How to Respond to China’s Carrots and Sticks?

China is increasingly resorting to economic coercion in order to advance political objectives. In the Asia-Pacific regional context, Beijing has repeatedly leveraged economic interdependence to subject regional states to its political and security interests. In Europe, on the other hand, China has thus far relied on subliminal measures to compel individual actors to its will. But as China’s global ambitions and stakes in Europe rise, heavy-handed coercion of the kind that South Korea, Japan, Taiwan, or the Philippines have experienced could soon become a reality in Europe. A case in point are Beijing’s threats to reduce German car sales in China should Huawei be excluded from the German 5G market. In consequence, European policy makers have come to appreciate that China’s rise implicates European security, and that economics and politics cannot be separated in diplomatic relations with China.

Event Summary:

Background:

• Over the past three decades, outside observers assumed that China would integrate itself into the global economy.
• The increasing liberal paradigm in the global world order greatly increased interdependence between nations thus making conflict more difficult.
• Chinese economic experts believed China would have little to gain and much to lose by challenging the status quo.
• It is in Beijing’s interest to maintain friendly relations, and China goes to great lengths to assure its neighbors that it is rising peacefully in power and not seeking Asian/Pacific region domination.
• However, China is increasingly using economic coercion in Southeast Asia to advance its political and security interests, and as Chinese stakes and interests in Europe rise, it is likely that it will also use economic coercion in Europe as well.

European Theater and China

• Early in 2020, China threatened to restrict the sale of German cars in response to discussions in the Bundestag about restricting third-party access to European 5G development.
• By looking through the different cases in Chinese coercion in Europe from the past decade, it is clear that the Chinese coercion response corresponds to the gravity of the situation. This implies that China’s coercion is measured and calculated rather than more of an emotional reaction.
• For example, China is threatening coercion against Europe’s possible refusal of Huawei 5G for two possible reasons:
  • They want to have their software there in order to collect more European intelligence, however, this seems less likely due to reports from European intelligence agencies.
  • They want to integrate a national brand into a household name in order to remain relevant in future emerging technology and markets.
• Europe and the United States both have as much if not more leverage over China than China does on them.

Policy Recommendations

• The EU and the United States should introduce decoupling methods to mitigate Chinese economies measure on industries for which the EU and the United State overly rely on China.
• The best response may be for the United States and Europe to double down on liberalism and create stronger bonds of interdependence with China across all non-critical industries and those not threatened by Chinese supply-chain domination.
• The United States and EU should work together to make a new trade deal that goes beyond TTIP to include trade enforcement mechanisms and a blocking statute aimed at third parties.
• The United States and the EU should deepen transatlantic cooperation in critical industries impacting national security such as 5G, ICT, Defense technology, AI, energy storage, rare minerals, pharmaceuticals, and medical equipment.

Additionally, the United States and EU should help further allies and partners beyond the transatlantic context, specifically in the Asian-Pacific region.

Supported by the DAAD with funds from the Federal Foreign Office (FF)