Germany-China + Italy-China + E-Commerce

On April 7, German Chancellor Angela Merkel and Chinese President Xi Jinping exchanged a phone call in a move seen as an attempt to de-escalate the tensions in EU-China relations.  

What you need to know:

• Neither the Chinese nor the German readout explicitly mentioned the exchange of sanctions.
  • The brief German readout highlighted the need for international efforts on the production and deployment of vaccines, economic cooperation and joint efforts on combating climate change, while also stressing “the importance of dialogue”.
  • According to the lengthier Chinese readout, Xi urged Germany and the EU to take a “strategic perspective” on their relations with China hoping that the EU will “make a correct judgment on its independence and truly realize its strategic autonomy”.
• Chinese think tank EU experts offered more insights into the meaning of this last point:
  • Wang Yiwei (Director of the Center for European Studies at the Renmin University) praised Germany’s pragmatic approach to ties with China and the fact that it does not get “confused by noise”. He described Europe's desired strategic autonomy as limiting the United States interference and “properly dealing with internal dissent within the EU over the China policy”.
  • Cui Hongjian (Director of the Department of European Studies of the China Institute of International Studies) described the EU’s strategic autonomy as a quest for “limiting dependence” on the United States and argued that cooperation with China offers a way to achieve it. 

Quick take: While the exchange may help to prevent the tensions from escalating further in the short-term, it does not signal any prospects to alter the diverging trajectory in EU-China relations in the mid-term or long-term. Beijing remains greatly concerned about the prospect of potential alignment between the EU and the United States on key issues. But Beijing's continued attempts to leverage the EU's strategic autonomy concept and its increasingly patronizing rhetoric, undermine its own efforts to convince the EU that working with China could be a way for it to build its strategic autonomy. 

Read more:

• Bundeskanzlerin: Telefonat von Bundeskanzlerin Merkel mit dem chinesischen Staatspräsidenten Xi 
• Xinhua [CN]: Xi Jinping talks on the phone with German Chancellor Merkel 
• Global Times: Xi, Merkel phone call 'timely to stabilize ties' 
• CIIS [CN]: The EU's "strategic autonomy" must not find the wrong direction

At a press conference on April 8, Italian Prime Minister Mario Draghi revealed new information on the deployment of economic security measures that his two-months-old government has been actively using to target strategically sensitive deals involving Chinese actors.

What you need to know:

• The measures are based on the “Golden Power Law,” which governs Italy’s investment screening regime. The law grants the government special powers to intervene on national security grounds in private business activity in multiple sectors including finance, energy, telecommunication, robotics, semiconductors or cybersecurity. The government is considering broadening the applicability of the measures to the automotive and steel sectors.
• So far Draghi’s government has used its “golden powers” to impose conditions on the following two 5G equipment procurement contracts and to block one takeover: 
  • March 11 – purchase of 5G network components from ZTE and the Taiwanese company Askey by the Italian telecommunications company Fastweb. The same company was barred from purchasing 5G components from Huawei in October 2020.
  • March 25 – purchase of standalone 5G equipment from Huawei and ZTE by an Italian telecommunications company Linkem.
  • March 31 (according to reporting) – acquisition of a 70 percent share in LPE (components for power electronics applications) by Shenzhen Investment Holdings. The related decree cites notes from the European Commission, Sweden and Holland suggesting wider European coordination. 

Quick take: National and economic security appears to be one of the driving factors of the new government’s China-related agenda. With the active deployment of “golden powers”, the government is delivering on its promise to keep Italy’s digital transformation on a European track, thereby impacting Chinese operations. Another indication of how the new government intends to approach China will be its handling of the, now postponed, parliamentary vote on a memorandum on human rights abuses in Xinjiang, which some of Draghi’s coalition partners call to be labeled a genocide.

Read more:

• Formiche: Draghi sides with US on Chinese 5G concerns 
• Bloomberg: China Targeted Milan Semiconductor Firm Before Draghi’s Veto 
• Politico: Italy debate on charges of China ‘genocide’ puts pressure on Draghi coalition 
• Formiche [IT]: Italian embarrassment. Thus the majority split over the genocide in Xinjiang 

On April 12, the EU Commission declined to support Montenegro in its repayment of a USD 1 billion loan to China for a controversial highway project. The response comes two weeks after Montenegro’s Deputy Prime Minister Dritan Abazović made an unprecedented, public request.

What you need to know:

• The loan is linked to construction of a 41 km section of the, roughly four times longer, Bar-Boljare highway. The project was launched by the previous Montenegrin government in 2014 with China’s ExIm Bank providing 85 percent of financing, despite at least two feasibility studies advising against it. Montenegro is set to start servicing the loan in July against the backdrop of a crisis in tourism – one of its leading sectors. The contract gives China the right to Montenegrin land as collateral. China owns over 20 percent of Montenegro’s debt, which totals at around 90 percent of the country’s GDP. 
• While the Commission is not willing to help Montenegro repay the loan, it is open to help finance the other sections of the highway through its EUR 9 billion Western Balkans Guarantee Facility aimed at supporting infrastructure and connectivity projects in the region.  

Quick take: The EU’s refusal to bailout Montenegro could be considered a missed geopolitical opportunity to counter Chinese influence in the Balkans. Yet should the EU decide to repay Montenegro’s loan, it would be supporting a project which breaches its own environmental and transparency standards and present itself as an available “bailout option”. Such a move could decrease the perceived costs of pursuing a multi-vector foreign-policy and of hedging between the EU and China among the Balkan countries. 

Read more:

• FT: Montenegro calls for EU help over $1bn Chinese highway loan 
• MERICS: MERICS Global China Inc. Tracker No. 1  
• CHOICE: Watchdogs Detail Damage Done by China in the Western Balkans 
• CSIS: Red Flags Triaging China’s Projects in the Western Balkans  

On April 8, Poland became the latest member state to introduce a package of EU regulations aimed at modernizing the applicability of value-added tax (VAT). The move will affect operations of Chinese e-commerce B2C platforms such as AliExpress which manages between 2-5 percent of the European e-commerce traffic

What you need to know:

• The new regulation that will apply EU-wide from July 1, aims to target the inflow of untaxed goods from non-EU countries, primarily China, into the EU’s Single Market. Chinese sellers could offer much better prices than their European counterparts thanks to this legal loophole that the EU is now closing.  
• Key points of the new regulations relevant in the context of Chinese exports:
  • Eliminate import VAT exemption for goods in small consignment with declared value up to EUR 22. VAT will be applicable regardless of the good’s value.
  • E-commerce platforms offering products shipped from outside the EU with a real sales value of up to EUR 150 will be treated in some respects as sellers and as a VAT payer.
  • The European Commission estimates that member states will gain EUR 7 billion annually thanks to the legislation.

Quick take: The new regulations are bound to impact the operations of Chinese e-commerce actors in Europe. The development of Alibaba’s EUR 300 million investment in a logistics center in Belgium’s Liège that was expected to manage over 80 percent of AliExpress’s consignment traffic to Europe will be something to watch. According to estimations by the Polish Post, the new regulations can lead to a 30-40 percent decrease in number of consignments sent from China.

Read more:

• Poland’s Ministry of Finance [PL]: Sealing VAT in international e-commerce 
• European Commission: Modernising VAT for cross-border e-commerce 
• The Guardian: Open sesame: Alibaba's push into Europe a mixed blessing for Liège 

MPs of Sweden’s opposition Christian Democrat (CD) and Swedish Democrat (SD) parties called for expulsion of Chinese Ambassador to Sweden, Gui Congyou, over controversy surrounding the Embassy’s targeting of a freelance journalist Jojje Olsson.

What you need to know:

• On April 9, Olsson received an email (visible in video here) from the political section of the Chinese Embassy in Sweden denouncing his critical coverage of China and his “moral corruption” in the “smear campaign” against China. The Embassy urged him to “stop the wrongful actions” or “face the consequences.”
• On April 10, Swedish Minister of Foreign Affairs Ann Linde criticized the Chinese Embassy’s conduct but said that the Ambassador’s expulsion is not on the table even though it is not the first time that Gui’s Embassy is trying to pressure Swedish public opinion. Only after the Minister’s statement did the Chinese Embassy condemned the comments by CD and SD politicians and called their criticism of Chinese Embassy’s comments to Olsson a “dictatorship of expression.”

Quick take: The Swedish case shows a dilemma which an increasing number of European capitals will grapple with in the coming months: how should countries respond to repeated forceful attempts by Chinese diplomats at shaping public opinion? Expulsion of such diplomats may only earn them greater reward from Beijing and endorse a confrontational communication style. Instead, in responses to such incidents the governments can reaffirm their commitment to freedom of expression of those targeted to exhibit the resilience of the democratic systems.

Read more:

• Euronews: China’s Embassy in Sweden under fire over ‘threats’ to journalist
• Expressen [SE]: After the threatening email: Demands that China's ambassador be expelled
• Embassy of the PRC in Sweden: Chinese Embassy Spokesperson's Remarks on the Wrongful Comments on China by Some Swedish Politician