China’s Economic Statecraft in Europe During the Pandemic

The novel coronavirus pandemic has unleashed an immense shock to the global economy. In Europe, the gross domestic product among the countries that use the euro has dropped by over 12 percent while unemployment rates have risen to nearly 8 percent. Many countries are unlikely to reach pre-pandemic levels of gross domestic product until 2022 or later.

China may take advantage of the crisis — just as it did in the wake of the global financial crisis of 2007 to 2008 — to advance its geopolitical and economic interests in Europe. While the European Union put together a 750 million euros ($878 million) pandemic recovery package this July — demonstrating more advanced crisis management capabilities than it has during past Eurozone crises — the continent is still struggling. Beijing may use its sovereign wealth fund as well as nominally private Chinese companies to act as lenders of last resort in Europe, building Beijing’s soft power at Washington’s expense. Given China’s assertive turn in its foreign policy, it may use this influence to splinter Western solidarity on issues like Taiwan, Hong Kong, and the South China Sea. Additionally, China is likely to use its economic statecraft to acquire sensitive dual-use technologies through the purchase of AI or robotics firms, and purchase infrastructure that is important to U.S. and allied military forces operating in or through Europe.

To be clear, much of the Chinese-origin foreign direct investment in Europe is not of national security concern. By one estimate though, as much as half of China’s foreign direct investment in Europe could be considered to pose a security risk. Whether Europe is prepared and able to parry Beijing’s moves is somewhat unclear, given varied attitudes toward China and the patchwork of investment screening mechanisms across the continent. Regardless, the outcomes will have significant implications for U.S. security.

What Happened After the Last Serious Economic Crisis?

In the wake of the global financial crisis over a decade ago, Chinese investment in Europe exploded. In 2008, Chinese outward foreign direct investment in Europe was valued at just 700 million euros — by 2016, that amount had grown to 37.3 billion euros. These investments brought much needed capital to the cash-strapped continent.

Chinese investors — both public and private — were drawn to Europe for several reasons, including the undervaluation of European assets and the friendlier investment climate relative to the United States. Chinese investments were mostly concentrated in a few key countries, with the United Kingdom (30 percent), France (18 percent), Germany (13 percent), and Italy (11 percent) receiving the lion’s share.

Most of these investments were made by Chinese state-owned enterprises or its sovereign wealth fund, which are directly tied to the central government and hence to the Chinese Communist Party. Ostensibly, private Chinese firms have increasingly invested in Europe as well, but China’s 2017 national security law effectively blurred the line between private entities and the Chinese state.

There is some evidence that China’s investment boom in Europe paid geopolitical dividends. Beijing might now again take advantage of Europe’s economic position in the aftermath of the novel coronavirus to build soft power, obtain sensitive technologies, or acquire militarily significant infrastructure. The question confronting Europe, as well as the United States, is whether it is prepared to respond any differently to Beijing’s use of economic statecraft than it did in the wake of the last economic crisis.

Evolving European Attitudes

The most significant sign that Europe is indeed prepared to respond differently to Beijing’s economic statecraft during the pandemic-induced recession is the shift in European attitudes toward China. The European Union defined its relationship with China in 2003 as a “maturing partnership” and in the wake of the Great Recession, this seemed an applicable label. However, in more recent years, European attitudes toward China have hardened significantly.

Evidence of the shift in European perceptions became clear in early 2019, when the European Union labeled China a “systemic rival.” This was characterized as a “dramatic sharpening” of Europe’s attitude toward China and a “perceptible change of tack.” More recently, E.U. foreign affairs chief Josep Borrell argued Europe has been naïve in its approach to China.

The reasons for this shift in perceptions are several. First, some Europeans have increasingly come to view Chinese investment as predatory, particularly in the way Chinese firms receive preferential backing from Beijing that enables them to undercut European firms’ prices and bids on contracts. Second, certain European firms have been routinely victimized over the last decade by China’s efforts to steal intellectual property or force technology transfers. From Europe’s perspective, China is “priority 1” in this regard.

Third, China’s treatment of Uighur Muslims in the northwest province of Xinjiang — including physical abuse, so-called “re-education,” and internment in concentration camps — is increasingly seen as a shocking violation of basic human rights. More recently, China’s introduction of authoritarianism in Hong Kong has also served to sway public and elite opinion in Europe against Beijing.

Finally, and most recently, China’s handling of the novel coronavirus pandemic has resulted in “mounting anger” across Europe. Covering up the outbreak and extent of the virus, price gouging by Chinese suppliers of medical equipment, and aggressive Chinese diplomacy have together broken Europe’s trust.

European leaders have sounded the alarm bell regarding the need to protect certain firms and industries for national security reasons. Most notably, the European Commission was quick to issue additional guidelines on safeguarding strategic European assets and technologies. The president of the commission, Ursula von der Leyen, argued that although “the E.U. is and will remain an open market for foreign direct investment … this openness is not unconditional.” Former E.U. Trade Commissioner Phil Hogan urged E.U. member states to toughen investment screening. German Transport Minister Andreas Scheuer expressed concerns that weakened German mobility and infrastructure companies could be targeted by international investors and that Berlin needed to take more preventative measures. Reflecting on Europe’s ongoing debate over the balance between open, free markets and closed or more protected ones, even E.U. Competition Commissioner Margrethe Vestager suggested that member states buy stakes in companies in order to prevent Chinese takeovers.

Nonetheless, increasing European skepticism toward China has not necessarily been uniform across the continent. Some E.U. member states, such as France and Germany, have become more wary of Chinese investment and engagement, but elsewhere in Europe — especially in the south and east, where governments and firms have still not fully recovered from the sovereign debt crisis or are otherwise more cash hungry — member states appear less concerned with Beijing’s influence and have been more open to Chinese investment.

Europe’s New Tools

Europe has had a variety of regulatory, legal, and policy responses to Chinese investment across the continent. Only 14 of the 27 E.U. member states, plus the United Kingdom, have some kind of investment screening processes or mechanisms in place. These include most of the European Union’s larger economies — Germany, France, Italy, Spain, the Netherlands, and Poland — as well as several of the smaller ones. However, they vary widely in terms of the scope, the kinds of investments screened, the sectors deemed worthy of screening, and the design of the screening procedures. For instance, Denmark’s regulations apply only to companies that manufacture war material or those that own electrical cables or hydrocarbon pipelines, while Latvia’s regulations apply to companies involved in electronic communications, broadcast television and radio, natural gas, electricity, or heating networks.

In the wake of the novel coronavirus pandemic, some of these countries that already had investment screening mechanisms in place have sought to strengthen them. For example, France added biotechnology to its list of critical technologies likely to be subject to foreign direct investment screening and it lowered the threshold of voting rights acquired in a company that would trigger screening procedures from 25 to 10 percent. Similarly, Spain passed legislation in response to the outbreak, requiring government approval for any foreign investment exceeding 10 percent in domestic assets in strategic industries. In Italy, Prime Minister Giuseppe Conte announced increased powers to block foreign takeovers in banking, insurance, food, health, transport, water, technology, communications, energy, and defense sectors. Germany established a 100 billion euro fund to provide liquidity in exchange for equity stakes in companies in danger of imminent takeover.

However, even these efforts to strengthen existing tools remain somewhat flawed, leaving Europe vulnerable to Chinese economic statecraft. For instance, the French threshold rule change only applies for a limited time and only for specific companies. Similarly, the strengthened powers of Italy’s prime minister will last only until the end of 2020. The result is that even among those European states with screening tools in place, risks remain.

Meanwhile, several other E.U. members lack foreign direct investment screening mechanisms altogether, such as Sweden and Ireland, which are both home to technologically advanced industry and manufacturing. Stockholm has produced more unicorns — a venture capital term used to describe a privately held startup company with a value of over $1 billion — per capita than any other city in the world, while Ireland is considered to host some of the world’s leading artificial intelligence academics and research centers.

Elsewhere in Europe, the Czech Republic, Greece, and Slovakia also lack investment screening tools. These countries aren’t necessarily known for producing world-leading tech startups, but both the Czech Republic and Slovakia are known for strong, export-oriented manufacturing sectors. Greece’s most important industry is tourism, but it is also home to a large ship building industry and key transportation nodes that could prove important to European security in the event of a crisis in the Black Sea.

The European Union has tried to get all its member states on the same page, introducing an investment screening framework in April 2019 designed to add additional scrutiny “over purchases by foreign companies that target Europe’s strategic assets.” However, this new approach did not empower the European Union to block investments coming into the member states nor did it require the member states to screen incoming foreign investments at the national level or coordinate their policies or approaches.

More recently, the European Union has arguably made greater progress in terms of providing a liquidity alternative to China for those European countries confronting rising debt. If approved, a landmark 2020 E.U. budget deal will provide 312.5 billion euros in grants and 360 billion euros in loans for cash-strapped member states. But the budget negotiators discarded a proposal for a 26 billion euro solvency fund that would have directly benefitted distressed European companies.

In summation, the European investment environment has changed significantly over the last decade thanks to some improvements at the state and intergovernmental levels. But there remain serious flaws in the approaches of both the European Union and many of its member states, including the investment screening tools at their disposal, the strength and durability of those tools, and the lack of E.U.-wide requirements and regulations — it’s these gaps that Washington should worry about when it considers how China might wield economic statecraft.

Can Washington Help Europe Resist Chinese Pressure?

In an era of increased great-power competition, Washington needs all the friends it can get. Only with allies and partners can the United States successfully push back against China’s promotion of its state authoritarian model that’s inimical to U.S. interests and prosperity. Moreover, because American security remains intricately tied to Europe, the United States should keep the continent from becoming contested space vis-a-vis China, as well as Russia.

Unfortunately, the new economic and geopolitical landscape brought about by the pandemic and Beijing’s recent aggressive attitude toward great-power competition together create an opportunity for further Chinese economic statecraft at the West’s expense. This is especially so in terms of China’s efforts to build its soft power, obtain sensitive technologies, and acquire militarily important infrastructure. Admittedly, foreign direct investment is expected to decline significantly around the globe this year, and there is some early evidence that there may be more investment flowing into China than out. Nonetheless, it is also clear that European economies are expected to shrink significantly as a result of the pandemic’s impact. For instance, the International Monetary Fund predicts the euro area will see a 10 percent contraction this year, with some countries, such as France, Italy, and Spain, seeing even deeper declines.

With firms across most sectors in Europe hard hit by the recession, and E.U. member states already struggling with chronic debt burdens, cash from China could be seen as the lifeline needed to make it through the novel coronavirus pandemic-induced recession. Governments may be more wary of Chinese economic opportunism this time around, but concern hardly guarantees necessary action will be taken. As an example, one need only look at Berlin’s reluctance to keep the high security risk 5G supplier Huawei out of German telecom infrastructure.

Together, these factors paint a picture of continued risk to allied security in three areas: military operations in and through Europe, the role of dual-use advanced technologies in defense capability development, and geopolitics writ large. From Washington’s perspective, looking at Europe through each of these three lenses yields serious concerns over Chinese investments in a variety of countries. First, in terms of military operations in and throughout Europe, the United States is concerned with its ability to move from its forward-stationed locations in Germany, Italy, Spain, the United Kingdom, and Belgium to potential crisis zones in northeastern Europe and the Black Sea littoral. In the event of a crisis, it is also likely the United States would send more forces to Europe. As a result, Washington is concerned with Chinese investment in transit countries, in those that host prepositioned U.S. military equipment, and in those critical for supplying the energy necessary for operations in Europe, especially Germany, Italy, and the Benelux (Belgium, the Netherlands, and Luxembourg). Chinese ownership of key infrastructure could give Beijing leverage over key countries and could impact freedom of military movement, as well as operational security.

Second, when it comes to defense capability development and manufacturing, Chinese investments in the most technologically advanced economies in Europe is also worrisome to Washington. Whether it is a company designing and building industrial robots in Germany, a big data firm in the United Kingdom, semiconductor developers in the Netherlands or in Germany, or other similar firms in European tech leaders like France, Sweden, Finland, or Italy, Chinese investments could put defense capability development and manufacturing at risk.

Finally, Washington is keen to ensure Chinese investments do not build decisive influence through economic statecraft in Europe, potentially undermining Western solidarity. For example, there is already evidence that Germany’s close economic relationship with China has pushed Berlin to take a softer line on Beijing’s human rights violations. This concern is not merely limited to a handful of European countries where U.S. military forces are based or to those that are home to high tech firms. Rather, it extends to each of America’s NATO allies in Europe, given how the alliance operates by consensus.

What is needed to manage the challenge is a collective, transatlantic approach that sets a common strategic approach, facilitates agreement on standards and norms, and both synchronizes and aligns policy decisions. The European Union clearly has a central role to play in much of this. But given its limited mandate in investment screening, the European Union alone is insufficient to plug the gaps and further reduce risk. While most of the action will need to play out at the national level, another intergovernmental organization may have an important role to play. Specifically, NATO could help to bring about action when it comes to building a common strategy, promoting the adoption of standards and norms, and acting as a forum for the alignment of strategy and policy decisions. The alliance has performed a similar coordination and convening function in the past under the terms of Article 4 of its founding treaty, which notes that any ally can request consultations whenever their territorial integrity, political independence, or security is threatened.

NATO can and should act as the geostrategic policy forum that aligns transatlantic objectives when it comes to the impact of Chinese economic statecraft on common security interests in Europe. While it’s true that the European Union currently has a more expansive toolbox to deal with China’s influence in Europe, only a transatlantic approach will be enough to protect vital Western interests — and NATO is the key transatlantic forum. Through NATO’s consultative framework, allies can build a common transatlantic strategy towards China, identify the risks posed by Beijing’s exercise of its economic statecraft, and share intelligence on the same. In fact, NATO has already taken the first step in this process, promulgating a China review last year.

Second, when it comes to norms and standards, the alliance has the logistical knowledge and planning skills to help identify those specific assets — such as particular port facilities, rail lines, energy assets, or other critical infrastructure — that might be operationally important in the most likely and most dangerous military contingencies in Europe. The alliance also has defense capability insights and defense investment expertise necessary to help identify risks when it comes to the most critical technology sectors and firms across Europe. Pinpointing these risks will help to strengthen the arguments of those within allied governments who are engaged in interagency deliberations on whether to permit or block particular Chinese investments.

Third, NATO can help to align policies by facilitating exchanges of information on and promulgating best practices when it comes to legislation, regulations, and organizational procedures. These activities can be accomplished through routine North Atlantic Council meetings, under the auspices of NATO’s recently revived economic analysis capacity, or through relevant NATO Centres of Excellence that focus on energy security.

There are certainly many in Europe, especially the so-called Europeanists within the alliance that includes Belgium, France, and Greece, that are resistant to any expansion of NATO’s mandate beyond security and defense. However, NATO’s mandate does not need to expand at all for it to play a helpful, supportive role vis-a-vis predatory Chinese economic statecraft. Instead, the allies can use NATO as a tool to highlight, facilitate, and promote work done at the national level and even within the European Union.

Given America’s ongoing turn toward the Indo-Pacific region and its view that allies, such as those in Europe, “are crucial” to competition with China, Washington should not merely want to prevent Europe from becoming a field of competition with Beijing. Of course, not all Chinese investments are threatening. However, Washington should endeavor to work with European allies to advance collective Western interests in the face of Chinese behavior that is predatory or exploitative. Maintaining and strengthening transatlantic solidarity, ensuring access to critical European infrastructure for operations in and through Europe, and preventing the loss of technologies vital to the development of allied and American military capabilities should provide plenty of impetus for Washington to lead the West in building a more integrated and effective approach toward China’s economic statecraft.

John R. Deni is a research professor at the U.S. Army War College’s Strategic Studies Institute, and the author of NATO and Article 5. Jake Shatzer was an intern at the Strategic Studies Institute in the summer of 2020, and will graduate with a Bachelor of Science in economics and a Bachelor of Arts in international studies from Texas A&M University in May 2021. The views expressed are their own.

Image: Mission of the People’s Republic of China to the European Union