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Chinese President Xi Jinping is in no mood to admit to policy failure. (Source photos by AFP/Jiji and Reuters)
China up close

Analysis: China loses Europe as Xi's hard-line diplomacy backfires

A much-touted investment deal with the EU is now in deep freeze

KATSUJI NAKAZAWA, Nikkei senior staff writer | China

Katsuji Nakazawa is a Tokyo-based senior staff writer and editorial writer at Nikkei. He spent seven years in China as a correspondent and later as China bureau chief. He is the 2014 recipient of the Vaughn-Ueda International Journalist prize for international reporting.

TOKYO -- The European Parliament has voted overwhelmingly to freeze the ratification process of an investment pact with China -- a deal that Beijing six months ago considered a big strategic victory.

It has sent shock waves throughout China, with only one month and change before arguably the most important event in President Xi Jinping's era, the 100th anniversary of the Chinese Communist Party's establishment, on July 1.

Some party members are worried that the centenary's festive mood will be dampened by the harsh diplomatic reality. Not only are China's relations with the U.S. bad, but now EU relations are stuck in a ditch.

At this rate, not many Western leaders are likely to phone or telegraph congratulatory messages to Beijing for the party's 100th birthday.

President Xi does not appear to have many cards to play.

A giant clock at the Beijing Daxing International Airport announces the Chinese Communist Party's 100th anniversary. The most important event in the Xi era now has clouds hanging over it.   © Reuters

China and the EU finished hammering out the Comprehensive Agreement on Investment at the end of 2020, after yet another year of strained U.S.-China ties.

Beijing touted the achievement, seven years in the making, as a huge win in the international political arena. It has a bigger strategic meaning than mere economic benefits, analysts explained.

At the time, the EU's relations with the U.S. under former President Donald Trump remained sour. China's well-calculated attempt to drive a wedge in the trans-Atlantic alliance seemed to have succeeded.

But dark clouds are now hanging over the future of the investment pact. The European Parliament's decision on May 20 to put the pact on hold has made it difficult for the deal to take effect at an early date.

China tried its best to salvage the deal, working until the last minute. On May 17, Premier Li Keqiang held telephone talks with Mario Draghi, telling his Italian counterpart, "Both sides should work jointly to ensure that the China-EU agreement on investment will be signed and put into effect at an early date."

Italy is among China's European friends and is the only Group of Seven member to formally take part in the Belt and Road Initiative. It also happens to be the G-20 chair and will host a leaders' meeting at the end of October.

China had expected the European Parliament's deliberations on the investment pact to conclude before the Rome G-20 summit at the latest.

Li's last-ditch effort did not pay off. Tensions between the EU and China over the latter's human rights issues had already reached a point where they cannot be resolved easily.

French President Emmanuel Macron. When China and the EU hammered out the Comprehensive Agreement on Investment at the end of 2020, Beijing called it a huge win.   © Reuters

In March, the EU imposed sanctions on Chinese officials over Beijing's alleged ill-treatment of the mostly Muslim Uyghur minority in Xinjiang. They are Europe's first sanctions on China since the Tiananmen Square crackdown in 1989.

If strictly seen from an economic lens, China overtook the U.S. as the EU's biggest trading partner last year. With the investment pact eliminating barriers and making it easier for EU companies to break into the Chinese market, it would have brought benefits to both sides.

"It's a win-win deal," the Chinese repeatedly said. But the EU could not shelve the human rights issues and just move on.

China's diplomatic efforts suffered another blow when Lithuania, one of the three Baltic countries, said it is leaving the 17+1 cooperation framework between 17 Central and Eastern European countries and China.

The 17+1 is an important framework for China to exert its influence in the region and goes hand in hand with the Belt and Road Initiative.

But on May 22, Lithuanian Foreign Minister Gabrielius Landsbergis announced his country was out.

Lithuanian Foreign Minister Gabrielius Landsbergis looks on during a joint news conference with his German counterpart Heiko Maas, in Berlin on March 17. Days later, he announced that his country was out of the "17+1" cooperation framework with China.   © Reuters

To prove that China was even more committed to the 17+1, Xi himself -- and not the usual Li -- attended the leaders' online meeting in February.

Some 17+1 members are EU members, and it was always Beijing's goal to guide EU policies so that they are favorable to China by leaning on its 17+1 friends. Lithuania has thrown a wrench into these plans.

A small country of fewer than 3 million people, Lithuania has played an outsize role in the recent EU-China tit-for-tat.

In March, China slapped sanctions on 10 European individuals, including one Lithuanian member of parliament, in retaliation for the earlier EU sanctions against Beijing.

But the sanctions barring entry into mainland China, Hong Kong and Macao have backfired.

The European Parliament's freeze on CAI ratification will not be reversed unless China's sanctions, including those on the Lithuanian parliamentarian, are lifted.

Lithuania also said in March that it would open a trade representative office in Taiwan, which China considers part of its territory. On May 20, Lithuania's parliament adopted by a majority vote a resolution recognizing China's treatment of its Uyghur minority as "genocide."

China has responded with harsh words, with the hawkish Global Times writing in an editorial that Lithuania is "not qualified" to attack China and "this is not the way a small country should act."

"There is no problem with Lithuania's withdrawal from the mechanism. But we suggest the country should keep away from China's core interests," it said.

A vocational skills education center in the Xinjiang Uighur Autonomous Region. The EU recently imposed sanctions on Chinese officials over alleged mistreatment of the mostly Muslim Uyghur minority in Xinjiang.    © Reuters

Lithuania's withdrawal from the 17+1 is based on a calculation that it will likely be more effective to deal with China as a member of the more powerful 27-nation EU than be buried in the pro-China gathering.

Lithuania also has its eyes wide-open to the dynamics of international politics. That China and Russia have drawn closer in recent years is worrying for the three Baltic countries -- Estonia, Latvia and Lithuania -- which were annexed by the Soviet Union during World War II. They harbor a strong distrust of Russia, which unilaterally annexed Crimea from Ukraine in 2014.

Considering China's cyberspace capabilities, is there a possibility of Lithuania's every move being leaked to Russia?

One could say that Lithuania sensed danger and instinctively started maneuvering to escape China's influence. This move by Lithuania might affect Estonia, Latvia and other 17+1 members.

What happens in German politics will also affect the future of the Comprehensive Agreement on Investment.

German Chancellor Angela Merkel, who attaches importance to relations with China, was instrumental in securing the basic agreement at the end of last year. Germany was holding the rotating six-month presidency of the Council of the European Union in the second half of 2020.

But Merkel is to step down after an election for the Bundestag, Germany's federal parliament, in September. If Germany's Green Party, which has objected to the CAI from the get-go, joins a new government after the poll, the situation will become harsher for China.

Angela Merkel, the German chancellor who champions relations with China, is to step down after a parliamentary election in September.   © EPA/Jiji

Meanwhile, China is also facing a belt and road dispute with Australia.

On May 6 it announced it would indefinitely suspend all activities under the China-Australia Strategic Economic Dialogue.

The move is believed to be retaliation for Australia's cancellation in April of two Belt and Road cooperation deals that the state of Victoria had struck with China. Australia canceled the deals on national security grounds.

The catalyst for the change in China's international standing was the Biden administration's move to rebuild alliances, which starkly contrasts with the Trump administration's disdain for alliances.

Be it U.S.-EU, U.S.-U.K., U.S.-Japan, U.S.-South Korea or between the Quad nations of the U.S., Japan, Australia and India, cooperation among allies and partners has advanced considerably in the several months since Biden's inauguration.

The path to dialogue between top U.S. and Chinese leaders, meanwhile, is still not in sight. U.S. House Speaker Nancy Pelosi, a Democrat, is now calling for a "diplomatic boycott" of the Beijing Winter Olympics, which gets underway in February.

In contrast, the U.S. and Russia on Tuesday announced that Biden and Putin will hold their first in-person meeting, in Geneva, Switzerland, on June 16.

A new divide looks to be emerging, one that we have not seen before.

The U.S., Japan, the U.K., other G-7 members, the EU, India, Australia and others are now surrounding and watching China from a distance. While all eyes are on China, meaningful direct dialogue with that country remains stalled on a number of fronts.

China's only response seems to be to double down on "wolf warrior diplomacy."

With Xi playing his cards to remain as China's top leader beyond the party's next quinquennial national Congress in the autumn of 2022, he is in no mood to admit to policy failure. Therefore, no major reversals are on the horizon.

If that is the case, the current deadlock may become the "new normal" of Western nations' diplomacy over China. Xi's woes remain deep ahead of that 100th birthday party.

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