China’s Designs on Europe
An approaching star in the world’s capital markets is China, now being noticed both by Europe and the US after its head spinning industrial growth lasting for decades. It is a vital trade partner for a majority of German companies which accumulate close to 60% of their country’s GDP and constitute an important part of its economy. China is second only to these German Mittelstands in machinery exports, and it has recently seen them as a tool to exploit for clinching the number one spot itself. China oppressively forces these machinery companies, known for their technical know-how, to open joint ventures and be majority operated by a Chinese citizen once they step a foot inside their country’s home markets. The state later, by law, can extract any information it deems necessary from these operators and pass them on to local businessmen. There’re many examples of fraud committed by these types extractive actions and theft. China has recently set up SMIC, a chip producer, by extracting critical data from Qualcomm, though it remains technologically limited after Qualcomm backed out for security reason. It’s also no surprise, then, that they were the first to accumulate the right combinatorics algorithm to develop a world class company: TikTok.
As it is clear to other countries by now, China does not offer an even playing field for private companies. This is especially true in the financial sector where foreign companies are only allowed to open a few branches, making Chinese banks solely in power of capital investment. This seeping of capital by state companies has turned the country into one micromanaged China Inc.
But, despite these dire circumstances, Merkel has done her best to keep relations decent and has managed to increase trade fivefold with the closed economy in order to push Germany out of the 2008 recession. Many of the German industrial oligarchs have fiddled well off in China monetarily. Take Volkswagen; it has 40% of its revenues made in China. However, overall Germany must recognize China as a threat to its commercial intelligence and as a strategic competitor of the EU, rather than a trusted partner, as this is how an aggressive China will play it at its best.
Europe and the US can embolden past alliances when it comes to China’s state abuses of their companies abroad or its aggressive use of state funds to kindle its foreign direct investment (FDI) strategically used to deepen global ties with Beijing when the world economy took a hit during the 2008 recession. Xi, the Beijing strongman, has promised to promote China’s standing in technology and spur domestic business competition. This agenda has created Chinese “aircraft carriers” of companies that dominate the market, like Tencent, SMIC, or Huawei. Along with this, Xi has started the Belt and Road Initiative project in order to increase China Inc’s investments abroad and reverse supply chains to its crony governments. The opportunistic investments in infrastructure across the Eurasian plain was a step in order to change the current marine routes, thus giving full control of ports and roads to China while staying as a huge production center. This now pits European countries against each other, as poorer ones look on investment as feasible. Countries in south Europe, which did not have the stellar industries of the north and were consequently punished by the big banks in 2008, saw their GDP decline and public debts rise up. These same countries are in dire need of some sort of economic activity to ease up the unemployment problem.
The decision to delay a continent wide relief program by Europe after the 2008 crisis, made by the more frugal countries of the group, such as the Netherlands and Austria, forced Greece to turn its head to China for investment. It seemed plausible, but caused an open dent for China to exploit and sell cheaper to Europe, thus making them ever more dependent on its infrastructure. Over time, it proved to be a Trojan Horse, and Beijing was able to preempt key decisions regarding its future taken in the EU committee through Greece. The most recent action came in 2018, when Greece voted against the bill to recognize Human Rights Abuses by the country, clearly turning a blind eye to the Uyghur concentration camps.
China’s policy with its Belt and Road Initiative (BRI) is simple: blaze through the emerging markets and make them dependent on Chinese usurpation and trade deficit. It’s easier to seep through autocrat led nations, who can be made cronies by incentivizing individual gains. Beijing has recently increased its aggressive policy of state fueled takeovers via the use of soft banks, most recently taking over the German robotics maker Kuka. Since the last decade, the ruling party’s foreign direct investment into strategically important sectors in Europe has quintupled from one end of the continent to the other.
This is as close as it gets to breaking the rules of the commercial world by aggressively using state funds to clear the way for a China Inc. Individual companies can’t stand China’s state competition themselves if they are not protected. Trade is an area where Beijing can restore pride and global dependence by indebting countries and owning autocratic cronies. But BDI, a commercial union in Germany, has realized the latest increase in China’s appetite for German machinery, and recently called on the government to intervene for companies as shares slumped during the Covid caused recession. Merkel’s hawkish cabinet obliged to business owners and worked to secure their companies during the pandemic. It now monitors the books of purchasers and can decide to put a company out of Chinese reach. While Germany might think it saved itself, the EU is not yet out of reach, especially in autocratic Hungary or debt ridden Greece, where China’s firepower of its soft banks have been cannonading the country’s infrastructure for a long time.
It’s no surprise that China is masquerading behind this curtain of increased globalization and so called “beneficial” two-way trade to cover up the influence that it is politically gaining in Europe. It’s ruling in a new system of state capitalism where Xi is trying to increase business competition within the state by making rules clearer and cutting red tape, but also cementifying allegiance to his party beneath the corporate line. It has recently been very hard for the Europeans to take a unified position against the country’s expansionist regime and abuses of human rights because of this eroding line between China’s political and commercial sides. The Chinese transporter, Cosco, recently invested hefty sums in the Piraeus port in Athens, promising it to be a center of trade in a linkage between the Black Sea and Mediterranean. Instead of dishing out parts of their ports, the EU should help Greece to keep its national ports or assign them to a Greek company, not a Chinese one. A public investment into the Athenian port, supported by Europe, would in turn be the smart one to make, leading to monetary benefits over time that can be applied to fields ranging from education to health, all the while empowering Greek businessmen.
Germany shies away from direct engagement partly because Merkel wants to preserve the successful trade ties that her country has established with Beijing which brings immense profits. But trade is not always a “zero-sum game” for Germany, as Mr. Trump likes to describe it. China has also benefited hugely, since one German automation company has already formed a partnership with Huawei to partner in building self automated cars and breaks. This “linking” of corporations is melodramatically opposed to the US Secretary of State Pompeo’s goal of “decoupling” from China. But what is the reason for the ridge between these two democratic nations? Why can’t the US have Europe at its side when addressing a clear cut problem as this one? Huawei, which has been rightly accused of data theft and obliging to the Chinese government when it comes to the National Security Law, knows its future is shaky in Europe. However, only time will tell if Beijing can trump on German car makers’ market leverage within China, and keep Germany at their side. Or at least at bay.
Right Problem, Wrong Solution?
Mr. Trump has a reputation for alienating even the closest of his allies. He has ripped up the TPP (Trans Pacific Alliance) and severed relationships with NATO countries by nitpicking over small stuff like military spending as of corresponding GDP. He undermined the importance of diplomacy in foreign relations with the effective budget cut of 25% in the state department, a department that had already absorbed serious blows after the financial crisis of 2008. On top of this, America is finding it harder to persuade young graduates into pursuing a career in the state department, which is now famous for its banal and obsolete career paths and almost zero flexibility. In contrast, Xi has doubled spending on foreign affairs for China between 2011 and 2018, replacing the US as the number one country of total consulate counts around the world. This should look embarrassing, but not to the Trump administration, who painstakingly says it puts America first. The administration recently followed through with its decision to completely pull out militarily from Europe. His evasive rhetoric of labeling allies as “free riders” was met with shrugs from the German audience, who now view their relationship with America on par with China. This is a 14% fall for the perception of team America within Germany according to Pew Research. It is true that, while the public may only shrug, America’s word is losing value exponentially with the Trump administration in office than ever before. As NATO goes astray, the reaction from the Baltic States is an effort to keep at their own, without any help from America. The Baltic countries recently moved in accord to free their grid system from the Soviet central plan, proving they feel more threatened than ever. Politically contested areas all over the world are finding themselves evermore in a power vacuum.
But what lies beneath the opaque goal of pushing America to greatness? Why are we punishing away old allies like Germany and the EU, instead of winning them over against China, which should be very easy? Europe knows we are an open society and definitely trusts the US more in a lot of factors, ranging from tourism to intellectual property.
If the US tries to punish Germany’s automation industry or France’s wine, cheese, and luxury items by imposing tariffs of 100%, yes you might bring some jobs back here, but we’ll also lose some from their respective tariffs on us. The EU is a sizable market for US exports already, and tariffs are generally more hostile than you want to be, especially to a friendly nation.
Instead of viewing this intertwined relationship as a “zero-sum game”, we should be open to seeing science, business, and politics evolving side by side with our respective allies. For example, what Trump is trying to get at with his campaign promise, is bringing back the manufacturing jobs to Indiana and the rest of the Midwest. As he’s trying to build this fate up and switch the fortunes around for the great Rust Belt by implementing tariffs, he is not realizing that even if we make and sell goods here, the top quality automation would be made around the world, where the intermeddling of Huawei’s cutting edge technology and Daimler’s automation would meet and conquer the global markets.
So it’s not useful, in the long term, to imply tariffs and alienate yourself. Instead, just like the college preparatory school in Ohio, a state of the great Rust Belt, we should reinvigorate and teach some community college students mechanical skills. This is the German model every country has been trying to implement, and it reduces youth unemployment while bolstering regional pride. It creates skilled workers that are more connected to their specific trade and creates strong home-made industries. Pittsburgh has recently followed this plan by switching up its budget from a hefty police department to a better school system and an attractive city center for young tech entrepreneurs. What’s lost now in the Midwest is not doomed forever, as states like Indiana currently have high values in terms of manufacturing as of GDP at 29% and are pushing for more innovative training programs. If we open ourselves more to Europe, lucrative investments from Mittelstand companies can follow up, like the one in Grand Rapids, which turned a dead American town around with some German investment.
Is Collective Collaboration Hard?
If we can cope with some goods being produced outside, we can transfer our potential to new fields at home. It shows we can absorb some monetary deficits for creative destruction and collaboration. Acting together when barring state fueled Chinese companies from making critical investments during this harsh pandemic period, when shares of companies have slumped to all-time lows, would mutually benefit the political freedom of both regions. Or, China would exasperate all its funds, as its doing right now, to enrich its state factory and push forward as a big benefactor of the global supply chains. As most of the aid went to families here in the West, China kept state aid low, and instead spit out funds to state companies. This is a classic mercantilist approach, as it would keep their manufacturing based economy from going through a full collapse and proves that the hostile dragon is nothing to deem insignificant.
However, Chinese capital goods occupy only 5% of the US market, which is arguably the biggest hodge podge for goods and services around the world. Something the West can do collectively, to defend its national industries, is to push China to step into an even playing field. To manage this, Trump’s approach of punishing Hong Kong and stripping it of its trading and financial privileges ought to work. It would be even more influential if Europe followed about. It is about time the United States and Europe act together.
Europe should value the intellectual rights of their own citizens more than the pockets of a few Mittelstand oligarchs and ban Huawei along with the US. Stricter measures taken on this 5G stand can lend more opportunities to European grassroots companies like Ericsson or Nokia, as Mr. Macron of France suggests. Europe’s political future is at stake here too. Huawei has been one of the most generous contributors of some governing conservatives in Bavaria, a region in Germany, showing it’s got a lot more than trade in mind. When the seas get wavy, Beijing is not shy to strong arm its aircraft carrier companies with extra gunpowder, and Europe should act mindfully.
Europe can safe guard itself against China’s buyout of weaker economies in Greece or Hungary by pushing a qualified majority voting (QMV) in matters regarding China. This would stop China from meddling with Europe’s critical foreign policy matters, since the unanimous vote wouldn’t be required. If paired with US’ Pacific partners like Australia, which has already banned Huawei, Europe can be influential against the Chinese economic machine, and eventually make it play by the rules. This way, Xi’s chauvinistic “Made in China 2025” policy can be met with dire opposition. On the bright side, a secluded China wouldn’t be able to maximize growth within itself, at least not without data theft. Unlike Germany’s liberal and lawful approach to create a relatively free economic zone for Mittelstands, China still relies on party cells within companies to micromanage some business operations.
At the end, it’s looking bright for Europe, with its latest stimulus package passed with the intention to increase solidarity across its members. This will turn into a rebound for their businesses and also for nations which struggled with wide account deficits from tourism loss. Mr. Macron of France has dubbed to establish Paris Saclay, an upper learning institution that will rival MIT. It can make the area a center for European software development by creating Europe’s very own silicon valley. The US shouldn’t block itself out; as Toby Smith notions, “You can’t do science with walls around it.”
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