partner perspectives

Apr 8, 2019 | 10:00 GMT

6 mins read

Are EU-China Relations at a Crossroads?

Chinese President Xi Jinping, right, meets with European Commission President Jean-Claude Juncker, left, and European Council President Donald Tusk, second from left, in Beijing on July 16, 2018.
(NG HAN GUAN/AFP/Getty Images)
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By Valbona Zeneli for the EastWest Institute

China's increased economic and political footprint in Europe has finally caught the attention of policymakers on the Continent. In a new European Union approach, for the first time, Beijing is mentioned as a "systemic rival" of Europe. According to a recent European Commission document, "EU-China: A strategic outlook," China is moving from a "strategic partner" (as depicted for more than 15 years in EU parlance) to a "negotiating partner." Ideally, the European Union needs to find a balance of interests with China as an "economic competitor" in the pursuit of technological leadership, and as a "systemic rival" promoting alternative models of governance.

One of the main challenges in Sino-European relations is being played out by China's far-reaching Belt and Road Initiative (BRI), the brainchild of Chinese President Xi Jinping. The BRI platform provides new market opportunities for Chinese firms and capital (most of which are state-owned enterprises) at the expense of host countries' enterprises. Elevated to the constitutional rank by the Chinese Communist Party as a part of Xi's "China's Dream," BRI is an open competition for global leadership, and a way to reshape the international system, putting China at its center.

Ironically, the same day the European Council met, on March 22, to discuss a common EU strategy toward China — serving as a basis for the EU-China summit to be held on April 9 — the Italian government signed a memorandum of understanding (MoU) with Beijing to officially become a member of the BRI.

Initially seen as an opportunity for European economic recovery after the eurozone crises, the BRI has prompted new concerns. Following a "wait and see approach" on the EU side, there is a wider understanding that while the BRI promises global development, it carries daunting challenges that run counter to an EU agenda that favors trade liberalization. In response, the European Commission published its "Strategy on Connecting Europe and Euro-Asia," based on Western economic and institutional norms and principles — a document that completely ignores BRI.

Chinese Strategic Partnerships With Main European Entry Points

While the European Union was formulating its strategy, China was carefully targeting countries in South and Central Europe. Starting in 2012 with the "16+1" platform, China has garnered 11 new EU member states and five candidate countries. Since then, two other EU countries, Greece (August 2018) and Portugal (January 2019), have signed on as members of the BRI.

Beijing — underlining its long-term strategy — has slowly penetrated the "softer" central and southern periphery of the European Union, aiming to access the "core economies" of Europe, while simultaneously taking strategic control of the main shipping ports as points of entry for Chinese products.

In the framework of China's 21st Century Maritime Silk Road, an integral part of BRI, Italy is one of China's most important European strategic players. The flagship Chinese project, the "Five Ports" initiative, links together the Italian ports of Venice, Trieste and Ravenna — plus Capodistria in Slovenia and Fiume in Croatia — by the North Adriatic Port Association.

While Italy is not the first EU state to become a member of BRI, it is the largest EU economy, and the only G-7 member.

The MoU between China and Italy is a very ambitious (though not legally binding) document, aiming at a strategic, bilateral partnership (with involvement from other willing participating nations) that covers a broad range of areas: trade, investment, finance, transportation, logistics, infrastructure, connectivity, sustainable development, mobility and cooperation. Notably, the agreement left out telecommunications.

Beijing has slowly penetrated the 'softer' central and southern periphery of the European Union, aiming to access the 'core economies' of Europe.

The Italian government hopes that membership in the BRI will open new opportunities in trade and investment, considering the country's sluggish economic growth over the last two decades. Since 2001, the average GDP growth rate is 0.25 percent compared with the 1.7 percent EU average, which has a negative effect on local markets and the purchasing power of average Italians.

With a government debt of 130 percent of GDP, Italy is hoping to finance some of its infrastructure projects with Chinese money. Since 2000, Italy has attracted a stock of $16 billion in Chinese investment.

While Chinese banks might finance select infrastructure projects in Italy, there are concerns this may lead to an unsustainable financial situation, adding to the economic and political strings attached to Chinese economic funding under BRI. In other countries, Beijing has been accused of leveraging its economic capacity to take control of strategically important infrastructure assets, while countries have become heavily indebted to China.

The European Union, as a whole, has not achieved increased access to Chinese markets, despite long years of insistence. It is possible, however, that strengthened transportation networks and future Chinese control over infrastructure and strategic investment will, in the long-term, destroy Italy's local industries.

While the European Union is trying to implement a new mechanism to screen Chinese investments in strategic areas across Europe, Italy recently abstained from a vote on just such a mechanism earlier this month. This is a significant change from the previous Italian government of the Democratic Party coalition led by Paolo Gentiloni, which in collaboration with the German and French governments, had requested such a mechanism in a letter submitted to the European Commission in February 2017, highlighting growing concerns about Chinese investments in Europe.

How Will Europe React?

Europe needs to defend its technological sovereignty, while investing in new industries that can compete with Chinese big-state enterprises. One should not forget that Chinese spending in research and development has exceed the European Union; China has spent 2 percent of its GDP, displaying the most rigorous R&D growth (accounting for nearly one-third of the global R&D spending over 2000-2015) and pledging to reach soon 3 percent of GDP.

In the new "EU-China: A Strategic Outlook" document, the focus is to achieve a more balanced relationship with China, based on fair competition and market access, with the goal of persuading China to commit to reforms (within the framework of the World Trade Organization) of industrial subsidies and policies.

The EU strategy is signaling an end to China's unfettered access to the EU market, and Beijing is failing to reciprocate by liberalizing its own market. Though prospects for better alignment in European and Chinese interests are questionable at this juncture, the common strategy is a good step forward. Effective implementation, however, will require a joint European response.

Through deeper trade and investment with China, Italy hopes it can boost its economy; its bargaining power, however, can increase only if relations with Beijing are pursued through the European Union, as outlined in the EU's 2016 Strategy on China. Nevertheless, Italy is among the most important economic and political players in Europe, and any EU response that excludes Italy would be incomplete and unsuccessful.

Valbona Zeneli is the Chair of the Strategic Initiatives Department at the George C. Marshall European Center for Security Studies.

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