No limits, p.6
No Limits, page 6
I’d heard people say that Merkel didn’t like it. It wasn’t true. She was the first to take to the floor to say that she liked the style. She has never used the term “rival” but she liked that it was in that document, she knew that the Chinese would take it seriously.
The French president, Emmanuel Macron, would claim that it signaled that the era of European “naïveté” on China was over. With Xi Jinping due to visit Paris shortly afterwards, Macron made a point of bouncing the Chinese leader into accepting that his supposedly bilateral trip would feature Merkel and Juncker too. As one official involved in the trip preparations put it to me at the time: “For us, it was a twofold narrative to China—united we stand and: go fuck yourselves.” But they also sought to make a point to other Europeans: “Europe could stand up to China, and it still wouldn’t stop them buying our products.”
Beijing’s unhappiness with the new European strategy was evident. As one of the participants in the meeting noted: “In the EU–China summit they were very irritated. For an hour they spoke about nothing else.” Chinese diplomats would embark on a witch-hunt for which EU officials were behind it. If the Commission’s bureaucratic ambush had been a success in putting Europe’s approach on a different footing, it was only the starting point. As Selmayr reflected later:
It was surprising that we needed to surprise our systems, to get them out of their comfort zone. It showed that people were very naive if it was already seen as surprising and courageous to go that far. If you’ve ever sat on the other side of the table with Xi, it’s absolutely common sense. It’s the minimum. This change should have happened much earlier.
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To make sense of why it was not just the language that represented a break, some disentangling is required. For outsiders, the Brussels institutions are an opaque blob. A jumble of acronyms and a mostly unlovely set of buildings clustered around a roundabout at the end of a multi-lane highway. China policy had largely been the purview of two of these institutions, which wielded far from equal clout. The European External Action Service ostensibly acts as the EU’s diplomatic service, with its chief often dubbed the European foreign minister. But the unwieldy name—pointedly not the EU foreign ministry—reflects the discomfort that European states had for handing over their foreign policymaking powers. It is also hobbled by the requirement for unanimity, which means that not even a joint statement can be issued in the EU’s name if, say, Hungary or Greece decide to block it. Much of the new agenda, however, would fall to the more powerful beasts in town.
The Directorate-General for Trade was near the top of the food chain. With the capacity to marshal the full economic force of the world’s largest trading bloc, no inhibiting veto for individual member states affecting its decisions, and the unalloyed status that trade is a full EU competence, it was already deeply embroiled in the China game. The new proposals envisaged giving DG-Trade even more capacity to block Chinese investments, enforce reciprocity in the EU’s enormous government procurement market, level tariffs on Chinese imports with additional robustness, and tighten restrictions on high-tech exports. But it would also unleash other Brussels powerhouses on the China account. The Directorate-General for International Partnerships, which controls the world’s largest aid budget, was supposed to reconfigure its approach to deal with China in a more competitive manner, though it would prove exceptionally painful to persuade them to do so. The digital wing of the EU, DG-Connect, was tasked with rethinking technology rules and regulations to deal with the growing presence of Chinese firms in the European market. But one of the most interesting cases was the heaviest of the heavyweights, the Directorate-General for Competition, “DG-Comp.”
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DG-Trade is part of the newly empowered Europe that emerged with the establishment of the European Single Market in the 1980s, turning diffuse national economies into the world’s largest trading bloc. DG-Comp’s roots run even deeper, back to the founding mythology of the entire European integration process. Decartelization had been a critical part of the Schuman plan, with the language originally drafted by a US official and Harvard professor, Robert Bowie, the leading expert on US antitrust legislation, “which the Americans applied as rigorously as morality itself” as Europe’s founding father, Jean Monnet, put it in his memoirs.[8]
Breaking down concentrations in the coal and steel industry had been central to US policy in the post-war settlement, part of the plan to limit the re-emergence of the forms of German industrial power that had existed under Nazism. As such, the competition provisions in the Schuman plan were highly contentious, resisted by the West German government at the time. But they stuck. Monnet later noted that “the extensive antitrust legislation now applied by the European Community essentially derives from those few lines in the Schuman treaty.” And they had in their DNA a US spirit and philosophy of highly competitive markets, which would now become hard-wired into the way the new European institutions worked.[9]
In more recent years, DG-Comp had emerged as the bane of Silicon Valley, trying to regulate and take on concentrations of market power where US antitrust authorities, fixated since the 1970s almost exclusively on keeping consumer prices down, were no longer willing to go. US companies and officials complained that they were too often the targets, Trump himself calling the responsible commissioner, Margrethe Vestager, a US-hating “tax lady.”[10] European officials, by contrast, lamented the fact that the United States no longer seemed meaningfully committed to the very competitive values it had helped to inculcate in Europe in the post-war settlement. But now a new problem was on the table: the China question.
The trigger was what would typically have been an open-and-shut case, the proposed merger of Alstom and Siemens in 2017, the French and German companies that were Europe’s largest suppliers in the rail market. In normal circumstances, this would barely have merited a debate. Yet the companies involved had a different argument to make than in years past. The Chinese high-speed rail sector had consolidated rapidly and was now posing a threat in every international market. European champions were required to take it on. EU competition authorities should therefore no longer restrict themselves to looking at the position of these firms in the European market alone but take a global view. DG-Comp officials were bitterly resistant to this line of argument, seeing it as a new form of anticompetitive special pleading. Even when Vestager was hauled in front of European leaders to explain the decisions, the merger was blocked in early 2019.
When I dropped by to talk to the China hands in the DG soon after the decision, it was striking how few of the EU’s powerful competition tools the institution believed could actually be deployed to take the China problem on. Blocking Chinese mega-mergers was too much of a reach, and “European champions” were antithetical to their mandate to ensure competitive markets. Everything that might have looked like a job for DG-Comp actually belonged in the trade realm, they contended. “Competition law is not the answer to all evils.” Taking on large, well-connected European and US multinationals was challenging enough already for the embattled officials. China risked becoming their get-out-of-jail-free card.
By 2020, everything had changed. “There is a reflection in the house on how to approach the overall state of affairs and the detonator for this is China,” as one official put it. The first public sign of what was going on was a series of proposals that year laying out an ambitious set of plans for how the EU could go after Chinese subsidies. Beijing’s untrammeled capacity to back its firms with cheap land, electricity and other inputs, as well as outright finance, had been a headache for Western firms in China but was now becoming one in third markets and even in their home markets. It was one of the single biggest advantages that Huawei had over European telecoms firms. How to level the effect of this was a problem that virtually every competitor was wrestling with.
It was the European Commission that would lay out the single most comprehensive approach to address it, even if they rarely mentioned China by name in the process. For the various foreign officials who contacted me enthusiastically the week the EU’s proposals were released, the most exciting part of it was that DG-Comp was now in on the game. “This is lightyears ahead of us,” one US official commented. “Once it was us with Brandeis,” she noted, referencing the anti-monopolist Supreme Court justice who had dubbed economic concentration the “Curse of Bigness”: “We trained you on antitrust, and now you’re going to train us.”
In private, there was a changed spirit. When I went back to the European officials who covered the account, they were fizzing with ideas for how to overcome China’s non-transparent practices, how to target cartel-like practices among Chinese firms, metrics that could indicate anti-competitive behavior, methods for blocking subsidized takeovers, models for thinking about China’s use of data, and a long list of other proposals. Bolder arguments suggested treating all Chinese firms as a single “China Inc.,” given the role of the state and the Party across the totality of the Chinese economy, a decision they had already hinted at when they decided that Chinese firms in the energy sector should be seen as a single entity for the purpose of merger assessments. “We went through a long reflection process on what’s legally possible. We had to come up with a solution,” they noted in priestly fashion. When it really mattered, Commission lawyers could suddenly become very creative. Now, even core EU doctrine needed reinterpreting with China in the picture.
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Dwelling on the arcana of European competition law may seem like a sideshow in the context of militarized islands in the South China Sea, vast infrastructure investments and mass detentions of Uyghurs. But China has long understood the base of its power to come from its access to the Western-created system and its ability to game it at the same time, whether that be technology acquisition by fair means or foul, or the freedom to access international markets while ensuring only the most selective access to its own.
The reluctant revisiting of fundamental orthodoxy about antitrust practices was more emblematic of the newfound impetus to think differently about how to deal with these basic asymmetries than any statement of European criticism about Hong Kong. China didn’t represent a narrow challenge. It posed questions about whether the foundational principles of the existing system could still function in the same way. As one French Treasury official commented: “We haven’t changed our understanding of economics. We still don’t think that the Chinese model will succeed in the long run. But how many decades are we supposed to wait for it to fail? And what will happen to our industry in the meantime?”
Talking to European officials at the time, there was the sense of a dawning recognition that an era was coming to an end, if not full acceptance of the revolution it implied. But the first step was simply to face up to the problem. As one of the officials reflected:
There was Trump, we have to recognize that he had a role in getting us to rethink our position. There was the promise fatigue—China would keep making announcements and nothing happened. There was the evidence accumulation, the long track record, the depth of understanding of how the Chinese economy was really working.
There was also a coming to terms with past mistakes. “We gave a lot of access to China, believing that we had to be the first movers and then we’d be rewarded. We were fools.” But just as the United States had started to wake up to what the changing nature of China’s economic and technological ambitions would mean for their military rivalry, so too was there a growing awareness in Europe. “We also saw more clearly what was happening systemically—it was Made in China 2025 meets the Belt and Road. We didn’t take some of these things as seriously in the first place.” It was not just about seeing China more clearly though; it was also about training the mirror on themselves. As one French official put it:
“We saw our own weakness: the openness paradigm. That no matter what people do outside the EU, we were convinced of the virtues of being open. This way of thinking can work when you don’t have the likes of China playing on these rules to their advantage.”
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It was no longer tenable. “We needed to have a way to ensure that this openness and freedom were sustainable. The sheer magnitude of the China problem puts it at risk.”
Tokyo, July 2018
It was my last meeting in Tokyo. I was in town to give a talk at the National Institute for Defense Studies and had my usual round of meetings at the foreign ministry and the prime minister’s office. But the appointment I was keenest to get to was at the Ministry of Economy, Trade and Industry. METI’s forerunner had been responsible for Japanese industrial policy and was alternately vilified and admired by US policymakers back in the 1980s when Japan was the locus of American anxieties. Chinese planners had used elements of Tokyo’s approach as a model, even as they took it to a whole new level.
Times had long changed. METI was now at the cutting edge not only of the drive for ambitious new trade agreements but all forms of economic and technology cooperation among the world’s free-market democracies. The tradition of strategic economic thinking in which they were steeped often gave METI officials an edge when they saw industrial strategy being pursued on an even grander scale by their overbearing neighbor. The Japanese government had been quick on the draw in providing countries with alternative financing to China’s Belt and Road Initiative while the Americans and Europeans lagged well behind with their own efforts. It had reached an ambitious trade and data agreement with the EU. It had held together and revived the pan-regional Trans-Pacific Partnership trade pact despite Trump withdrawing the United States from the unratified deal. I was told I would be meeting an interesting China hand in the department and that I “wouldn’t be disappointed.”
Even by my standards of being outflanked in a meeting, this was a singular record, as I arrived to find nearly a dozen officials sitting round the table. At the center of the conclave was the head of the ministry’s economic intelligence division, which analyzed competitive threats to the Japanese economy. The issue he wanted to expound on was artificial intelligence.
The Japanese officials were concerned that China was poised to take advantage of its closed data market to gain considerable edge over its international competitors. The phenomenon was a familiar one: China’s market in many sectors was of such vast size that if its own companies were able to benefit from the scale advantage while foreign firms were effectively excluded, it gave them an enormous leg up. Some economic analysis assessed it as an even more critical factor in tilting the playing field in favor of China Inc. than the Chinese state’s vast subsidies.
But this was even more worrisome. Data was the lifeblood of AI. If Chinese companies were able to tap into far larger datasets, while Japanese companies were confined to their own national market, the benefits would extend not just to the Chinese AI firms themselves but all the industrial sectors that would benefit from its application, whether that was advanced manufacturing, healthcare or transportation. This was not a flimsy, speculative assessment, a wide-eyed “data is the new oil” analysis, or a claim that only data mattered among the many different dimensions of competition in the AI space. It was run with numbers as best they could approximate and stitched together into one of the typically meticulous collections of slides that the Japanese government departments produce with such facility. In this instance, I was asked not to remove the documents from the room.
Taking the challenge on required a number of different measures, but one of the most important was pooling data on a scale that could plausibly allow the advanced industrial democracies to compete. Therein lay the problem. Data flows were a matter of high contention. The agreements that had permitted data to move freely from Europe to the United States had been struck down twice by the European Court of Justice as the result of the insufficient privacy protections for European citizens from US law enforcement. Japan and the EU themselves had just established the biggest area of free data flows in the world, based on an EU determination that Japan’s entire privacy regime, by contrast, was “adequate.” Japan would spend much of its presidency of the G20 promoting its “data free flow with trust” concept. But METI’s message was that the advanced industrial democracies would collectively lose out to China if transatlantic privacy standards could not be sufficiently aligned.
For European and American officials and legislators, this was still a leap beyond current thinking. The data agreements they had reached, Safe Harbor and Privacy Shield, were workarounds rather than a comprehensive solution. There was no attempt to bring the underlying approach on the US side in line with European privacy concerns, and certainly not yet any sense that doing so might represent part of the collective process of systemic competition and rivalry with China. This was a highly charged battle over the preservation of distinct European and American models, with China a factor that had not even been seriously considered during the early rounds. But the need for a truce, and preferably a settlement of various long-running transatlantic disputes in order to focus on a common threat, was becoming increasingly clear, even if METI was ahead in identifying its salience to perhaps the single most important general-purpose technology. As one European official working on digital issues put it: “On the one hand, you have questions about whether the protections under Privacy Shield are adequate. But you contrast that with a Chinese system that is veering off into totalitarianism and it puts it in a different perspective.”
