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Not just Russian oil and gas, China is dividing Europe—from money to metals

While the EU realises that China will continue to be a major trade and investment partner, it needs to devise impactful economic strategies to counter Beijing’s economic coercion.

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The European Union, since the end of the Cold War, has emerged as a formidable economic power rather incapable of defending its military or economic security. It has hoped that its economic weight would translate into enough geopolitical traction – a faulty assumption whose price the Europeans are paying today with structural dependencies and almost no plan B for quick diversification let alone decoupling. EU’s largest trading partner, China, has been playing ‘divide and rule’ in Europe, arm twisting the bloc’s economic dependence on Beijing to drive its global ambitions, especially on Taiwan.

The ongoing Russia-Ukraine War has manifested many latent and not-so-latent discrepancies in European economic statecraft, which is designed to perform amid favourable situations but lacks the resilience to absorb uncertainties.

While the energy dependency on Russia is well explored, the worrying dependencies on China aren’t. However, there comes a tipping point when challenges begin to unravel latent power structures and a new reality emerges with changed rules of engagement. For Europe, a part of that realisation came with China’s bullying of the EU to soften its Coronavirus Disinformation Report but the tipping point came with Putin’s war in Ukraine and the strengthened Russia-China bond.

China’s dent in EU unity

China has been successful in converting its economic power into geopolitical influence with astonishing success worldwide. It is with such confidence that China has been trying to dent the EU unity for the last few months by economically bullying Lithuania, an EU member, over the latter’s stand on Taiwan. If the EU fails to respond adequately Europeans seem doomed to spend the 21st century being pushed around by outside powers. The EU has so far stood united in its support for Lithuania while taking countermeasures to fight off China’s economic coercion joined by major global players like Australia. But there are other structural dependencies and internal divisions it needs to address right away that, if left unattended, could wreak havoc on an already befuddled Europe dependent on Russia’s energy.

While the EU realises that China will continue to be a major trade and investment partner, it needs to devise impactful economic strategies to counter Beijing’s economic coercion. Lithuania’s digression from China’s policy led to Beijing downgrading its diplomatic relationship and implementing an effective trade embargo against Lithuanian goods.

Interestingly, the trade embargo was not considered enough by China as it accounts for only 1 per cent of Lithuania’s exports. Hence Beijing exhibited a fuller spectrum of its power by introducing extra retributive measures against several European companies that use Lithuanian labour. But in doing so, Beijing dented the very rationale of the EU supply chain that is the core of their economic integration and existence as a bloc. EU owes much of its economic weight to its regional value chain being embedded into the global value chain.

Beijing expected that the harsh measures would force the EU to pressure Lithuania to apologise along the terms acceptable to China. However the EU rallied behind Lithuania, and in January 2022, decided to file a formal complaint at the World Trade Organization (WTO) against China.

Also read: Natural gas is Europe’s Achilles heel. Russia to Germany—everyone’s desperate to diversify

China’s failing ‘17+1’ mechanism

There is more to China punishing Lithuania than just Taiwan. After Xi Jinping came to power in 2012, the quest for China’s influence in the world riding on its aggressive economic statecraft began via the Belt and Road Initiative (BRI). China launched a specific programme for the east European countries, which was a strategic move to divide and weaken the EU and make them economically dependent on China. Back in 2012, the central and east European countries had welcomed China’s then ‘16+1’mechanism, which was later expanded to ‘17+1’ with the addition of Greece. To China’s dismay, the very countries that were supposed to be a ‘Gateway to Europe’, a decade later, signed a memoranda of understanding with the US targeting Huawei’s access to their 5G networks or  joined Washington’s Clean Network Initiative – a containment policy aimed at Huawei and other Chinese tech companies.

The ‘17+1’ group got frustrated with unfulfilled projects as the Chinese BRI dream met with disappointments. For the European Union, the ‘17+1’ became a mechanism whose ultimate goal was to divide the bloc because it grouped 11 EU member states with five non-EU member states, thereby undermining the unity of the EU as a single market.

Arguments have emerged that the ‘17+ 1’ mechanism has become a zombie mechanism similar to the Chinese zombie companies that are kept alive through cheap loans and state aid, only to avoid problems that closing them down would trigger. The CCP also keeps alive degenerating economic statecraft mechanisms to maintain the optics of China’s infallible mega plans.

Subsequently, the EU started accusing China of “divide and conquer” tactics more frequently.

In May 2021 Lithuania pulled out of the ‘17+1’, urging European countries to stick to the unity and solidarity of the EU itself. The Lithuania-China row forced the EU to stand up to protect its core economic rationale. Around the same time in mid-2021, the European Parliament voted overwhelmingly to freeze the legislative process for ratifying the EU’s investment deal with China, unless Beijing lifted sanctions against EU lawmakers that were imposed after the 27 EU countries sanctioned Xinjiang officials over mass internment of Uyghur minorities.

Since the end of 2021 the EU Commission has started strengthening its toolbox of autonomous measures. It has adopted a proposal for an Anti-Coercion Instrument, which would give the EU more possibilities to react in the event of economic coercion by both Russia and China. The proposal could be a watershed moment towards a new geo-economic order.

Also read: Why Turkey’s rise in Russia-Ukraine war is a masterclass in balancing, hedging strategy

Lithuania’s fallout paved way for further disenchantment

While Lithuania left, 11 other EU countries still remain in the ‘16+1’ grouping: Bulgaria, Croatia, the Czech Republic, Estonia, Greece, Hungary, Latvia, Poland, Romania, Slovakia and Slovenia. Out of these, two more have openly challenged China’s Taiwan policy. The next to attract China’s wrath is likely to be the Czech Republic, whose successive governments have issued independent statements against China’s Taiwan policy. In 2020, the Czech senate’s visit to Taiwan had angered China but the Czech Republic did not buckle and, to China’s consternation, this visit was returned by the Taiwanese Delegation’s eastern Europe tour in October 2021 to the Czech Republic, Slovenia and Lithuania.

The latest to join the list of Taiwan supporters in the now ‘16+1’ bloc is Slovenia, whose President Janez Janša recently criticised Beijing’s economic coercion and vowed to strengthen relations with Taiwan. Days after this controversial statement, the Slovenian trade groups reported Chinese backlash.  According to the the Slovenian Press Agency, the Slovenian-Chinese Business Council said Chinese partners were already “terminating contracts and exiting the agreed investments”.

EU takes China to the WTO

After months of failed bilateral diplomatic attempts following China’s sanctions, in January 2022, the EU launched a case against Beijing at the WTO for targeting goods from Lithuania over its stance on Taiwan. This move further deteriorated ties, with a long-negotiated investment deal already on the rocks.

The key, however, is for the EU to remain united and take necessary actions to identify and diversify from structural dependencies. While Lithuania alone will not affect China’s economic interests, a united EU will. As of 2021, the EU is China’s biggest trading partner. Janka Oertel from the European Council on foreign relations said, “By Europeanising the problem, China has turned this into a test for the entire EU.”

Despite challenges from within, a more confident EU seems to be learning to convert its economic might into strategic leverage.

China’s divisive tactic sets a “bad international precedent”, which will discourage other European countries from trusting it as a bankable economic partner.

Also read: US-China rivalry not the same as US-Soviet. What India needs to watch out

Complex terrain of dependencies

Not just Russian oil and gas, EU countries, especially Germany, are also dependent on China for industrial metals and rare earths. These are reportedly needed for wind turbines, electric vehicles, solar cells and semiconductors, and the demand will only rise.

China could arm-twist the EU for its rare earth dependence as well. China not only exports 98 per cent of rare earths to the EU, but also monopolises the mining and processing of these materials.

Just like Putin has weaponised energy for political outcomes, Xi could weaponise the export of rare earths to the EU in lieu of the latter’s stand on Taiwan or China’s faulty trade practices. A March 2022 report hinted that China could be planning to weaponise export of rare earths to the US.

Learning from the Russian experience, Europe should be worrying lest raw materials exports from China reduce at this crucial juncture. Beijing plans to cut exports to meet the domestic demand.

All these put together, there has been brainstorming within the EU for achieving European strategic autonomy on a horizontal cross-policy basis (defence, trade, industrial policy, digital policy, economic and monetary policy). It would strengthen the EU’s multilateral action, self-reliance and resilience, and, in turn, reduce dependence on external actors, making it less vulnerable to external threats. The European Raw Materials Alliance, founded in 2020, is meant to enhance supply security and diversify imports for Europe’s industries.

The EU needs to evolve principles that should guide Europe’s quest for economic security It is only once they set their house in order, will outward and crucial policies such as engaging the Indo-Pacific region will make any significant impact.

Europe, today, is standing at the cusp of a paradigm shift in its weltanschhauung (worldview). The political-economic order it thrived on is giving way to a new paradigm where profit motive shall be curbed in favour of resilient supply chains, diversification would precede mere economic gains and the convenient separation of economics from politics will no longer work.

The writer is an Associate Fellow, Europe and Eurasia Center, at the Manohar Parrikar Institute of Defence Studies and Analyses. Views are personal.

(Edited by Neera Majumdar)

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