image copyright © Mercator Institute (MERICS), “Export Controls and the US-China Tech War”, Noah Barkin , March 18 2020 , refer https://merics.org/en © No copyright infringement intended. All rights belong to their respective copyright owners

09/20/2020_The virtual EU summit between Merkel, von der Leyen and Xi Jinping has not generated any breakthrough. A EU-China investment agreement is still far away. As indicated in mijngroeve.nl numerous times, the West is in a watershed moment in the relationship with China. Over the past 2 years this site has described the background to this changing relationship and the increasing tensions, which suddenly became very visible to the general public after the outbreak of the Corona-crisis and the subsequent war of words between China and the US.

The Covid 19-crisis has reminded European decision makers and the European public of the deep interdependence with China and of the resulting vulnerabilities. In Dutch governmental thinking this strong interdependence between the economies should have guaranteed responsible behavior by the CCP and have ensured greater international stability, creating a better Dutch (and European) position to positively influence China’s behavior.

Unfortunately Beijing’s behavior during and in the aftermath of the on-going Covid-19 pandemic seems to challenge those assumptions. Dependency in some cases even became a vulnerability, as China threathened to cut off medical supplies if governments dared to challenge Beijing’s handling of the Corona outbreak or criticize it for its human rights violations.

China finally on the European agenda

It took the EU a long time to put the China relationship as a regular (permanent?) topic on the agenda of the meetings of the European leaders. The old rule of thumb was that for security topics the European choice would be for the US, and in economic/trade matters for China: but given the strong links between economy, technology and security, this EU position has fallen under intense pressure. Sadly public awareness of the geopolitical position of the European Union is still extremely poor. This is predominantly due to years of skepticism by the leaders of the EU member states about the desirability or feasibility of a joint EU foreign policy.

Only in 2019 it really started to dawn upon those same European leaders that the business first approach towards China, driven by countries such as Germany and the Netherlands, the EU’s two major trading partners with the PRC, would be very difficult to maintain, especially in view of Xi Jinping’s self pro-claimed goals to make China a dominant and self-reliant superpower and of the escalating geopolitical technology war between the US and China. Yet the Netherlands has traditionally been critical of restricting the role of the market and of transferring national powers in the field of security, justice and foreign policy. That approach left largely unanswered the pressing question which geopolitical course Holland and the EU should take vis-à-vis China (and the US) in the opinion of our Dutch government.

The new reality

Meanwhile the China dream began to evaporate in the West. New realities have quickly emerged, as painted in various mijngroeve.nl blog posts. Suffice it to say that the confrontational relationship between the US-China is going to last irrespective of the outcome of the American Presidential elections. And that as a default scenario should be taken a situation in which the Chinese economy will continue to develop while the CCP will keep (or even further expand) its firm grip on Chinese society.

The Dutch will have to accept a conclusion which Xi has long nurtured: Europe’s system of economic and political governance is in competition with China’s strategic priorities and political preferences. It doesn’t mean there can’t be co-existence and co-operation. Yet the Hague, the Dutch and the EU need to get ready for all kind of eventualities, including serious deterioration, and fundamental, abrupt changes in the relationship with China in the years ahead. The Chinese one party-state has always seen itself in competition with liberal democracies, it really shouldn’t have come as a surprize to our European leaders.

In Chinese decision-making, political, economic and security dimensions are seen and taken as a whole. China’s one Party system has a great capacity to merge and define these dimensions into one comprehensive strategy and set long term strategic priorities and goals. Hence it’s no coincidence the sectors of Chinese foreign direct investment (FDI) in the EU have mostly targetted strategically important areas such as transportation and infrastructure, ICT, and energy.

The new Cold War

European decision-makers have claimed China is playing different roles for the EU; as potential partner and economic competitor as well as a system rival. However, if the US-China confrontation will lead to a socalled “New Cold War” including serious military conflicts, China’s role could be stripped down to just system rival: the US is still a NATO ally after all.

The term Cold War is a bit of a misnomer as during the conflict between the US and Soviet Union after WWII the EU’s economy never was as intertwined with communist Russia as the EU’s trade and business relations with the PRC today. No, the world is not going to fall apart into two neat camps. But a lasting systemic rivalry and major decoupling of the European and Chinese economies would be very disruptive for both players and global stability.

Below I will introduce some of the likely consequences of this rapidly evolving international environment for the Dutch relationship with China. I reckon most of the cited examples/cases will apply to other EU member states too. Perhaps they will be translated into a coordinated EU policy, though the EU’s principle of ruling by unamity and having the right to veto will make such co-ordination very difficult and time-consuming. And, apologies in advance, I could of course be wrong in my predictions!

I expect we will witness within the coming ~6 months the following:

Further tightening of Dutch Foreign Investment (FDI) screening

On June 2, 2020, the Dutch Government announced that it plans to apply a proposed comprehensive FDI screening mechanism retroactively to investments and takeovers carried out as from June 2, 2020. It’s part of an effort to create reciprocity and a level playing field with the Chinese, who have severe restrictions on foreign investment in place in the PRC.

The Dutch proposal covers investments in (A) providers of critical processes and infrastructure as well as (B) companies active in high-end sensitive technology, such as goods with military or dual-use applications.  This proposal consists of a mandatory notification requirement prior to the investment allowing the responsible minister to do a risk analysis. The government will submit the proposal for Parliament’s approval in Q4 2020.

Unlike some other EU member states, the Netherlands only has had limited sectoral FDI screening mechanisms in place (such as in the gas and electricity sectors). Dutch Parliament recently adopted a new sectoral regime through the Act on Undesirable Control (Telecommunications; Wet ongewenste zeggenschap telecommunicatie or AUCT) which provides for an investment screening mechanism in the telecommunications sector too. When the AUCT will go into force has still to be announced.

But future Dutch governments and MPs will be much more sensitive to Chinese (and non-European) take-overs in key sectors in the Netherlands than in the past. A Chinese take-over such as of the Dutch company Ampleon highlighted in an earlier post will in the future receive much more governmental scrutiny and could possibly be blocked. https://www.mijngroeve.nl/history/holland-europe-china-strategic-questions/ The new FDI regime is likely to result in a much lower level of Chinese investment in the Netherlands.

Export controls on dual-use goods and emerging technologies

The shift in attention from the classical arms industry to high-tech in a broad sense means that a considerable part of European economic production is – and will be – affected by arms export regimes. Mijngroeve.nl reported at an early stage how ASML got caught up in the geopolitical technology war. https://www.mijngroeve.nl/history/taiwan-and-holland-sandwiched-in-the-geopolitical-technology-war/ https://www.mijngroeve.nl/history/export-stop-asml-euv-steppers-who-will-be-the-next-target-in-the-usa-prc-geopolitical-technology-war/ .

Several blog posts also pointed to the high risk that European chip companies would be impacted by the anticipated new American export control regulations as the latter would have extraterritorial reach. In the current tense international climate the Dutch government will surely no longer dare to grant an export license to allow ASML to ship its unique EUV machines, vital to China’s ambitions of becoming a high-tech semiconductor manufacturing powerhouse, to the Chinese pureplay foundry SMIC.

D66

Former Dutch ambassador to China and member of D66, Ed Kronenburg, disagrees: in his view it would be wise to give ASML permission for the controversial sale as soon as possible: https://fd.nl/economie-politiek/1330606/peking-waarschuwt-voor-verslechtering-nederlands-chinese-relatie-om-asml. The Americans can’t be trusted in the ASML issue, claimed Kronenburg. “They let their own technology companies earn unrestrained money in China. If the Americans want to punish ASML for their Chinese ties, let them do it themselves. If the Dutch government goes along with the Americans, you give China an excuse to strike back”. Sounds like the former Dutch top diplomat is of the opinion Holland should not exercise any restraint or caution in the delivery of most advanced and unique equipment/technology to China.

MP Verhoeven, his colleague of D66, a coalition government partner, chipped in too https://www.bnr.nl/nieuws/internationaal/10401087/china-strategie-kabinet-kan-asml-dilemma-niet-oplossen: “China wants to be the most powerful country in the world by 2030 at all costs, primarily through technology. And if the Chinese cannot do that benevolently by importing a machine, they will do it maliciously,” Verhoeven warned. “With substantial state aid, espionage and theft, they will and should get those chips, so ASML says: do you create a competitor who will import those chips at all costs, or do you help the competitor by selling the machine and keeping a headstart yourself? I think that is an important consideration.” So Holland had better agree to the export because otherwise the Chinese surely will steal and copy the technology/chips without the Dutch making any money? A rather strange argument to justify an export license, I would say. And what does D66 want to leverage from the Chinese in return? A promise for better behavior?

For ASML the sales of the EUV machine to China isn’t a matter of life and death at all. ASML biggest EUV customers are in Taiwan, South Korea and the USA, not in China: ASML’s innovation is not driven by mainland China. Whether the Chinese will be able to build their own EUV machine within a few years is very doubtful, it’s far less easy as some people want to make us believe. The Chinese even require ASML’s continued support for the maintenance of existing, less advanced tools in Chinese fabs…

The PRC needs Western know-how to make their semiconductor industry state-of-the-art. After 20 years of major Chinese investments in a domestic semiconductor industry, China only holds a 5% share in the global semiconductor sales as shown in above table by SIA. China above all lacks domestic tool equipment vendors. Without access to Western know-how, it’s highly unlikely the Chinese semiconductor industry will be able to meet the ambitious goals set by Chairman Xi.

What would be effect on ASML’s US business if the Dutch government would allow ASML to export to the PRC? And what could Holland get from the US in return for blocking the export of the EUV machine to China? Valid questions. Perhaps a guarantee that the US will continue the exchange of intelligence info with the Dutch security services despite an earlier USA threat to cut off all intelligence ties with those European countries which would allow Huawei into their network?

It wasn’t until a few days ago that members of another coalition party, CDA, asked the responsible Dutch ministers to quickly map out the consequences of the latest American sanctions against China for the Dutch tech sector. The CDA MPs requested those same ministers to help formulate a coherent EU response. In addition they challenged the ministers how the EU could be pushed to pro-actively present its own export control policies instead of always reacting to American unilateral actions…

Even if the Rutte cabinet would prefer to co-ordinate such restrictions within an EU framework, the lack of high-political attention or interest in EU member states without advanced technology could make it difficult to reach a quick European consensus.

As a matter of fact, the diminishing lines between trade, technology and security are calling into question a fundamental principle on which the EU is based, namely that centralized rules should govern economic considerations whereas foreign and defence issues should be left primarily to the individual member states. And, as coalition partner CDA knows very well, successive Dutch governments have been very hesitant to hand over power to the European commission in foreign, security and defense policy.

Fast European policy responses required

Yet the rapid advances in technology do require fast policy responses, in particular in the eyes of the US: just look at what the Trump government has been issuing unilaterally in terms of new export control regulations towards China with the consent of Congress over the past year. A new Democratic President might be willing to give multilateralism a new chance, but even he could grant Europe only limited time to agree on a new export regime.

If the EU isn’t able to quickly agree on a new control regime, Washington will keep on trying to secure on a bilateral basis the support of allies such as the Netherlands for its emerging technology controls. Hence Dutch political parties had better discuss and review with the respective Dutch ministers what the Netherlands themselves would like to protect in the exchange with China in terms of know-how and technology instead of wasting too much time complaining about the effects of unilateral American actions.

Unrelenting American pressure

The chances are very high the US will not relax its pressure on The Hague to restrict emerging technology transfers as the existing Wassenaar Agreement does not sufficiently cover them either. Following the recent American restrictions and sanctions, access to European technology and know-how is of even greater importance for China to upgrade to higher-level international value chains and to further modernize its army.

It forces the Dutch political establishment to re-think the value of know-how and technology, in view of its dual-use (civilian and military) character. The Dutch government therefore has a duty to prepare its own clear frameworks, guidelines and conditions under which certain Dutch trade or exchange in new technologies, goods and products may or may not take place with China.

If a European export control regime doesn’t materialize, I foresee the Dutch government is likely to mostly go along with the US, while formally introducing its own controls at the national level at the same time.

Task force to evaluate and screen academic exchanges/co-operation

Subsequent to the forementioned comprehensive FDI screening mechanism and need for new export control regimes, I believe the Dutch government is likely to form a cross-functional Task Force (consisting of members of the intelligence service, Ministry of Education, Ministry of Defense, Ministry of Justice, Ministry of Economic affairs) or National Council to review and approve/disapprove of Dutch-Chinese academic cooperation and joint research projects in sensitive studies and technologies (refer table above). Perhaps this Task Force should be the driving force to draft and finalize the new export control framework too.

This Task Force could also be made responsible for or co-ordinate the screening of Chinese students/researchers, for example to investigate eventual ties with military organizations in China. The student screening and review of research projects would and should no longer (solely) fall to the universities. Research in emerging technologies such as the A.I. search engine project of the two Universities of Amsterdam funded by Huawei (https://www.mijngroeve.nl/history/holland-china-policy-growing-parliamentary-discontent/) would in the future be evaluated by this Task Force, which should issue a formal advice to the Dutch government upon completion of a thorough risk analysis.

The list of high risk countries

The US has meanwhile banned academic projects and technology/know-how exchanges with (students from) a number of Chinese universities and research organizations, such as Harbin Technical Institute & Harbin Engineering Institute because of their their close ties with the Chinese military and their prominent role in China’s space program. Similarly I expect the Task Force will start screening the university of origin and background of Chinese students at the TU’s in Holland as well as draft a list of Chinese universities and institutes which could possibly be excluded from research co-operation by default for national security reasons.

If the US-China relationship would turn extremely confrontational in the coming months, a Dutch Parliamentary majority could possibly prove to be in favor of putting China on the list of high risk countries such as Iran and North Korea, potentially fully excluding Chinese students/researchers from joining any TU or sensitive study/research project in the future. I reckon some Dutch research labs or institutes like SRON, NSO and NLR might already have started to revisit and scale down planned joint space/aeronautic projects with Chinese partners out of a growing fear of sharing too much knowhow with a potential formidable future adversary.

Over the past year there have been several high profile cases in the US and Europe of Western academics and government officials suspected/accused of being spies for the Chinese government or having leaked sensitive info to Chinese counterparts against lucrative payments. The Task Force could possibly also get involved in screening (the research projects of) Dutch academics on any payroll of Chinese TU’s.

Huawei, yes again!

Officially due to reasons of national security only a select group of Dutch MPs has been updated on the status and progress of the 5G roll-out and the implementation of extra security measures. Consequentially the Dutch citizen is left in the dark what the exact role is/will be of Huawei in the 5G network of the Netherlands. This Huawei soap, underreported in the Dutch press, has been a kind of embarrassment for both Chancellor Merkel and Prime Minister Rutte, who failed to realize or explain early on that the choice for a Chinese telecom giant shouldn’t be considered just a technical or economical-, but also a geopolitical and strategic decision, touching upon the question of national and European security interests and the transatlantic partnership.

As the UK and France have now decided to completely phase-out Huawei (by around 2028), I foresee the Netherlands will take a similar course and gradually replace and phase out all Huawei equipment. Even for Merkel and Germany it will be extremely difficult to stick to their positions. It will be interesting to see who will pay for the replacement of all this equipment and whether this discussion will also be shredded in secrecy.

Smart city concepts

Will Huawei be allowed to continue to play a role in the smart city concepts such as devised by Amsterdam and Amsterdam Arena (Johan Cruyff stadium)? It’s hard to find any recent info on the status of the co-operation between Amsterdam and Huawei. Perhaps this silence speaks volumes, but it would be better if the city would be fully transparent about the participation and role of Huawei in its smart city plans. The same for the (harbour of) Rotterdam: will Huawei remain part of the network in this strategic location? Local politicians should speak out loud and clear about their own opinions and concerns and push city governments to provide clarity.

The free trade champion Rutte will have to acknowledge and explain to the public that an economic and technological “decoupling” with China in specific products, areas or industries could be justified for national and security policy reasons, while simultaneously admitting it could carry strategic risks as economic interdependence does indeed sometimes dampen global conflicts. But it has been proven that the structural Dutch focus on trade and investment has had only limited success: more and more competition and rivalry with China has come to the fore in the meantime, greatly limiting chances for future partnerships.

Principles first

Economic ties with China that solely continue a “business as usual approach” could turn into severe liabilities if they result in one-sided dependencies. Be reminded that EU’s status as China’s number one trading partner and all of Europe’s diplomatic restraint in the mutual relationship over the past decade, has not deterred the PRC from displaying increasingly aggressive behavior in the South China Sea, breaching the international agreement regarding Hong Kong, stepping up cyber-attacks in Europe and bullying European governments unwilling to comply with Beijing’s wishes, to name just a few examples.

As the AIV report advised the Dutch government last year, Holland’s engagement with today’s China should first of all be based on principle and values: this includes first and foremost a commitment to pluralist democracy based on the rule of law and the respect of human rights, adherence to open and transparent market economy principles, boundaries for state interference and a shared goal of sustainable development. As the CCP clearly doesn’t underwrite most of these principles and is meanwhile promoting its own values and development model to the rest of the world, a much more careful and selective Dutch engagement with the PRC is fully justified and urgently needed. Reciprocity and leverage should always be kept in mind when dealing with the Chinese, while overdependency should be avoided at all cost.

Red Lines

The constant Chinese propaganda demands a strong and frequent public response by European top government officials too, including by the Dutch Prime Minister and Minister of Foreign Affairs, being China’s number two trading partner within the EU. Only by these public statements the CCP as well as the Dutch citizens and business community will remain alert to the red lines of the Dutch government (and EU). The liberal democratic model is under siege around the globe, Rutte c.s. should stand up and defend it publicly as much as possible, more than ever.

The Dutch Minister of Foreign Affairs Blok has finally gotten under Parliamentary pressure to no longer acquiesce in Chinese wishes for secret, last minute meetings without press conferences. In the future he might be forced by Parliament to address human rights abuses publicly and much more forcefully standing next to his Chinese counterpart. In addition, the Dutch Minister of Justice is expected to finally announce -again under strong Parliamentary pressure- the abolition of the extradition agreement with Hong Kong, a belated action in line with similar, much earlier, announcements by several other Western countries.

Taiwan will play a central role in the escalating American-Chinese confrontation, Dutch policy makers better be prepared. In light of the crucial role Taiwan (TSMC) plays in the semiconductor value chain and for the Dutch high-tech industry (NXP, ASML) and for liberal democracy in Asia in general, the Dutch government should condemn Chinese aggression against the island in meetings with the Chinese leadership and urge Chinese restraint in the region to ensure global peace. As a sign of support for Taiwan and its exemplary role in fighting Corona, the Dutch goverment should support Western efforts to make the island a member of the WHO.

Action Plans

What the Netherlands and the EU have been lacking is a concrete actions plan in response to unacceptable Chinese behavior and aggression. Holland and the EU need to step up the game if they want to be taken serious in the geopolitical dispute. Take the Hong Kong case: other than a statement expressing grave concern, there has been little or no concrete action against China for its interference.

I believe Dutch Parliament will drive the Dutch government towards such a plan in anticipation of eventual future Chinese aggressive behavior, laying out the escalating steps which could be taken in response. Such steps could f.e. include targeted sanctions against Chinese individuals or entities, which -hopefully- could be pre-aligned and agreed on at EU level as well, to demonstrate another united European front.

There are more ways to make clear to the Chinese they are crossing red lines. If for example Chinese government officials or overseas diplomats bully a European member state for not complying with Chinese diktats, the Dutch Foreign Minister should summon the Chinese ambassador for an explanation and issue a reprimande, while asking all his European colleagues to do exactly the same in their capitals. This would signal a coordinated European front against Chinese bullies and be perceived as sign of geopolitical strength: silence only signals weakness as it confirms to the Chinese the EU is paralyzed out of concerns of (perceived) dependency or fear for Chinese reprisals.

Wide public debate

Last but not least, China policy is no longer a topic solely for the top-level decision-making elite in the Hague. It should be an issue for day-to-day politics across Dutch government departments, at all levels of political parties as well as in regional and local settings and in all Dutch business communities. The debate should not be dominated by entrepeneurs or intellectuals who behave almost like fellow travellers of the regime in Beijing by only pushing China’s narrative out of fear of losing business or academic opportunities. A more balanced, realistic view of China is urgently required with inputs from all sectors of society.

There needs to be a much wider Dutch awareness of what’s going on in the relationship with China and how to best engage with the PRC in these changing and challenging circumstances. Luckily enough the Dutch government has promised to Dutch Parliament to much more actively stimulate and promote this awareness among Dutch entrepreneurs and society in Q4 2020….

It is time for the Netherlands and Europe to rise to the challenge and shape more decisively what is going to be one of its most crucial relationships in this century.

see also: Adviesraad Internationale Vraagstukken (AIV) “China en de strategische opdracht voor Nederland in Europa”, Juni 2019

Mercator Institute (MERICS), “Export Controls and the US-China Tech War”, Noah Barkin , March 18 2020 https://merics.org and MERICS, Papers on China #9 Sept 2020, chapter “Competing With China in the Digital Age”

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