USA, Europe & China: crossing swords?

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Last week Trump proudly announced the Phase 1 “historic trade agreement” with China. The embattled US President needs positive news as the 2020 election campaign is imminent. We still don’t know the details of the agreement that apparently covers 86 pages, the final text is not yet ready nor signed … The US government has at least won a Chinese commitment to import more agricultural products (= doubling the current import level!), which has been Trump’s personal and main focus. Also, the additional pre-announced tariffs on Chinese goods will be suspended for the time being and previously imposed tariffs will be lowered. China has also put on hold previously announced retaliatory taxes. A large number of tarifss, however, still apply … A phase 2 agreement is not in sight.

Phase 1 trade agreement

In the agreement China also declares that it (finally!) will comply with earlier promises to no longer force foreign companies to transfer technology and know-how to Chinese companies in exchange for market access. In addition the Chinese have committed themselves to introducing more stringent legal measures to protect copyrights and patents, including rules to combat on-line copyright infringement and on-line offers of counterfeit goods. The deal also promises more access for the US financial sector to the Chinese market.

How exactly the phase 1 agreement will be implemented and monitored is not yet clear, but regular bilateral consultations will be required. The US government has already announced through its trade representative Lighthizer that the success of the deal will entirely depend on China. Or, in other words, in case the phase 1 agreement isn’t executed, it will be entirely due to Beijing.

The agreement does not address the fundamental disputes that underlie the “trade war.” The Chinese have not been forced to reform their centrally-led economy or the close relationship between government and companies. Nor have they committed to far-reaching liberalization of their market. While the stock markets have of course cheered last week’s news, the reaction of the US Congress to this truce has been rather lukewarm. Currently only one topic unites the opposing and defiant Democrats and Republicans: China. There is a consensus in Congress that China is a threat to US national security. Representatives are busy devising and taking measures to constraint the US economic and political ties with the People’s Republic. https://www.mijngroeve.nl/history/us-eu-and-china-further-escalation/

Systems’ clash

The # 1 and # 2 economies in the world have completely different economic and political systems: the state-led People’s Republic is ruled with iron fist by a communist party dominated by an all-powerful president: until 1989, such a party was usually seen as the archenemy of Western democracy. After the fall of the Berlin Wall, the CCP was given the benefit of the doubt for a long time in the West, because it was / seemed more willing to open up and modernize the country unlike the Russian Communist Party in the past. But the US Congress has gradually become convinced that the CCP under the direction of the authoritarian, life-long ruler Xi Jinping, no longer is willing to change the country economically or politically. Congressmen fear China’s long-term strategy’s sole purpose is to impose its own system, rules and values onto the world ​​… America, in short, is getting prepared for a longer term struggle with China’s authoritarian state capitalist system… https://www.mijngroeve.nl/history/america-first-vs-china-first/

Under pressure from Congress, the US Department of Economic Affairs is busy completing a 5-point list to prevent sensitive technologies (such as quantum computing, 3D printing) from falling into the hands of rival powers, just a week after the announcement of the “fantastic trade agreement”. The current list does not even go far enough for Congress. It also wants this list to be shared with international agencies and bodies so that it will be applied not only by America but also overseas by other Western, South Korean and Japanese companies and governments. And as known, Huawei, China’s telecom giant, has been declared “persona non grata” by both Republicans and Democrats. The company’s Chinese CFO is still under house arrest in Canada, despite the “phenomenal” phase 1 trade agreement …

Interesting to note is that at the plenary meeting of “the Wassenaar Arrangement” in Vienna earlier this month, more types of semiconductors and semiconductor equipment (incl. EUV lithographic equipment from ASML) have been put on the list of so-called dual-use goods (= civilian products that could be used for military purposes). These products require a special export license from Western governments. China is not a member of the Wassenaar agreement. ASML’s business with China is likely to come under even more American scrutiny …although naturally the Dutch government remains silent about whether or not it is going to grant a license to ASML to export its most advanced lithographic equipment to SMIC, the pure-play foundry in China…

Europa and China

A consensus on China or a coordinated China strategy is hard to find in Europe. Most striking is Germany’s near governmental crisis about the 5G rollout and the Huawei dilemma. In my blog I have already mentioned the growing criticism in CDU / CSU (“Unions fraction”) of Merkel’s position in this matter. https://www.mijngroeve.nl/history/german-government-also-considering-to-ban-huawei-from-5g-roll-out/ https://www.mijngroeve.nl/history/5g-roll-out-merkels-headache/ Unlike the Netherlands, German political parties want the parliament to have the final say on the nature of the 5G roll-out. Members of the Unions faction started to work with members of the other government faction, the SPD, to prepare a motion that would completely exclude Huawei equipment from both the core and the periphery of the 5G network…

Merkel

Merkel has slowed down her fellow party members and is now working with the Unions group on a proposal that should satisfy her rebellious party members a well as the member of the SPD. The proposal could not be finalized before Christmas: only in the New Year will it become clear what that compromise entails. And whether it will appeal to other parties in the Bundestag such as the Greens and FDP, who have already explicitly rejected Huawei. Merkel also has to deal with severe American pressure on another topic: US Congress has also proposed sanctions against people/companies involved in the gas line project with Russia worth around $10 billion, Nord Stream 2. How Merkel believes she can withstand all of this American pressure while preserving an united NATO, so much cherished by Germany, by embracing Huawei as well as Nord Stream at the same time, is not entirely clear to me …

Merkel will have to accept that the majority of the German parliament at least does not want Huawei equipment to be deployed at the core of the network. As to the periphery, the role of Huawei is likely to be reduced too: according to the compromise proposal drafted with the Unions fraction a maximum of 30% of the RAN network may be owned by a non-European supplier by 2025: in Germany Huawei currently makes up around 70% of the 4G network.

Telefonica, one of the telecom operators involved in the 5G roll-out in Germany, was quick to announce this Thursday its purchases of Huawei equipment for the core of the German network will be drastically reduced, after it explicitly said last week that the Chinese telecom giant was her preferred candidate. In anticipation of political clarity in the Bundestag, Deutsche Telekom, a major buyer of Huawei equipment, has temporarily suspended purchasing Chinese equipment. The 5G rollout in Germany will certainly be delayed. Just like many other European countries, our neighbor was originally boasting it would be the “fastest, first, the best” etc to implement a completely secure 5G network …

The Chinese government is getting very vocal too: the Chinese ambassador in Berlin has already threatened that if Huawei is excluded, China will have to review the import and purchase of German cars. Oh dear, has Trump not threatened to take measures against the import of German cars too? Poor Merkel … Other European countries which are considering banning Huawei are receiving strong warnings from the Chinese government as well. Take the insignificant Faroe Islands who risk to encounter China’s wrath: if they would exclude Huawei, the island group can forget a free trade agreement with China, the Chinese government has threatened.

5G roll out in Europe

What about other European countries? All European member states have been urged by the European Cyber Security Agency not to make themselves dependent on a single supplier. Furthermore, the European risk analysis provides all kinds of recommendations to check and improve security of the network https://www.mijngroeve.nl/history/11896/ . It is unclear to what extent individual member states will adhere to these recommendations.

France does not boycott Huawei, but the telecom operators over there must request permission for their 5G projects from the French government, which reserves the right to “exclude certain suppliers based on national security.” Huawei’s fate is in the hands of ANSSI, France’s cyber security agency, which will advise the government on “a case-by-case basis”.. .We are also very much looking forward to the decision of ex-European Boris Johnson, who as mayor of London welcomed Huawei with open arms. Does he dare to defy Trump who has told him to break the ties with Huawei or otherwise risk the end of mutual cooperation between the intelligence services? Johnson will most likely exclude Huawei from at least the core of the network…

Italy: lies in bed with both Huawei and ZTE and is a big fan of Xi Jinping’s Belt and Road Initiative, but says it will not ignore national security. Belgium: the home country of the EU and NATO. Has recently been startled by a major cyber attack on the trade delegation to China. Has now postponed the auction of frequencies until next year after fear has grown in political circles with regard to Huawei and ZTE. Greece: the auction of frequencies is only planned for the end of 2020, but the Greeks are under heavy Chinese pressure, with Chinese companies being the largest investor in their economy, especially in the port of Piraeus.

Hungary: heavily in love with Huawei. The Chinese company supposed to be part of the core and periphery of the network if it is up to the current government. In the Balkans, in particular Serbia, Huawei will not be blocked. In Belgrade, government officials are even considering involving Huawei in setting up the cloud infrastructure for a large data center.

Norway and The Netherlands

Remarkable is Norway’s approach: Telenor has chosen Ericsson as the main 5G technology supplier and has decided to phase out Huawei’s 4G equipment completely in 5 years after more than 10 years of close cooperation. Two smaller operators Ice & Telia already picked Nokia and Ericsson before. I wonder if it will have repurcussions for Norway: Chinese diplomatic relations with Norway were restored in 2016 after a 6-year freeze due to the fact that in 2010 the Chinese political prisoner Liu Xiabo won the Nobel Peace Prize after a nomination by the Norwegian parliament. Liu Xiaobo died in Chinese captivity.

The Dutch cabinet, and in particular Prime Minister Rutte, has been keeping its distance from the China debate as much as possible. Perhaps the Dutch prime minister feels slightly embarrassed by the fact that as late as last year he was still seen cozying up to the Chinese telecom giant. https://www.mijngroeve.nl/sport-en/ajax-huawei-contract-extension/ He is slipping and slidin’ to circumvent American pressure and blame, while at the same time trying not to offend China publicly. But the recently issued general administrative regulation (“AMvB” in Dutch) regarding the 5G roll-out does not seem to leave any room for Huawei in the core of the network, although the Dutch population remains in the dark about the details of the regulations.. https://www.mijngroeve.nl/history/the-die-is-cast-huawei-banned-from-core-of-dutch-5g-network-at-last

Rutte, Minister of Foreign Affairs Blok and State Secretary of Economic Affairs Keijzer must feel relieved they are still hardly questioned in Parliament or by the media about their China strategy or the 5G rollout. https://www.mijngroeve.nl/history/holland-europe-china-strategic-questions/ KPN is already busy replacing Ericsson’s towers (equipment) in the so-called periphery with Huawei. Vodafone / Ziggo claim they only use Ericsson in 5G. As far as I know, T-mobile, the other telecom operator active in the Netherlands and a subsidiary of Deutsche Telekom, is still highly dependent on Huawei. It is still not very clear how the 5G roll out is going to pan out in the Netherlands … The details remain murky at best … Perhaps that’s the Rutte strategy?

PS; on December 18, 2019, the daughter of Uyghur scholar Ilham Tothi, who lives in Chinese captivity, received the Sakharov prize (for Freedom of Thought) from the European Parliament. While European heads of state such as Merkel and Rutte have been doing their utmost best not to offend China, the EP has made a clear statement with this award. The Chinese human rights issue, in particular the situation in Xinjiang and Hong Kong, is likely to play a greater role in 2020 in European discussions and policy debates about the People’s Republic.