Source: Eurostat

As European governments debate whether to allow Huawei to build critical 5G infrastructure, fears of economic retaliation by China play a major role in their thinking. While this is a legitimate concern, it would be a mistake if such concerns were allowed to dominate decision-making on strategic issues.

China certainly has serious economic weight, and its market is increasingly important to some European countries, but its real retaliatory power is often overstated. Governments across Europe tend to overlook an obvious fact: the EU single market—not China—is by far their most important source of economic growth.

Following the Chinese Call

As part of accelerated Chinese Outbound Foreign Direct Investment starting around 2012, Europe began to emerge as a preferred investment destination. A surge in Chinese companies’ activities to diversify their portfolio abroad resulted in mergers and acquisition of technology assets in the wealthiest European countries, and infrastructure investment in Europe’s periphery.

Against this backdrop, China sought to institutionalize political and economic cooperation with EU members, both bilaterally and through sub-regional formats. In the aftermath of the eurozone crisis and in the context of rising euroskeptic movements, Beijing benefited from the perception that China could offer attractive economic opportunities in the face of weak GDP growth and be an alternative to Brussels. The launch in 2013 of China’s global trade and infrastructure project, the Belt and Road Initiative (BRI), further reinforced this perception. This has prompted European governments to sign Memoranda of Understanding (MoUs) with Beijing in hopes of securing economic benefits.  At the same time, they made sure to avoid criticism of China for fear of losing out on such opportunities.

Now, the threat of Chinese retaliation if governments decide to exclude or limit the role of telecom equipment provider Huawei in their countries’ 5G is making countries that are more dependent on the Chinese market think twice. However, a look at the numbers shows that European nations have less reason to be afraid than one might expect.

A Narrative of Dependency

In 2018, the EU single market accounted for on average 66.1 percent total exports of the individual EU 27 members plus the United Kingdom, against an average of 2.4 percent going to China.  For member states (and the UK) exports outside the single market, the share of exports to the US was on average 9.3 percentage points larger than those going to China.

These figures should help put the importance of the Chinese market for European economies in perspective and debunk the narrative that China is a source of unlimited economic opportunities. By the same token, these figures show the limits of China’s retaliatory power vis-à-vis European countries and indicate an untapped potential for the EU to leverage its economic power in relations with Beijing. In some states, the narrative about economic dependency on China is likely driven by an over-exposure of some large corporates, such as the German automotive industry, which is heavily invested in the country.

Despite this reality, the economic opportunity/retaliation argument is still disproportionately affecting how governments think about China, including on issues that have strategic and national security implications. It is possible that Chinese ambassadors’ activism across Europe is contributing to this perception.

Ambassadorial Pressure

In December 2019, Beijing’s envoy in Berlin, Ambassador Wu Ken, said that “If Germany were to make a decision that led to Huawei’s exclusion from the German market, there would be consequences. The Chinese government will not stand idly by.” Members of the Bundestag are convinced that in case of an unfavorable decision on Huawei, Beijing would go after the German car industry in China.

It turns out that Germany–which along with France has promoted itself as a leading force behind a coordinated European China policy—may be the EU member state most vulnerable to Beijing’s pressure in bilateral economic relations. In Europe, Germany has the highest share of exports to China (7.1 percent of its total exports, and 17.3 percent of its exports outside of the EU in 2018 according to Eurostat), far above the EU member state average of 2.4 percent and 7.3 percent respectively. German investment in China is also the highest in the EU. The Chinese market is particularly vital to German carmakers. Volkswagen, for example, generates almost half of its revenue in China. All together BMW, Daimler, and Volkswagen made over one-third of their car sales in the People’s Republic in 2018. In January 2019, the influential Federation of German Industries (BDI) urged companies to reduce their dependence on the Chinese market in response to China’s selective market opening and its ambitious industrial policy, which aims at reducing its reliance on foreign companies.

However, while China and the US are Germany’s single most important export markets outside the EU (7.1 percent and 8.7 percent respectively), its export markets are highly diversified, with the EU single market accounting for 59 percent of exports in 2018. So even though Germany is far more exposed than other member states to both the United States’ and China’s retaliatory power, its overall economic dependency on China is smaller than it is often made out to be, and not enough to justify an accommodating position on strategic issues.

Growing Disappointment With China

For years, European governments’ China policies were based on the premise that maintaining friendly political relations, even at the expense of standing up for their own values and interests, was key to unlocking special economic treatment in bilateral relations. Euroskeptic governments have been especially keen on showing Brussels that they had an economic alternative in China. This has made them  cautious not to upset Beijing—an approach that has occasionally extended to economic policy, for example when the previous Italian government worked to water down and eventually abstained from voting on the EU investment screening framework that its predecessors in Rome had asked the European Commission to draw up.

Different European countries are now starting to be more clear-eyed about the gap between China’s promises and the trade and investment reality. For example, the Chinese market still only plays a minor role in the economy of the twelve eastern EU states that are part of the 17+1 framework for cooperation with China. They all joined the China-led format and signed BRI MoUs to cash in on Beijing’s promises for trade and investment. But on average, exports to China still only account for 1.4 percent of their total exports, and Chinese investment has continued to flow to western Europe, neglecting their region. Some of the format’s members, like Poland and the Czech Republic, have voiced their disappointment. Importantly, an average of 72.4 percent of these 12 countries’ total exports go to the EU internal market.

Italy finds itself in a similar situation. The previous euroskeptic government signed a BRI MoU with the stated goal of exporting more to China. However, Italian exports to China declined in 2019, and the Chinese market still accounts for just 2.8 percent of its total exports, compared with 56.6 percent of exports that go to the EU single market. Rome is now also taking a more realistic approach to China and has joined Berlin, Paris, and Warsaw in the push to revise EU competition policy to stand up to China and the US.

Learning from China’s Neighbors

While countries like Germany, the UK, and Finland are slightly more reliant on the Chinese market, lessons from Japan, South Korea, and Taiwan show that economic dependency does not have to translate into an accommodating position toward China.

Beijing’s East Asian neighbors depend much more strongly than European countries on China (individually, their export share to China was between 20 and 30 percent in 2018). However, they are forced to adopt a comprehensive approach that goes far beyond economic interests and factors in national security considerations, not least because of their proximity to China, which they see as a strategic rival. When Beijing weaponized its economic power against them in the past—for example over the Senkaku/Diaoyu islands dispute with Japan or over South Korea’s deployment of the THAAD missile shield—they took measures to foster economic sovereignty in response, effectively limiting China’s economic leverage instead of giving in to Chinese pressure.

European governments should learn from East Asian nations. They should put strategic considerations first and not be overly worried about China’s economic retaliation. This requires growing more comfortable with compartmentalizing the relationship into areas of cooperation and competition. In addition, while the Chinese backlash temporarily hit individual companies (e.g. South Korea’s Lotte), economic ties between China and the three East Asian nations have remained stable overall.

Indeed, another lesson from China’s immediate neighbors is that while Beijing would quickly take advantage of a Europe that was being too accommodating, it is unlikely to substantially follow through on its threats. If Europe took more measures to promote economic sovereignty, China would most likely adapt its own approach in order to continue profiting from good relations with the EU and its members instead of jeopardizing this crucial relationship.

After all, European countries shouldn’t forget that close economic ties run both ways: the EU is China’s most important trading partner. China needs the EU bloc economically and geopolitically in its competition for global leadership with the United States. As Brussels works to rebalance its economic and political relationship with Beijing, leveraging the EU’s economic power should be part of the solution.

The post Exposure to China: A Reality Check appeared first on Berlin Policy Journal - Blog.

© REUTERS/Andrea Verdelli/Pool

Let’s start with a thought experiment: Imagine you work for a German company, university or government agency, and you’re flying to the United States for a business trip. There you meet American colleagues, and after the official work is done you go out to eat together. You’re talking about your families and recent holidays, and eventually the conversation lands on current politics: on Donald Trump’s latest Twitter thunderstorm and the support he gets from Fox News. On the situation at the Mexican border, where human rights activists are arguing with the authorities about a humane way of dealing with migrants. On the deep division between the political camps and the outlook for the coming elections. Can you imagine such a conversation with American colleagues? Probably.

And now imagine the same situation in China. You are on a business trip in Beijing or Shanghai. You meet Chinese colleagues, and after the official conversations you go to dinner. You chat about this and that and eventually, of course, also about current politics: about Xi Jinping, around whom the state broadcaster CCTV is building up a Mao-like cult of personality and whose words of wisdom are the subject of a mandatory learning app. About the internment of Uighurs in the western province of Xinjiang, which human rights activists condemn. About the protests in Hong Kong and the question of who might become China’s next head of state. Can you imagine having such a conversation with to your Chinese colleagues? Probably not. And that’s a problem.

The Things You Can’t Talk About

It is harder to speak frankly about China than about any other major topic of our time. The People’s Republic and the United States are the two formative global powers of our time. We have important relationships with both of them; neither one is easy these days. But our discussions with and about China differ from those with and about the US in a fundamental way: with Americans, we can talk about anything; with Chinese, we can’t talk so readily about a lot of things. Even when we are among ourselves, we often act differently—because Beijing could be listening. And when you can’t speak openly about something, it’s hard to reach a consensus and settle on a functional strategy.

When German top politicians go to China, commentators always ask whether they use “the right tone.” What do they say in public? What about behind locked doors? And what, in the best case, not at all? There’s no other big country that attracts the same amount of attention from commentators when it comes to this issue—not even Donald Trump’s America. There, too, diplomats do their best to skillfully handle the unpredictable president. But otherwise one can have open and “grown-up” conversations with American counterparts.

There are more than 70 bilateral dialogues between Germany and China. Among the most important are the encounters between German top managers and the Chinese leadership in the framework of Chancellor Angela Merkel’s state visits. While complaints about the conditions on the Chinese market often dominate during the run-up to the talks, in the actual conversations with the Chinese side the Germans mostly praise the good cooperation.

The fact that the managers prefer to leave the unpleasant messages to the chancellor is a something Merkel has repeatedly complained about to the business representatives.

For years, surveys conducted by German and European chambers of commerce in China have shown that foreign companies there suffer from increasingly difficult market conditions, for example due to worsening legal standards or the systemic discrimination against foreign companies. However, what is clearly apparent in surveys and is also a permanent topic in confidential discussions is not illustrated by specific examples in the press. No company wants to talk publicly about problems in China. And Chinese diplomats like to use this circumstance to refute criticism: If there really were grievances in China, why can’t this be substantiated with concrete cases? After all, one can supposedly talk about anything!

Fear of the Party State

But you cannot—at least not without consequences. Sure, there are open discussions with Chinese people. But when they occur, they are the exception rather than the rule, and proof of a particularly trusting relationship. The more the Communist Party extends its control over public discourses—in the media, in classrooms, on the Internet—the greater the worry that one might say something wrong.

Why is it so difficult for us to maintain an open dialogue with China when we can do so with the United States or other major partners? The reason is not cultural differences, which people often cite in the China case. The real reason is much more profane: We are afraid. We fear that criticism of China will have a negative effect on us: on business, on political access, on the next visa application. It’s not so much a fear of individuals, of individual business partners or interlocutors, but a fear of an increasingly autocratic political system, whose power is not restricted by laws and which employs a huge apparatus to prosecute attacks on the authority of the party.

Many incidents in recent years show that this concern is not unfounded. When a Dalai Lama quote appeared in a Daimler Instagram channel in 2018, there was immediately a wave of indignation in China. The calls for a boycott only stopped when the car manufacturer formally apologized. The Marriott hotel chain had similar problems because it had Taiwan on its list of independent countries in its booking system.

After Chinese democracy pioneer Liu Xiaobo was awarded the Nobel Peace Prize in 2010, Norway was inflicted with a Chinese political and economic boycott for years—despite the fact that the Nobel Prize Committee is not under the control of the Norwegian government (let alone the Norwegian salmon exporters who were excluded from the Chinese market).

Combining Political and Economic Pressure

Canada currently sees itself under similar pressure: After the Canadian police arrested Meng Wanzhou, CFO and daughter of the founder of Huawei, on the basis of an international arrest warrant, several Canadian citizens were arrested in China, including China expert and former diplomat Michael Kovrig.

This way of combining political and economic pressure has a real effect. The message is: If you are critical of China, you have to expect consequences. These often turn out to be far less dramatic than the headline-grabbing cases: permits are delayed, visas are not issued, or warnings are dropped in conversations. That’s enough to turn heads in the West. If you want smooth business or cooperation, you’d better be a little overcautious.

Often the result is heated arguments about what to say and what not to say. For example, the Federation of German Industries (BDI) published a paper in January in which it took the rather moderate position that China was not only a partner for Germany but also a “systemic competitor.” It received much praise for this unusual openness, but it also faced accusations of negligence: in China, something like this could lead to unpleasant demands and diplomatic disgruntlement that could have been avoided. This temptation to self-censor becomes fully visible when in press interviews, personalities like former German chancellor Gerhard Schroeder or Volkswagen’s CEO Herbert Diess painstakingly avoid taking a position on the detentions in Xinjiang and even claim to not know anything about them.

Distorted Discussions

From a business perspective, it’s quite understandable and, in a certain way, reasonable not to take a political position on China. Whoever is responsible for a company and its employees is therefore also responsible for ensuring that business runs smoothly. Moralizing appeals are of little use here. But on a broad scale this leads to distorted discussions, because the Communist Party has a say in what we talk about when we talk about China—not only in China, but also here in Germany and Europe.

However, with the Chinese leadership being increasingly open in its commitment to the course of authoritarian state capitalism, we have to recognize the fact that when we talk about China’s economy, we must also talk about politics. For a long time, we believed we could avoid this fact. There was hope that the economic opening would eventually be followed by a political one, and that many of our concerns would thus be resolved. This position has always been controversial, but there have always been indications that this is ultimately also the position of the Chinese leadership.

The fact that Xi Jinping began his term in office with a major reform agenda raised hopes for a new wave of liberalization. But six years later, it’s hard to avoid the reality that Chinese politics has developed differently—toward more state, more control, and more nationalism, in politics as well as in the economy.

The Limits of Misunderstandings

What can be done to hold on to China as a partner and take it seriously as a competitor? Beijing would like things to continue as before. And to interpret the West’s critical perceptions as misunderstandings. After all, China’s government insists that it is committed to the rule of law,  transparency, open markets and a multilateral world order.

There is no doubt that we would prefer nothing more than for some of our criticisms to turn out to indeed be misunderstandings. For that, the impetus, however, would need to come from Beijing. The annual position paper of the European Chamber of Commerce in China, for example, sets out what steps the Chinese government could take to convince European companies and politicians that the world’s second largest economy is still on course towards open markets and a level playing field. At the end of September, the chamber published a list of more than 800 problems that concern European companies in China. The greatest wish is “competition neutrality”, i.e. equal treatment for all companies, regardless of their ownership structure.

Five Recommendations

In Beijing, Germans and Europeans can only wish. However, at home, we have a real capacity to act. So, what can we do?

First, we must openly name and admit the dilemma we are in. That may sound obvious, but it’s not. Politicians and entrepreneurs prefer to project security rather than uncertainty or fear. Academics and think tankers prefer to talk about their knowledge rather than about gaps in that knowledge or mistakes.

It’s easy to accuse others of self-censorship, but harder to admit it ourselves. Tactically weighing up what can and cannot be said in and about China is the core of our dilemma. We have to be clear about this: The things we do not talk about in China—such as the political system, the arbitrary use of the legal system or human rights—are sensitive because they are important, not the other way round. If they had no relevance, they would not be taboo.

Second, we need more media organizations, academics, think tanks and associations that are able and willing to do research without regard to political constraints and also to name critical issues. Freedom of the press, freedom of expression and research are among the central values that distinguish our political system from the Chinese one. What comes out of this is not always pleasant, undisputed or correct. That’s the nature of such things. However, a general bashing of “the China reporting in the German media” undermines the quality of our discussions, as does the sweeping labelling of positions as pro-Chinese and anti-Chinese.

Third, Germany and Europe need strategies for a world order in which our relationship with China will be difficult for the foreseeable future. As long as Beijing’s authoritarian and nationalistic course continues, we cannot avoid seeing China in many areas as a “systemic competitor” or even rival, and drawing the necessary conclusions from this.

This in no way means that the People’s Republic is our opponent or enemy. It is not! This does, however, provide the context in which we define and prioritize our own work at home. Central to this is the strengthening of Europe as an economic area and global player. That is easier said than done, but that urgency has finally been recognized in Brussels.

Criticism Is Possible

This is exactly what the incoming European Commission President Ursula von der Leyen is talking about when she says she wants to lead a “geopolitical” commission. She is inheriting a number of initiatives and discussions that can be developed in the coming years: The EU’s Connectivity Strategy, first presented in 2018, aims to put cooperation with emerging economies on a new platform and provide a response to China’s Belt and Road Initiative.

Initiatives to promote education, research and future technologies should strengthen Europe’s competitiveness. The free trade agreement with Japan shows that Europe is in a position to forge new alliances. All these are all hard nuts to crack—but they are the right ones.

Fourth, we should talk as openly as possible with Chinese interlocutors about the dilemmas in which we find ourselves. They should be made aware how unsettled we are by China’s current course and how hard we struggle to respond properly. That applies to dealing with the government as well as with individuals. For the West’s critical attitude towards China, many Chinese only have the explanation that Beijing’s party propaganda gives them: that the West wants to prevent China’s rise. If we want them to understand our view of things, we need to explain it better.

Beijing Listens

China’s government is also reliant—as strange as this may sound—on comprehension aids. Experience in recent years has shown that Beijing can listen attentively. At the recent Belt and Road summit, Xi Jinping systematically worked through the criticisms that have been levelled at the giant project for years, such as the massive indebtedness of the partner countries or a lack of consideration for sustainability. The party no longer publicly mentions its “Made in China 2025” industrial policy, at least not by name.

Whether the new rhetoric will be followed by action is still open, but the message has at least been received. Critical strategy papers from Europe, such as the Federation of German Industry’s China paper or the EU Commission’s 10-point plan, were received in China not with joy, but with respect, and did not lead to the tit-for-tat response feared by some.

Fifth, we need a positive agenda for constructive cooperation with China. Despite the current difficulties and concerns, China is an important partner for Germany – and should remain so. A decoupling strategy such as that of the US under Donald Trump is not a realistic, let alone desirable, option for Germany and Europe.

Global political tasks such as combating climate change and its consequences, implementing the UN’s sustainability goals or securing peace only have a chance of success if the largest, richest and most powerful countries work together.

Economically, Germany and China—and by extension, Europe and China—have benefited enormously from each other in recent decades. They can continue to do so. To create open and fair market conditions for this is possible and is in both sides’ interest; a realization that is political mainstream at least when it comes to words and that can be followed by action again once the wave of economic nationalist solo attempts subsides. Germany and China are also more socially networked than ever before.

The much-described era of a “low trust world” does not need to become a self-fulfilling prophecy if cooperation continues: with new openness on both sides. Europeans and the Chinese will continue to be successful together where this succeeds. And nothing creates more trust and understanding than mutual success.

The post Silence is Silver appeared first on Berlin Policy Journal - Blog.

© 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/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.”

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© 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.

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