October 20, 2020

The Problems of Reciprocity

Sticking to its demands for “level playing fields” and reciprocity in its relations with China, the EU has entered a slippery slope. It may end up acting more like Beijing rather than persuading it to act more like the EU.

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Xi Jinping, Charles Michel, Angela Merkel, Ursula von der Leyen
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Tensions between Europe and China have been growing uncharacteristically hostile this year; in fact, they arguably haven’t been this dire since 1990, buoyed by a European populace whose unfavorable views of China are at a decade-long high.

This makes it worth asking what exactly Europeans want Beijing to do differently.

Liberals demand that it ends its crimes against humanity in Xinjiang province and restores Hong Kong’s political autonomy. Military hawks say European states must become more involved in security operations in Asia, especially in the South China Sea or Taiwan, to forestall Beijing’s increasingly belligerent tactics. Others are now more willing to speak of China in ideological terms, signaling a more fundamental gulf.

Level Playing Fields

As for most governments in Europe and the European Commission, a successful outcome would be if Beijing were to level the playing fields for European companies in the Chinese market. In May, EU foreign policy chief Josep Borrell wrote that “the watchwords for EU-China should be trust, transparency, and reciprocity.” Margrethe Vestager, the European competition commissioner, put it in simpler terms at a news conference in June: “We want reciprocity and a level playing field.”

“Reciprocity” has moved from cliché to dogma for the EU in recent years. Yet as with all dogmas, it risks drifting away from its original objectives if left unquestioned. In basic terms, Europeans want Beijing to provide equal opportunities for European businesses in the Chinese market. The OECD ranks China as one of the most restrictive markets in the world, especially its service sector, whereas the EU has one of the most open. Foreign firms are often prohibited from investing in certain sectors of the Chinese economy—real estate is the only sector where openness is comparable, the Berlin-based China think-tank MERICS noted in a 2018 study—while China’s state-run firms are provided with privileged access to funding and procurement by the communist authorities. Lacking transparency and corruption are additional problems, as are requirements that mean foreign firms often have to partner unfairly with Chinese ones.

Beijing has made significant strides toward market liberalization since the 1990s, but reforms stalled between 2008 and 2013. Ever since Xi Jinping became president that year, they have flip-flopped. Earlier this year, Beijing reformed its financial services industry by lifting equity caps for foreign investment and agreed to Geographical Indications with the EU in September. Yet, the state-sponsored industrial strategy “Made in China 2025” clearly sets out Beijing’s long-term dependence on state-run firms, while legislation like the National Intelligence Law, passed in 2017, requires even greater cooperation between private firms and the Beijing government.

CCP Says No

The Chinese Communist Party (CCP) remains opposed to allowing the private sector too much independence because—as ideology becomes a weak source of legitimation for the CPP, and as economic complexity demands more technocrats, not party loyalists, occupy powerful positions in government—it knows that an autonomous private sector could one day rival itself for authority. In fact, since the 1990s it has worked to co-opt tycoons and successful businesspeople into the party’s fold. In September, Beijing called for the creation of a new plutocratic frontline of “private businesspeople who are reliable and useful at critical moments.” Reliable, that is, to the Communist Party.

If the CCP were to offer genuine reciprocity to European firms, it would be a major step toward something akin to an independent private sector in China. Removing special treatment for its state-run firms would mean they would have significantly less money to invest abroad (a problem for Beijing’s geopolitical ambitions) and weaken its ability to steer industrial policy, including “Made In China 2025.”

In Europe’s Interest?

A moment’s thought would suffice to show that reciprocity isn’t in Xi’s interest, at least not yet. However, much ink has been spilled without questioning whether reciprocity is actually also in the EU’s interest.

Indeed, does reciprocity means European firms are treated in China the same way they are treated in European markets? Or, as recently queried by the Economist, “should foreign firms want to be treated like Chinese ones, if that means giving party committees a management role and sharing sensitive data with the state?” If the latter, it raises considerable questions about the EU’s apparent values-led principles and simply puts the profit of its firms above all else, a charge often levelled against several member states, not least Germany.

If it’s the former, however, then it first requires fundamental reforms to the rule of law and private property rights that Beijing is unwilling to make, and which are not included in the seemingly stalled EU-China Comprehensive Agreement on Investment (CAI). “Ultimately, only with substantial progress toward more ‘rule of law’ in China would foreign companies enjoy the necessary ‘contestability’ for equal market participation,” MERICS has noted. If it is the former, moreover, Chinese nationalists could well argue that reciprocity means European firms are given special, not equal, treatment in China. “Chinese people will not accept ‘an instructor’ on human rights, and oppose ‘double standards,’” Chinese news agency Xinhua reported Xi as saying in September.

A Different World

Reciprocity may have been a reasonable end-goal when CAI talks began in 2012, when most of the world still considered China a peaceful rising power and a possible ally in international affairs. Openness was then seen as mainly benefitting the West, not China. But that’s not the world today. Economics is slipping as the main sphere in which to view Europe-China relations, as issues of human rights and global security come to the fore.

Beijing’s “wolf warrior” diplomacy this year has shown the CPP’s true colors, threatening to punish European states if they don’t use Huawei technology or boycott Chinese products—Beijing’s new manner of ensuring reciprocity. Yet, would a level playing field for European firms now do anything to stop Beijing’s human rights abuses or its increasingly belligerent foreign policy? Would economic parity protect Taiwan from invasion, restore autonomy to Hong Kong, or defend Southeast Asian claims in the South China Sea?

“Without liberal values behind it,” the Economist noted, “reciprocity means not much more than getting even. After all, ‘an eye for an eye’ is a fair, if bleak, code of conduct.” This is certainly how US foreign policy has changed over the past decade. Washington, under previous administrations, also tried to carve out a more level playing field for US firms in China. But under President Donald Trump, whose focus is primarily parity in import-exports with China, it has escalated into tit-for-tat tariffs, sanctions, and a wide-reaching “trade war” that now spills out into other areas. After Beijing expelled several US journalists earlier this year, Washington responded by tightening visa rules on Chinese reporters in America.

Tit-for-Tat

Brussels hasn’t yet embarked on such a law of retaliation, yet its investment screening mechanisms, clearly aimed at Chinese investors, have often been viewed as a direct response to China’s lack of reciprocity. Speaking at a press conference in October after a two-day special EU summit, German Chancellor Angela Merkel seemingly warned of something akin to tit-for-tat responses. “If there is no market access from the Chinese side for certain areas, this will of course also be reflected in the fact that market access to the European market will be narrower,” she said.

China sees hypocrisy. “We also hope that the EU will keep to market economy principles and create a level playing field for Chinese enterprises,” Foreign Minister Wang Yi said somewhat sarcastically in December 2019, repeating almost verbatim demands made by EU officials over previous months. He also called for a “level playing field” for Huawei, after several European states banned the Chinese tech giant’s technology from their 5G programs after security warnings from Washington.

The case of the matter is that both the EU and China are now moving away from the tenets of reciprocity. Granted, there is an important difference between protecting European interests and starting a race-to-the-bottom contest with China. But, like the US under the Trump administration, if the EU remains obsessed with parity at the same time as its relations with China shift toward non-economic issues, such as security and human rights, the logic of reciprocity risks leading Europe down a slippery slope, whereby the EU starts to act more like China rather than pressuring China to act like EU.

David Hutt is a political journalist based between the Czech Republic and the United Kingdom, covering European foreign affairs and Europe-Asia relations.

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