© REUTERS/US Navy/Handout

China’s defiance of the arbitral decision on the South China Sea presents a serious challenge not only to the United States and its Asian allies, but to the entire international community.

The sweeping rejection of China’s claims by a tribunal at the Permanent Court of Arbitration in The Hague has increased the risk of an escalation of tensions in the contested region, especially if China chooses to reassert its own position on the ground. But even without further escalations and outright military conflict, China’s rejection of the July 12 decision on the South China Sea undermines German and European interests, the international legal order, and a multilateral approach to conflict resolution. It demonstrates that China’s integration into the international order is clearly conditional – meaning that leading European states need to work to prevent China from using coercion to enforce its claims elsewhere.

A Huge Blow to Chinese Claims

The tribunal delivered a remarkably sweeping legal victory to the Philippines, which had filed the case under the UN Convention on the Law of the Sea (UNCLOS) after it was unable to settle conflicting territorial claims bilaterally with China itself. As expected, China, which never accepted the court’s legitimacy, declared the decision “null and void.”

The ruling, a five-hundred page document, supports the Philippines’ submissions on almost all counts. In fact, the arbitrators have made any Chinese claim to large maritime zones legally impossible. They also determined that China had not only violated the Philippines’ sovereign rights through its land reclamation and interference with Philippine fishing and oil and gas exploration, but also violated obligations regarding protection of the marine environment and aggravated the dispute during the proceedings.

Clear Positions and New Instruments

The award and Beijing’s explicit non-compliance together constitute a turning point: China is openly breaking international law if it continues to deny the jurisdiction of the tribunal in The Hague and the fact that it is bound by the tribunal’s decision. Unfortunately, rather than constraining China, the award might actually reinforce Beijing’s resolve to establish China as the predominant power in the region by asserting its maritime and territorial interests more forcefully.

This means that a broad international coalition is necessary to prevent developments in the South China Sea from spiraling out of control. To build diplomatic leverage vis-à-vis China, new diplomatic and multilateral instruments, such as a “G7+ format” involving key actors in the region, will be necessary.

Governments that are committed to maintaining a law-based international order cannot let China off the hook; they will have to take a firm stand in defense of existing global rules. German and other European leaders should use the upcoming ASEM and G20 summits to publicly make their position clear. They have to be careful not to burn bridges by giving China the opportunity to be a part of the solution, but if Beijing decides to escalate further, a boycott of the G20 summit must be on the table.

The Risk of Further Escalation

A Chinese course correction is highly unlikely in the foreseeable future. Chinese official statements condemning the ruling and chalking the decision up to an American or Japanese conspiracy drive up domestic nationalist pressure, making it difficult for the government to find a “face saving” way out. The risk of escalation will increase further if other claimant states are tempted to use the new level of international support to advance their own interests. The new president of the Philippines, Rodrigo Duterte, has, however, announced that he wants to return to direct negotiations with China, which could allow for a temporary deescalation on the regional level.

The US is certain to continue its massive diplomatic campaign to “shame” China for its non-compliance. Depending on Chinese reactions, US military presence and support in the region, as well as its “Freedom of Navigation Operations,” could become more assertive.

It is mainly China’s behavior, however, that will determine the path forward in the months to come. While Beijing is unlikely to step up the pressure until after September’s G20 meeting, the situation might escalate if China’s leaders decide to respond forcefully. Beijing might reassert its claims by declaring an Air Identification Zone (ADIZ) over the South China Sea, deploying fighter jets on its new artificial islands and a more aggressive posture of its naval forces, including its fisheries militia. If China were to construct further artificial islands closer to others states’ coastlines, it would be a “red line” for many international observers.

Such an escalation would not only prevent successful management of regional tensions in the South China Sea for years, but would also increase the political pressure for Berlin to more explicitly take sides – making it difficult to act as a neutral intermediary between the US and China.

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The consecutive G20 presidencies of China and Germany provide a chance 
to further deepen bilateral cooperation. But while there is agreement on some issues, others like tax havens and debt-financed growth may prove thorny.

© REUTERS/Aly Song

Preparations for the G20 summit in Hangzhou in early September are in full swing, while the German G20 chairmanship and the July 2017 summit in Hamburg are not far off. The focus areas of the Chinese G20 agenda have already emerged: Among other things, Beijing is paying particular attention to infrastructure investment and the development of a green financial system. With regard to Germany’s plans, less is known. Against the backdrop of the discussion triggered by the Panama Papers, Chancellor Angela Merkel underlined that the fight against tax havens will play an important role during Germany’s G20 presidency. Meanwhile, Finance Minister Wolfgang Schäuble’s forceful criticism of debt-fueled growth in the context of a G20 meeting in Shanghai earlier this year suggests that dealing with rampant indebtedness in many parts of the world could also be high on Germany’s G20 agenda.

No Success Without Standards

Based on the success of China’s development strategy over the last three decades, Beijing considers infrastructure investment a crucial tool to unleash development potential and stimulate growth in the framework of the G20. The G20 already initiated a Global Infrastructure Investment Initiative at the 2014 summit in Brisbane. Yet it was China’s establishment of the Asian Infrastructure Investment Bank (AIIB) that drew global attention to infrastructure gaps hindering development.

When it comes to debt-financed infrastructure investment, the German government is generally hesitant. Yet there is no doubt that it is also interested in tapping new sources of growth. By joining the AIIB – Germany actually holds the largest voting share among non-regional members – Berlin has already demonstrated that it will contribute to closing the global infrastructure gap. To further support China in its efforts to strengthen global infrastructure connectivity, Germany could build on its experiences with the infrastructure investment programs of its Kreditanstalt für Wiederaufbau (KfW), the European Investment Bank, and the European Bank for Reconstruction and Development to promote the development of socially-, environmentally-, and financially-sustainable lending standards within China’s initiatives.

Green Finance

There may also be opportunities for cooperation between China and Germany in the development of a green financial system. Green finance aims to promote environmentally friendly projects through the creation of special financial products, setting the course for more sustainable growth by factoring environmental impact into credit-granting decisions. China has taken up the cause of “greening” its financial system to avoid environmental degradation becoming the collateral damage of its rapid economic growth. It became clear that Beijing places a high priority on greening its financial system in 2014 when China’s central bank collaborated with the United Nations Environment Program to set up a Green Finance Task Force. Consistent with China’s increasing integration into the global financial architecture, Beijing now also wants to promote green finance within the G20 and has established a Green Finance Study Group within the G20’s finance track.

When it comes to greening the global financial system, Germany may not be as suitable a partner as the United Kingdom, which is backing this trend in an effort to provide fresh impetus to its own financial industry. Nevertheless, Germany also has something to offer in this regard, given that green finance plays a growing role in the country’s development cooperation. In this context, the Global Climate Partnership Fund, initiated by the Federal Ministry for the Environment and promoting green growth in emerging markets, is particularly worth mentioning. It is also in Germany’s interest to encourage environmentally friendly growth in China since this would open up new business opportunities for German producers of environmental technology.

Hands Off of China’s Princelings

In the fight against tax havens, German-Chinese cooperation will prove much harder. Not even two weeks after the first reports on the Panama Papers were published, the G20 again put the topic on its agenda. During their April meeting in Washington, the G20 finance ministers and central bank governors announced that they would consider “defensive measures” against uncooperative countries, and reiterated their call for financial transparency with regard to the beneficial ownership of legal persons. Germany, along with France, the UK, Italy, and Spain had been the driving force behind this initiative.

The Chinese government needs to be given credit for having been flexible enough to consider the European proposal on short notice. Besides, it is beyond question that China has a great interest in putting a stop to tax evasion in principle given that the country is facing growing holes in its state coffers. Beijing has thus played an active part in the OECD-led project on the fight against base erosion and profit shifting of multinational companies (BEPS). Moreover, the Chinese Communist Party will also link its ongoing anti-corruption campaign, the largest in China’s history, with G20 efforts to halt illicit capital outflows.

Nevertheless, offshore companies aimed at concealing personal wealth remain a highly sensitive topic in China. In many cases, family members of the ruling elites try to hide their money behind shell companies. In order to protect these so-called princelings and prevent their secret dealings from casting a poor light on the Communist Party, Beijing does not allow any reporting on dubious offshore companies. The government also censored all media coverage of the Panama Papers, which revealed, among other things, that the brother-in-law of Party Chairman and State President Xi Jinping temporarily served as director of three offshore companies in the British Virgin Islands. That almost nobody in China wants to touch this topic explains why China has suspended the anti-corruption task force of the B20 – the business outreach group within the G20 process. In recent years, the group had developed proposals on how to increase the transparency of offshore financial arrangements. According to media reports, no Chinese company was willing to lead the task force.

If the German government wants to focus on the fight against tax havens during its G20 presidency, it can hardly count on Beijing’s wholehearted support.

Beijing Fails to Walk the Walk

German-Chinese cooperation will also hit obstacles in the fight against the rampant indebtedness of both the public and the private sector in many parts of the world. Within the G20, Germany has long been the fiercest critic of debt-financed growth. In the run-up to the February meeting of the G20’s finance ministers and central bank governors in Shanghai, Schäuble was particularly outspoken, stressing that “the debt-financed growth model has reached its limits” and that “talking about further stimulus just distracts from the real tasks at hand.” To lay the foundations for sustainable economic growth, he said, structural reforms and debt reduction were needed, rather than loose fiscal and monetary policy. In this context, Schäuble explicitly praised China for having made structural reform a top priority in this year’s G20 agenda. However, upon a closer look at China’s position, it quickly becomes evident that Beijing only appears to be a suitable partner on paper.

In 2013 the Chinese Communist Party announced a comprehensive reform package meant to lay the foundations for a growth model based primarily on the growth drivers of domestic consumption – innovation and the services sector. Yet in most areas reforms have either stalled or never even left the gate. The main reason for this lack of progress is that the government has time and again unleashed stimulus measures to fight the economic downturn and halt rising unemployment in an effort to prevent sinking growth rates from turning into a political problem. While in early 2016 the Chinese leadership initiated another push for “supply-side reforms,” there were no signs that China would be able to solve its debt problem quickly; in fact, debt continues to grow much faster than the economy. Before the outbreak of the global financial crisis, China’s total debt only amounted to about 150 percent of GDP. Yet in the first quarter of 2016, it had reached around 240 percent of GDP – a dangerous level considering the country’s stage of development. No turnaround is in sight, and the government’s efforts to contain rising financial risks have so far remained lukewarm.

If Berlin wants to make use of its G20 presidency to constrain debt-financed growth and shape the global debate on structural reforms, it should start looking for other partners.

Read more in the Berlin Policy Journal App – July/August 2016 issue.

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© REUTERS/Kim Kyung Hoon

On May 18-19, representatives from participating states and partner countries will gather in Berlin for an Organization for Security and Cooperation in Europe (OSCE) conference on economic connectivity. While China is not a part of the 57-member organization, the German OSCE chairmanship has invited senior Chinese officials to join the discussion.

Engaging China on security challenges in Central Asia within the framework of the OSCE could turn out to be a smart strategy for the EU. As China expands its security activities globally, EU member states need to rethink the way they pursue their own security interests. The need is especially pressing with regard to Central Asia, where both the EU and China have high security stakes.

Originally founded as a venue for dialogue between East and West during the Cold War, the OSCE today is an intercontinental forum encompassing the five former Soviet republics in Central Asia, three of which share a border with China. A wide range of Eurasian security issues, from the protection of infrastructure to the fight against organized crime, have topped the OSCE’s agenda recently.

The Emerging EU-OSCE-China Security Nexus

The OSCE and China will not be meeting for the first time in Berlin. A decade ago, the organization engaged Beijing in tentative talks on China becoming an OSCE cooperation partner in Asia. And over the past 20 years, EU and US security experts have attempted to convince Beijing to embrace the OSCE as a blueprint for East Asia’s security architecture. None of these initiatives yielded any results.

Now, as Beijing continues to promote its “One Belt, One Road” initiative to build an infrastructure and transportation corridor from Asia to Europe, it is in a fundamentally different context that the OSCE and China encounter each other in the German capital.

China’s projects in Central Asia are increasingly confronted with the same security concerns as Chinese economic entanglements in other unstable regions. Beijing is under growing pressure to protect Chinese assets and citizens abroad in the face of civil unrest, terrorism, and anti-Chinese sentiment over environmental and labor issues. China’s steadily growing dependence on energy imports from Central Asia, combined with the fear of transnational terrorism and refugee flows, has also heightened Beijing’s interest in stabilizing Central Asia and neighboring countries, notably Afghanistan.

Like China, EU member states also have significant stakes in the energy infrastructure of Central Asia. Moreover, the recent mass influx of migrants into the EU and the terrorist attacks in Paris and Brussels served as forceful reminders of the need to remain actively engaged in stabilizing Europe’s wider neighborhood.

EU and Chinese security interests do not just converge in Central Asia, however. There is substantial disagreement between the EU and China over how security should be achieved in the region, with differences being particularly pronounced when it comes to the role of human rights, the rule of law, and the sustainability of infrastructure.

EU Deployment of the OSCE

In light of these differences, the OSCE is an attractive tool for pursuing EU member states’ security interests in Central Asia vis-à-vis – and on occasion together with – China.

First, EU member states have already invested considerable resources into the OSCE’s efforts to get security in Central Asia right, for example by building capacities for good governance, border management, and combatting illicit trafficking. These capacities should be deployed when responding to Chinese security activities in the region.

Second, EU member states’ engagement with China within the framework of the OSCE, renowned for its “stealth diplomacy,” would attract much less public attention than similar engagement on a bilateral or EU level, opening up room for a frank exchange with Beijing.

Third, the OSCE’s holistic notion of security — encompassing politico-military, economic, environmental, and human aspects — provides a suitable “playing field” for addressing a wide range of issues in a cross-dimensional manner.

Finally, given the challenging behavior of Russia and the Central Asian republics within the OSCE, EU diplomats serving with the organization have extensive experience when it comes to promoting and upholding a security paradigm derived from the liberal norms of Western democracies in the face of competing authoritarian notions of governance.

To convince Beijing of the value of engaging more actively with the OSCE, EU member states should suggest areas of cooperation that would be of obvious and genuine interest to China. At the same time, they should focus on areas that will also have the support of the US and Canada, the EU’s most important partners within the OSCE. Proposed projects should have at least the tacit consent of other OSCE states, each of whom holds the power to veto initiatives.

With these considerations in mind, the EU should start deploying the OSCE strategically to engage China in all key areas of common concern: the protection of critical infrastructure as well as the fight against organized crime and terrorism.

Points of Departure for Engaging Beijing

Seizing the momentum that might emerge from the Berlin connectivity conference, EU member states should promote greater Chinese participation in OSCE expert workshops. In particular, Chinese officials should be invited to join training courses for Central Asian law enforcement officials on the protection of energy infrastructure from cyber-attacks. Further confidence-building measures in this field could eventually lead to a wider dialogue on cyber security.

With a view to combating the illicit trafficking of arms, drugs, and human beings, Chinese experts should be encouraged to participate in seminars at OSCE field offices, for instance at the organization’s Border Management Staff College in Dushanbe. OSCE training events on drug trafficking for Afghan police officers could be another venue open to Chinese participation.

Even though the EU and China clearly have a joint interest in combating transnational terrorism in Central Asia, the OSCE is not the right forum for a strategic dialogue on counter-terrorism or the exchange of sensitive information. What the OSCE can do is help the EU engage China in a dialogue on the root causes of violent extremism and terrorism.

EU member states should encourage the OSCE to invite Beijing to take part in select events of its campaign against violent extremism, which is intended to raise awareness in participating states and partner countries. Engaging China in a dialogue on countering radicalization within the OSCE framework could open up a venue for addressing wider human rights and rule-of-law issues, which have so far been stumbling blocks in EU-China cooperation in the fight against international terrorism.

As the EU and its allies grapple with China’s expanding global security activities, creating a new space for engagement with Beijing can be a useful tool for building trust and increasing global security. Yet European policymakers should proceed with caution and refrain from overreaching.

Entering into security cooperation agreements should not be seen as an end in itself. Engagement with China in Central Asia through the OSCE has to have realistic, substantive, and measurable goals. Above all it needs to help further the EU’s own security interests.

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