Journalistischer Abstract: Dieses Policy Paper untersucht die geopolitische Bedeutung des wirtschaftlichen Engagements chinesischer Staatsunternehmen in europäischen Häfen. Es wird argumentiert, dass eine solche Beteiligung ein ernsthaftes Risiko darstellt: Sie ist von großer Bedeutung für Chinas geopolitische Strategie (Maritime Silk Road als Teil der Belt and Road Initiative) im Rahmen des zweiten Pfades nach Brands und Sullivan (2020). Die Autoren gehen davon aus, dass China anstrebt, das US-Bündnissystem und die amerikanische Machtpräsenz in der Region durch die Entwicklung des chinesischen wirtschaftlichen, diplomatischen und politischen Einflusses auf globaler Ebene zu unterlaufen. Dabei stellen Häfen Knotenpunkte für die Logistik und Infrastruktur dar, welche bei einer Störung empfindlich reagieren. China kann daher strategische Abhängigkeiten schaffen und wirtschaftlichen Zwang ausüben. Um dem vorzubeugen, braucht es einen dreistufigen DeRisking- und Substitutionsansatz der Europäischen Kommission. Wichtig hierbei ist, dass der Erfolg der Gegenmaßnahmen vom Grad der Zusammenarbeit der EU-Mitgliedstaaten abhängt. Sie müssen sich gemeinsam an ihre internationalen Partner, insbesondere die USA, wenden.
I. Introduction
This paper develops a proposal for the EU Commission in dealing with the involvement of China and its state-owned companies in European ports as a factor of economic dependence. This is developed against the background of the geopolitical analysis by Brands and Sullivan (2020) and taking current policies into account. First, the status quo and the resulting political challenges are presented regarding the role of European ports in the context of economic dependencies. Then current EU policies regarding this challenge are analyzed before a concept for future geoeconomic policies is outlined.
i. Status Quo
This section analysis first the economic trade and interdependencies between China and Europe, before discussing in a second step the involvement of China in European ports. Economic dependencies have four dimensions that this paper includes in the analysis: balance in foreign trade (1), strategic dependencies in the supply chain (2), corporate dependencies (3) and innovation procedures (4). First, China is with 32% of the ex- and imports the most important trading partner for the EU (Eurostat 2021). Nevertheless, Matthes (2022: 24) found that China is slightly more dependent on the EU in terms of value-added ex- and import shares, than the EU on China, while China tends to diversify their trading partners more than the EU does, which leads to an increase of EU’s economic dependence. Second, looking at the supply chain, the migration of production to China in recent decades has created mutual strategic dependencies in the pharmaceutical, chemical and electronics sectors (Zenglein 2020)1 . These are limited, but shock situations like an escalation of the Taiwan Strait, can raise them significantly (ibid.). Third, for corporation revenues China is a highly relevant player but does not dominant the overall revenue expectations of most European firms (Zenglein 2020; Figure 1). Fourth, China's innovative strength stems not least from technology transfer through company takeovers, collaborations, or investments, but also European companies utilizing the dynamic Chinese market to develop innovations (Matthes 2020; Zenglein, 2020). The dependencies of the EU member states vary as well as the economic benefit from intensified trade relations (ibid.). European ports as key nodes in the transportation and trade networks contribute to and are part of the economic relation and must be considered with their economic dimension and geopolitical implications. The involvement of China and its state-owned companies in European ports are part of the MSR which itself is part of China’s BRI. China invested in ports in over 75 countries (Figure 2), in 15 European (Figure 3; Ghiretti et l. 2023b: 10) and has varying shares in all the five biggest ports measured on container handling (Figure 3, Figure 4; Jacobs 2023).
ii. Political Challenges
The central political challenge the EU must address is the question of finding a balance in the relationship with China as partner, competitor, and systemic rival and therefore between economic profitable trade and potential economic and geopolitical risks raised through this relation (2021/2037(INI): point 1). A second challenge is the disagreement among EU countries regarding their assessment of this balancing act, while at the same time the domestic political debate on China is taking different paths, making a joint approach challenging. (Seaman et al., 2022: 15; van Wieringen 2022: 40). Thirdly, this disagreement is exacerbated by economic competition between countries and their ports. The Chinese shareholdings can lead to “opportunities for China to play EU Member States off against each other by threatening to redirect Chinese containers from one EU port to another” (Grieger et al. 2022: 1). Fourthly, the knowledge and expertise about China is various across the countries, however expandable in any case (Ghiretti et al. 2023c). Regarding the role of European ports, the European Commission must therefore first evaluate their geostrategic importance and, second, balance the economic profit with economic and geopolitical risks to improve their policies in a final step. This paper will attempt to address these steps in section III.
II. Summary of current EU policies
The China Strategy states that the EU is “concerned about the increasingly unbalanced bilateral economic and trade relationship between the EU and China […].” (2021/2037(INI): paragraph 48). Especially the restrictive entry for EU firms in China is criticized (ibid.: paragraph 49). The EU declared special protection for ports as part of the European critical infrastructure and already addresses economic dependencies through de-risking strategies in their so-called economic toolbox (Directive (EU) 2022/2557; Grieger et al. 2022). For the paper’s context the FDI Screening Mechanism, legislation on foreign subsidies and the ACI are the most important instruments to prevent economic coercion by China through the existing economic dependencies (Directive (EU) 2022/2557: paragraph 48). The first allows the Commission to screen FDI’s that may affect security or public order and institutionalize information sharing and to provide a recommendation, but the final decision remains within the member states (Grieger et al. 2022; Jacobs 2023; Regulation (EU) 2019/452). The second instrument is intended to address the distortion of the internal market's level playing field by foreign-subsidized investments and empowers the European Commission to investigate and take corrective actions, such as requiring the repayment of foreign subsidies or the dissolution of acquisitions and mergers that may provide unfair advantages to foreign firms (Grieger et al. 2022; Regulation (EU) 2022/2560). The ACI’s objective is to shield EU’s sovereignty and prevent the EU and its member states from economic bullying through restrictions to trade, direct investment, and access to the EU procurement market as possible countermeasures (Grieger et al. 2022; Regulation (EU) 2023/2675). But according to the second political challenge some member states lacking behind to implement the mechanisms (Huotari & Stec 2023; van Wieringen, 2022:40). Therefore, “concerns regarding gaps and loopholes remain” (van Wieringen 2022: 9). One improvement could be the planned Outbound Investments Screening Mechanism currently developed in cooperation with the U.S. (European Commission 2023; Ghiretti 2023a; Grieger et al. 2022).
III. Concept for future geoeconomic policies
In the following section the role of the ports is positioned within the geopolitical analysis of Brands and Sullivan (2020), before the political challenges are addressed in a concept for future geoeconomic policies based on risk assessment.
Brands and Sullivan (2020) describe two possible ways for China to global domination. The first path focuses on regional primacy as a springboard to global power, which is comparable to U.S. own history. The second path would follow the strategy of outflanking the U.S. alliance system and force presence in the region by developing Chinese economic, diplomatic, and political influence on a global scale (ibid.). In consequence China could try to (re)shape international economic rules, technology standards, and political institutions, which would challenge the political, economic, and military power of western states including the EU. The success of this path depends on the western response to the elements of this strategy as well as on China’s capability to provide global public goods like the U.S. and dealing with existing ideological barriers with other leading nations (ibid.). The first is currently addressed by states de-risking strategies and the latter is visible in EU’s description of China as partner, competitor, and systemic rival (2021/2037(INI): point 1). All in all, each path has its trade-offs, that primarily manifest themselves in limited resources, while both are plausible (Brands & Sullivan 2020). The main strategic challenge is whether the western states under the leadership of the U.S. can address the strategies economically and militarily especially in context of the Taiwan Strait and find out which path Beijing has chosen (Brands & Sullivan 2020). For this paper the latter path is more interesting to address than the first, because European ports may support the path to regional primacy through a solid value chain for China, but their role is limited, while Chinese MSR is within the second path a crucial means to gain global economic and political influence and reshaping trade flows towards Asia (Banik 2019; Blachard & Flint 2017; Bond et al. 2022: 22; Brands & Sullivan 2020; van der Putten & Meijnders 2015: 13, 32). However, it is reasonable to assume a combination of both strategies instead of operating one of the two excessively and thus simplifying the strategic response.
The following geopolitical evaluation focuses on the economic instead of the military dimension of ports. To carry out a risk assessment it should be noticed that the general business profits from Chinese investments in maritime infrastructure cannot be denied (Banach & Gunter 2023: 15; Ghiretti et al. 2023b: 17; Rühlig 2022). The main determinants for the individual risk of the countries, but also the resulting network potential, depends on whether a minority, like Hamburg Port, or majority shareholding with corresponding shareholder rights, like Piraeus Port, exists (Figure 3; Hildebrandt 2023). Four main vulnerability risks must be identified: The first risk lies in the possibility of influencing the flow of goods respective supply chains and port logistics to China's advantage, as the participation in various European ports creates network effects and through these effects a relevant dependency on the Chinese terminal operator COSCO as key external player could arise (Figure 3; Banach & Gunter 2023: 13, 18; Hildebrandt 2023; Mardell 2021). This once again makes the member states vulnerable to blackmail (see comparatively the third political challenge; Rühlig 2022). COSCO could divert its traffic to ports or terminals in which it has stakes, thereby distorting the market. Advantages for the Chinese value chain derive from the economic openness of the EU, which China does not offer mutually, and its exploitation through a complex web of stately associated companies to gain market power (Figure 5, Figure 6; Ghiretti et al. 2023b: 19). The second risk lies in associated lock-in dependencies that lead to a loss of various trading partners (Banach & Gunter 2023: 17). According to Rühlig (2022), it would be conceivable for COSCO to commission a Chinese technology company to digitalize their own port terminals, because awarding the contract is part of the operator privileges. Thirdly, the (possible) access to sensitive data and the resulting possibility of intelligence gathering, which can be used to tap into know-how, competitive advantages or sabotage and espionage. This includes data about technical systems and the flow of goods, which allows conclusions about value chains leading to competitive advantages (Hildebrandt 2023; Mardell 2021; Rühlig 2022). Fourthly, shareholding creates long-term opportunities to influence the development of the respective ports and European infrastructure (Hildebrandt 2023).
Taken together, the risks and already observable trends of Chinese action reflect Europe's vulnerability in line with the second geopolitical suggestion of Brands and Sullivan (2020). To broaden the view, it is observable that China also tries to gain influence in other European infrastructure projects like the 5G expansion and already uses economic coercion as the embargo on Lithuanian shows (Brands & Sullivan 2020; van Wieringen 2022: 9). The geopolitical and economic risks of port investments are concerning, but not intolerable. But in view of the strategic economic dependencies and network effects, there is a need to design clear policies to reduce the likelihood of success of the geopolitical goal of MSR.
China is already firmly anchored as a global player and intertwined with the European economy. Therefore, the EU must mitigate risks by further developing policies, as no single one can adequately address the problem and at the same time try to benefit from the development by using the MSR “[…] as a catalyst to rebalance trade relations in favor of Europe as a whole […]” (Banik 2019:12). The latter could be realized by reducing trade costs through Chinese-financed infrastructure projects (Herrero & Xu 2017). For both options, success depends on finding a common and consistent strategy with the member states that addresses the various prerequisites in a differentiated way to avoid finding oneself in a dilemma of intra-European competition created by China to weaken the EU and its ability to react strategically as addressed by the third political challenge (Banik 2019; Brands & Sullivan 2020). A strategic response to China’s comprehensive MSR strategy includes continuous development of the European China strategy and competence. To be truly effective, this must be always done in consultation and cooperation with international partners, especially the U.S. as China’s rival superpower (Banik 2019; Huotari & Stec 2023). It cannot be seriously assumed that these instruments will prevent China from using its influence to implement its geopolitical strategy, but a strong and constantly used ACI and legislation on distortive foreign subsidies address the risks, while FDI Screening Mechanism should increasingly be used to prevent China from expanding its influence. Based on this, the paper recommends a three-step approach to create binding rules with the member states.
In the first step, the existing de-risking measures in the toolbox should be developed further in the short term. In particular, the FDI Screening Mechanism must be used seriously to freeze further investments, if China would gain majority shareholding, a blocking minority, access to sensitive data or obtain monopolies on infrastructure that are difficult to substitute. Additionally, the Commission should enter a dialog with the member states to establish binding regulations that will prevent blackmail in the future and encourage them to strengthen national China competence and strategies (Huotari & Stec 2023). The aim must be to expand the de-risking toolbox with jointly used instruments like the currently developed Outbound Investments Screening Mechanism.
In a second step, the European Commission should develop case studies with escalation levels that provide detailed information about the consequences that the risks enable. This paper has already made initial attempts to outline these but cannot undertake a case study for all holdings and their various shareholding structures. The focus should be on strategic dependencies, which are exacerbated by network and lock-in effects. Thirdly, this paper assumes that, for example, in the event of an escalation with Taiwan, worst-case scenarios in ports like Piraeus, such as complete blockade and use of technical knowledge for sabotage or cyber-attacks, must be expected. This should be prevented through a higher capacity in cyber defense and the development of substitution capacities, prepared together with European terminal operators or international partners to avoid vacancies in container operations and consequently immense economic losses and effects on supply chains. In addition, political signals should be sent to companies that there is a need for private de-risking through warehousing and the search for possible substitutes for those processing goods with strategic dependencies or high supply chain volatility.
IV. Conclusion
In summary this policy paper shows that ports are of great importance for China's geopolitical strategy in the context of the second path according to Brands and Sullivan (2020), because they are hubs for logistics and infrastructure which, if disrupted, react sensitively to existing strategic economic dependencies. This must be taken seriously and addressed through the de-risking and substitution strategies described. The EU can only be successful if the member states work together and jointly address their international partners.
Lara Werdehausen
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