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Mikko Huotari is the executive director of MERICS (Mercator Institute for China Studies), the Berlin-based think tank. He is an expert on China’s foreign policy, global and economic governance and competition, as well as China-Europe relations. He is the co-author of several publications, including Chinese FDI in Europe (2018), and Emerging Powers and Change in the Global Financial Order (2014). Prior to joining MERICS, Huotari taught at the University of Freiburg, where he earned his PhD. He has also worked at the German-Chinese Law Institute in Nanjing, the German Embassy in Beijing and the German Council on Foreign Relations.

Q: We’ve seen some pretty major developments in German foreign policy since the conflict in Ukraine began in February. How has this, in turn, shifted the stance of Germany, and the EU more broadly, towards China?

A: Not too much yet in practice, but that is first of all, it’s a question of capacity. Germany’s new government said in its coalition agreement last year that it would come up with a new China strategy, and in January the ambition was still to have it done by the summer. That is obviously not happening and we might need to wait until early next year. China is still somewhat of an afterthought, but this critical relationship is getting much more attention by the day in the government, corporate headquarters and media.

There was a period where Europeans and Germans were willing to test China’s position on Russia’s war in the Ukraine. By and large, China has failed that test. But there has been a certain level of understanding in Berlin that China is trying to not be drawn too much into this conflict and avoiding highly visible support for Russia, in terms of sanctions busting, or in terms of Chinese companies flooding into the void of the Russian market. Still, most German decision makers increasingly accept that China’s strategic alignment with Russia is the dominant pattern that we need to take seriously. Europeans would, however, generally not buy into the sort of “one-theater” theory that you might hear in Washington at this point. 

Do you think there was a hope that China might seize this opportunity to play more of a role in mediating the conflict, and thereby reach out to the West? 

There were two hopes, which I think turned out to be illusions. One hope was that China would, for strategic reasons, think that its relationship with the West is more important [than its one with Russia]. And that therefore it would make the right choices and support European interests in this situation, and use its influence and leverage — that I think is overestimated — on Putin. The second illusion was that China would be doing that because it needs to, i.e. that its dependence on European markets and technology is so high and that this would eventually lead to a change in China’s position. I think both hopes do exist still, but both, in many ways, are illusions. 

Do you see the conflict as a potentially decisive moment that will reaffirm Germany and Europe in their alignment with the U.S., and a permanent shift away from the idea that Germany and Europe can position themselves as somewhere in between Washington and Beijing?

I would love to say that, but I don’t think it’s the case. Current developments are generating momentum for those who would take a more Atlanticist perspective on China policy. The frequency of exchanges between [U.S. and European] officials on China policy, the German government’s investment in shaping new partnerships with the likes of Japan and India — all of that matters and is important.

But it is also happening against the backdrop of a lot of uncertainty, specifically in the German government, about the future of U.S. policy. A mainstream position at this point would probably be “Yes, let’s make use of that momentum. We have a lot of strategic alignment on China policy.” But the long-term solution probably is to invest more in European coordination and coordination with like-minded countries more broadly, and not solely rely on being in the U.S. camp on China policy. The question that would be posed here in Berlin and in Brussels is: understanding that we have common interests with Washington on China, how do we calibrate our own engagement with China so as not to damage those common interests? Plus, where is there complementarity in our approach that we can leverage and maximize, but not necessarily how can we get to full alignment on all of these policies?

Where do you see European concern about America’s position still? Is it the uncertainty of American politics, and the fact that Trump, or somebody like Trump could be back in power soon? 

It’s exactly that, the fear of a return to erratic policies and a willingness to not only risk but drive the world into a military conflict with China. These are factors that we are uncomfortable with. There is probably a pretty significant share of politicians in Europe who will say that the slowly unfolding big power transition between the U.S. and China is one in which where we are willing to see an increase in Chinese power — and accepting that this structurally needs to happen, and will lead to a growing say for China about quite a few global outcomes. 

The other point to raise here is that the standard response in Europe would still be that no one is really interested in a decoupling from China. Under Biden, overall, you have a much more rational debate about the degrees and modalities of decoupling but Europeans still operate with quite a few different premises about what the right responses need to be. 

Under [former chancellor] Angela Merkel, Germany’s approach towards China was that engagement through trade and investment was good for Europe’s and Germany’s economies, and also the best way to foster the sort of change in China that the West would like to see. Has the new German leadership given up on that idea? 

There’s a much greater realism about the capacity of interdependence with China to shape its political and societal trajectory. There has been a realization that China is changing us, much more than we really changed China. That’s the first part. 

I don’t think that the other part of the calculus is going away that easily, which is that deep economic entanglement with China is to the economic and wider strategic benefit of the European Union and Germany in particular. Obviously, there’s greater doubt about it. And there are big questions politically about how we can manage the deepening of interdependence, that I think Germany would, in particular, still seek to pursue. 

What is the appropriate level of public policy support for deepening Germany’s corporate footprint in China? That is where, behind the scenes, the debate is happening. Do we need big corporate delegations that fly to China to support a Chancellor’s visit? And a more technical, but much more impactful question: what is the right level of state guarantees for German corporate investment in China? 

More widely, there is the debate about economic security. What are our specific vulnerabilities with regard to inputs, with regard to market dependence, with regard to innovation and future technology ecosystem dependence? These are the three layers of dependency that governments are looking at and recalibrating currently.

What is German business saying about the relationship with China?

It’s a very mixed picture. Everyone in their right mind understands that it’s getting more complicated. You have a politicization of doing business in China on both sides. It’s not the non-controversial thing to do anymore. And you have new risks related to the fragmentation or “patchwork globalization” that we are seeing where, simply from a business strategy perspective, you need to make tough choices about where you locate your R&D, how integrated your global business can still be in a world that is fracturing. And then you have the third layer, which is the COVID-related uncertainties that China is generating across the world, with its new lockdowns, etc. So with supply chain logistics, can you actually produce continuously in China? Yes or no? 

Companies go where the subsidies are. You need to get your incentives right, if you don’t provide alternatives, businesses will continue to deepen their footprint in China.

And a fourth layer, which is increasingly important, is how strong is China’s growth outlook? It’s quite clear that under this new global scenario, we’re looking at a much slower China. So all of these factors have a differentiated impact on different segments of the economy and German business. To cut a long story short, you see the big German corporates — BASF, Volkswagen or Siemens — still doubling down on China’s market, in light of the size, the innovation capacity, the speed, the entanglement, the sunk cost investments. 

But you also see business federations becoming more critical about issues related to fair competition, lack of market access, IP threats and long term competitiveness. Those issues are becoming more prevalent and more debated. And then you combine that with the looming threats associated with uncertainty over Taiwan, the persistent and systemic human rights violations and China, many companies are reassessing their risk exposure. 

You wrote in a recent article that ‘Berlin must become more competent in assessing China’s strategic shadow games, and translate foresight regarding potential conflicts and tensions on issues such as Taiwan and technology development into a capacity to act.’ Are you calling for greater military buildup on Germany’s part, for example, in the Indo-Pacific?

We need to be clearer, or at least more realistic about our assessment of the capabilities and intent of Beijing. Having overestimated Russia’s capabilities, but underestimated its intent, we need to make sure that we get China right because it will be dramatically more consequential, on a global scale, if we don’t. Taiwan is one factor in that strategic landscape that is increasingly significant for long-term German and European interests. 

What’s the capacity to act that we need to develop? First, we’re well served to run scenarios on potential Taiwan developments and think through what can happen and under which time horizons. Second, we need to invest in preventing potential conflicts. The right responses will probably include signaling very clearly the high cost that a potential Taiwan invasion — or whatever grey zone scenario one can imagine — would have for Germany’s China relationship and the Europe-China relationship. We are absolutely right to work on a permanent, coordinated presence of Europeans in the Indo-Pacific; and that we align as much as possible with our like-minded partners way beyond Washington, but specifically with Japan, Australia, India, about the security architecture in East Asia, because we have a very fundamental shared interest on those issues.

Is there any way, given the size and the scale of China’s economy, that Europe could be as robust towards Beijing as it has been towards Russia in terms of sanctions, if China were to ever launch an invasion of Taiwan? 

That’s why the preparatory work needs to be done. There’s very basic steps involved in that which will take a long time. And they include investing in diversification on a political level, on a business level, as much as possible. This is starting slowly. But we also have to be realistic, the U.S. and other partners will not be able to do the same thing with China as we have pulled off with Russia. It is a completely different challenge. 

How can you initiate a process like that without incurring the wrath of Beijing and somehow making the situation worse — and if big companies like Volkswagen still see a massive market opportunity in China?

On the second question, what you do is you shift the risk towards companies. There will have to be a decrease, as we said earlier, in the level of public policy support and investment in that growing dependence on China. That’s the first step. 

But you cannot change, at least not easily in the European context, the calculus of business. If you really want to change that calculus, you have to put money on the table. Companies go where the subsidies are. You need to get your incentives right, if you don’t provide alternatives, businesses will continue to deepen their footprint in China. 

On the first part of the question: it’s part of the work to prepare your system for the costs along the way, because China will respond. You will have to endure that response and work with the deterioration of the political climate between you, your political system, and China. The fact that the [recent] EU-China summit came out as a “dialogue of the deaf” – as the HR/VP of the EU Josep Borrell called it – is exactly a function of both sides not being willing to compromise on what they call their core interests. 

What we’re probably looking at is a system where Xi feels pressured, or at least inclined, to double down on previous policies, rather than to open up space for other ideas and approaches.

We’ve been using the global financial system against Russia. Will we be able to do the same thing with China? Unlikely, and what is for sure, China is preparing everything that they can to make sure that it will never happen to them. 

So should we give up on deals like the Comprehensive Agreement on Investment [CAI] that the EU and China agreed in late 2020, but which hasn’t been ratified? Should Europe be looking at trade and investment deals with other Asian nations, rather than trying to pursue these sorts of deals with China?

The short answer is yes. The longer answer is, there is still both trade policy and business value in the CAI. We would be wrong to ignore that. But this is part of the willingness to incur costs: with this agreement, which is on the desk, we’re basically saying to the Chinese side, “We are sorry, we can’t do that, despite the fact that it would be in our interest.” 

It’s not the right political moment anyway, and we should have great concern about deepening our dependence on China through CAI. And indeed, we are well served to intensify our trade and investment policy around China, rather than necessarily with China. What will not go away is the need to find common rules with China. It’s just a question of how much energy we can spend for the next five years to try to get there. If it’s clear that we don’t get to any reasonable time horizon of actually achieving something, then it is a wise decision to invest in other priorities.

How united is the EU towards China right now? We’ve seen countries like Lithuania taking a fairly provocative stance towards China, while others seem keener to pursue Chinese investments and markets. 

Everyone who knows the European Union knows that there is no united position on anything really. But there is a zone of consensus that creates the possibility to act. And on certain matters, including trade and investment policy, you see a lot of consensus on the question of sharpening our defensive toolbox. Basically, everything that we agreed in 2019, with the strategic outlook document, is in process. We’ve added the anti-coercion instrument to the toolbox: instead of having an anti-Trump bias, it is now directed against China also, theoretically. 

I tend to be an optimist about EU-China relations and the capacity of the European Union to act, despite pretty significant divergences.

The divergences are largely a function of the diverging patterns of economic interdependence with China. A country such as Germany, that is deeply invested in China, will make different choices and have different interests, if you compare it to a country like Poland that is less invested in China. Overall, there is a greater cautiousness, a greater realization that China is a difficult partner, that systemic rivalry with China is a key factor; and a recognition that despite the fact that we will need to cooperate with China, it needs to be more conditional on the European side. And that economic competition is a growing feature, not only in China, and in Europe, but also in third-party markets. 

So the consensus is quite big. The responses will differ from country to country. But on the Brussels level, what it leads to is the fact that we don’t have a cooperation agenda with China, we have an upgrading of the defensive toolbox, and we have a continued interest in working with partners around China as the dominant mode of doing China policy, which is quite remarkable. I tend to be an optimist about EU-China relations and the capacity of the European Union to act, despite pretty significant divergences.

I wanted to ask for your read on Chinese politics. The smart money remains on Xi Jinping remaining in office after the party congress this year, and potentially for many years to come. But do you think that the issues of the recent months — the handling of COVID in Shanghai, the slowing economy, the Ukraine conflict response — have made him at all vulnerable? 

It is right to bet on a relatively high degree of continuity. If you look at personnel decisions, the institutional set-up Xi has created, and Xi’s capacity to push through with certain policy priorities and to remain on course, I don’t think there’s a strong signal of an elite split or anything that could fundamentally shake the trajectory of his grip on power. But is his role or position becoming more vulnerable to pushback? Yes. 

Now, my worry is that his response, and his team’s response, will be a further crackdown on those parts of the system that contradict his views, i.e. on the China-Russia entanglement, on his pretty tough stance on U.S.-China relations, on the degree of openness or self-reliance that China is seeking, on the degree of state interference and pushback against the private sector. What we’re probably looking at is a system where Xi feels pressured, or at least inclined, to double down on previous policies, rather than to open up space for other ideas and approaches. 

You have a system that thrives on loyalty and signaling what the boss wants to hear. I also think it’s a function of paranoia that has been built into the political system in China, where you have to constantly be on the lookout for pushback and infighting. That’s the way he and his entourage see the world. They do think that they are in a deep, existential battle for supremacy, and a struggle that they have to win, where the West is after them; and that threats to the leadership and regime are incredibly high and that ultimately everything that is creating turbulence is because of the machinations of the United States. That’s a genuine belief, and it leads to fundamental misunderstandings, miscalculations and also a lack of capacity to actually differentiate, for instance, between positions that the European Union takes, that Japan takes, that the United States takes etc.

MERICS was included in that list of entities that China put sanctions on last year in the tit-for-tat sanctions over Xinjiang. Can you talk us through how that affected your work on and in China?

Thanks for asking. Interestingly enough, we’re probably less worried about the outcomes of those sanctions than a lot of colleagues, partners and interviewers in the rest of the world, because we’re confident about our capacity to continue to do good China research, which is what we want to do and what we’ll do in the future. We’ve also benefited from a lot of support and solidarity from colleagues and our stakeholders in politics and industry all across the world, and back home here in Berlin. So while clearly it has created uncertainty, it also has shown our resilience as an organization and the importance of doing independent China research. 

In the meantime, some exchanges with Chinese counterparts have also happened again. Now, we will have to see how this moves forward. It is a fragile status quo and one that is heavily politicized. Our role remains to provide the best kind of analysis and advice grounded in a European perspective and based on our expertise and trusted networks on this continent and beyond.

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