging Berlin to rethink its “have your cake and eat it” approach to China. In the past, Berlin has talked about a united European response to China, while cultivating its bilateral relationship with Beijing on the side. Germany and China have held exclusive “government consultations” since 2011, a format that in the eyes of some of Berlin’s EU partners has helped deliver lucrative deals for German companies at the expense of European unity. So it’s telling that the BDI, whose members have benefited from these close bilateral ties, is calling for an “abandonment of isolated national courses of action.”

“No EU member state can on its own cope with the economic and political challenges posed by China,” the BDI paper reads. “Answers can only come from a strong, reformed Europe speaking with one voice.”

German Chancellor Angela Merkel seems to be listening. EU diplomats told Reuters this week that she wants to hold a EU-China summit during Germany’s presidency of the bloc in 2020 that would include the national leaders of EU member states. Until now, such summits were attended only by top officials from the European Commission—a setup China exploited by luring eastern Europeans to its 16+1 summits with the promise of access to the Chinese leadership.

Coupled with the unvarnished language on China was another message from German industry that goes to the heart of the current angst in Berlin: If China hawks in the Trump administration have their way, we could at the dawn of an economic Cold War between the United States and China, one in which German industry is increasingly forced to choose between its top two trading partners. Berlin is already under pressure from Washington to exclude China’s Huawei from the rollout of its next-generation 5G mobile network. And that, Germany fears, could be just a taste of what’s to come.

The post German Industry Comes Clean on China appeared first on Berlin Policy Journal - Blog.