How to Combat Beijing’s Malign Economic Influence
By Jan Famfollet and Jakub Janda, European Values Center for Security Policy
Many countries around the world and particularly in Europe have recently experienced the effects of malign economic influence originating from China. This influence has manifested itself in many sectors of national economies. Entities linked to China and the Chinese Communist Party (CCP) engage in politically motivated predatory acquisitions of strategic assets, critical infrastructure and sensitive technologies, intellectual property theft, industrial and academic espionage, personal and biometric data harvesting, cyberattacks, corruption, and interference in universities, among other things.
China regularly threatens political and/or economic retaliation against foreign business for the autonomous actions of their home countries’ governments, and often ends up resorting to coercion through tariffs, tourism restrictions, boycotts, and selective or all-out trade bans. Simultaneously, foreign businesses struggle in China’s adverse domestic business environment, where regulations hamper foreign access to its markets, the public procurement process is closed to foreign companies and the CCP forces mergers with Chinese companies. Moreover, the CCP may effectively interfere in any foreign company operating in China.
Predatory economic practices distort competition and price formation in Western markets. Some activities can even have security implications, such as controlling other countries’ critical infrastructure, harvesting people’s biometric and genomic data, building and exporting dystopic mass cyber-surveillance systems, or using Western capital markets to finance nuclear armament research and military buildup. Facing this challenge — amid trade disputes and concerns about China’s militaristic posturing in its backyard, its coercive economic expansionism and its gross human rights violations — the European Union labeled China a strategic rival in 2019. The EU and many of its member states have begun to seek out and deploy countermeasures to withstand the negative effects of such malign economic influence and address risky and weaponizable dependence on China. Options for effective policy reactions are therefore in high demand.
This overview examines best practices and countermeasures adopted internationally by democratic countries to counter malign economic influence. The policy options are categorized into four types of measures: 1) for monitoring China’s activities and understanding its modus operandi and objectives; 2) for protecting national economies and boosting the private sector’s resilience to malign economic practices; 3) for holding foreign perpetrators accountable; and 4) for overcoming the systemic challenge posed by China and succeeding in strategic global competition.
Monitor and Understand
The ability to act — either in a preventive or reactive manner — presupposes and requires good knowledge, constant monitoring and an understanding of the challenges posed by China in the economic domain. Analytical and policy development capacity is therefore needed even more in this new era, where complex links exist between trade, technology, security and human rights. In line with a holistic approach, studying these new challenges should take place on several levels.
Academia
To build knowledge capacity in academia, universities need to attract more students and train more scholars to study and understand China (Sinology) from the linguistic and cultural standpoint as well as the economics, security and other aspects of the modern Chinese state and society. To secure and strengthen independent China research, more financial support is needed from European states for Asia- and China-focused curriculums, such as a program announced by Germany to develop greater China expertise.
Chinese tools of interference and propaganda outshoots, such as the approximately 190 Confucius Institutes in the EU, are being reconsidered at hosting universities. Canada, France, the Netherlands, Norway, Sweden and other countries have already closed some of these institutes. Australia, by virtue of a new law, can review universities’ agreements and veto them if they are judged to be incompatible with its foreign policy toward China.
As an alternative to Confucius Institutes, and to sustain Chinese-language programs while safeguarding academic freedom, European universities might consider developing and expanding cooperation with Taiwanese academic institutions. Several national governments already assist in such endeavors by pursuing educational partnerships, as Canada has done, or based on the example of the U.S.-Taiwan Education Initiative.
Nongovernmental sector
In the NGO sector, China expertise needs to increase, too. Several well-established European think tanks focus on economic issues, such as the Mercator Institute for China Studies in Germany and Bruegel in Belgium. However, given the magnitude and importance of the challenge posed by China, Europe would benefit if more centers of policy expertise were established. For example, the Swedish Center for China Studies was founded in 2020, with support from Swedish industry, to provide industry, the public sector and civil society with analysis and advice on matters concerning China.
National governments
Academic and nongovernmental initiatives should not be the only sources of knowledge and analysis when policymaking is at stake. National governments might consider creating their own national centers for China that would be dedicated to the full-spectrum monitoring and study of China, since situational awareness is a first step toward countering malign interference. Such centers could be modeled on the National China Center recently established in Sweden — Nationellt kunskapscentrum om Kina.
European level
The full-spectrum monitoring and study of China by a governmental body could also be effectively delivered at the European level, complementing national centers of expertise (or substituting for them where no national centers exist) and enabling joint European research endeavors. A specialized working group of researchers could be focused exclusively on monitoring, collecting and analyzing information about China, its entities and their activities and information operations. The EU External Action Service’s (EEAS) Strategic Communications Division is well suited to fulfill this role. However, this division struggles with a serious shortage of suitably qualified personnel. To encourage the process, relevant bodies should push for expanding the EEAS’s capacities on China, as the European Parliament’s Special Committee did. In the past, national legislators, members of the European Parliament and security experts have also urged the EEAS to expand the StratCom team’s personnel.
Parliamentary platforms
Another option is to empower legislators — instead of executive bodies — by placing a China center or working group under parliamentary authority. One good example is the United States Congress’s U.S.-China Economic and Security Review Commission, established in 2000. This bipartisan commission is mandated to monitor, investigate and submit to Congress annual reports on the national security implications of bilateral trade and economic relations between the U.S. and China. This commission further provides recommendations, where appropriate, to Congress for legislative and administrative actions.
Protect and Resist
Detecting, studying and understanding China’s goals and tools of malign economic influence are paramount for adopting effective policies that can shield domestic targets from the adverse effects of such influence and interference, and protect national economies and strategic assets.
Protecting critical infrastructures and sensitive technologies
The EU and its member states first need to define the scope of the strategic assets that need to be defended. Some areas are already, more or less, clearly defined and accepted as important for controlling related trade, including under international agreements and regimes, such as military equipment and dual-use items. European countries have also generally regulated access to their critical infrastructures, such as energy systems, health care services, the financial system, public/government services, and information and communications systems.
Untrustworthy foreign vendors are being gradually prohibited from supplying technologies to critical infrastructure providers. For example, Huawei, a heavily subsidized Chinese tech company serving the China regime’s geostrategic goals and the CCP’s interests at home and abroad, is increasingly facing distrust internationally. It has been charged with cyber espionage, fraud, obstruction of justice and theft of trade secrets.
The Czech Republic has been a pioneer in taking a cautious approach toward Chinese vendors by issuing a warning in 2018 against the use of Huawei and ZTE software and hardware because the products pose security risks, and by denying Huawei a security clearance in 2020. The U.S. blacklisted Huawei in 2019 and announced further restrictions in 2020. The U.S. has also made it clear to the Five Eyes intelligence alliance (Australia, Canada, New Zealand, the United Kingdom and the U.S.) that secret information cannot be entrusted to any partner that allows Huawei 5G into its national telecommunications network.
In 2020, the European Commission advised EU member states not to let companies that are considered a security risk build sensitive parts of 5G networks. In the same year, Lithuania urged its citizens not to buy Xiaomi cellphones and to get rid of those already purchased due to the suspicious capability of the devices to recognize and censor content that Beijing considers inconvenient.
In addition, global competition is intensifying over access to sensitive technologies. In recent years, several European countries have been confronted with attempts by China to force the transfer of such technologies. The first step is to define these, which generally has not yet been done in the EU. As an example, Australia has identified a list of critical elements and technologies to protect their supply chains from being disrupted and stop China from dominating their development. These are critical minerals, advanced communications, artificial intelligence (AI), cybersecurity, genomics and genetic engineering, medicine, alternative fuels, quantum computing and robotics.
Once sensitive technologies are identified, the state could hold firms in the relevant sectors to a higher standard of accountability, in return for certain benefits. This could be done by requiring transparent ownership structures, conduct guidelines and supply chain policies, mandatory cybersecurity standards and counterespionage-related measures, a domestic tax domicile and at least some domestic production capacity, and other potential safeguards. This special regime would aim to increase the resilience and sustainability of critical segments of the economy, while preventing the loss of valuable know-how through covert and corrupt practices undertaken by foreign actors.
For example, in Taiwan certain strategic high-tech goods are subject to special regulations. Under the Taiwanese Foreign Trade Act, export restrictions apply to these goods (in addition to military equipment and dual-use items); they cannot be exported without permission and the recipients must be screened against the country’s Entity List.
To protect research and development (R&D) of critical technologies on campuses, Australia is considering imposing restrictions on domestic universities conducting joint research with foreign institutions in certain fields, whereas the Canadian government has already imposed mandatory comprehensive national security risk assessments on funding requests submitted by university researchers to avoid transferring important data and technology to China through research partnerships — specifically to its military and security apparatus.
Inbound foreign investment review processes
To protect domestic companies from foreign predatory takeovers that are pursuing political rather than commercial goals, EU governments have been gradually introducing foreign direct investment (FDI) screening mechanisms. By the end of November 2021, 18 of the EU’s 27 member states had already reformed their existing screening mechanisms or adopted new mechanisms based on the EU FDI screening regulation. This now allows them to screen and block harmful forms of FDI if there are risks to national security or public order.
The U.S. is a pioneer in this field. The Committee on Foreign Investment in the United States was established in 1975 to study foreign investments and later empowered to reject deals. In 2018, the Foreign Investment Risk Review Modernization Act strengthened the committee to more effectively address national security concerns, mainly those related to China and technology. The new screening mechanisms emerging across the EU could benefit from U.S. expertise by capacity and capability building, sharing best practices and lessons learned. In Taiwan, foreign investment regulations have specific restrictions explicitly targeting China. There are strict regulations targeting Chinese investors owning Taiwanese companies in sensitive sectors (semiconductors, electronics components, solar energy), whether owned directly or indirectly through third-party entities.
Finally, the EU should have a common financial instrument that could acquire a controlling stake in sensitive EU assets, should no private, nonrisky buyers be available, to prevent a hostile foreign takeovers, as argued by The Hague Centre for Strategic Studies in its 2021 policy report, “Taming Techno-Nationalism.”
Transparency and notification schemes
EU institutions and national governments would benefit from a transparency and notification system that monitors financial and nonfinancial support for political parties, media outlets and NGOs provided by entities linked to the governments of non-EU countries. An EU-wide regulation implementing such systems could obligate these entities to disclose information about the nature of their relationship with third-country state actors and expose de facto political proxies hiding behind straw economic entities. The U.S. Foreign Agents Registration Act and the Australian Foreign Influence Transparency Scheme are good models.
Foreign purchases of prime agricultural real estate comprise another emerging issue. Land has been bought up at an increasing rate in the U.S. by purchasers having connections to the Chinese government. A 1978 law requires foreign nationals to report their U.S. agricultural holdings to the U.S. Department of Agriculture, but this requirement is hard to enforce. Therefore, on the grounds that China’s increasing presence in the food system could pose national security risks, the Newhouse Amendment to the Department of Agriculture-Food and Drug Administration spending bill prohibits new agricultural purchases by companies that are wholly or partly controlled by China’s government.
Governance structures
Policies governing economic protection and resilience can be even more effective when administered under the appropriate governance structure.
For example, the U.S. Bureau of Industry and Security (BIS), an agency of the Department of Commerce, cumulatively advances U.S. national security, foreign policy and economic objectives by ensuring an effective export control system and treaty compliance system, as well as promoting continued U.S. strategic technology leadership.
Besides having an appropriate bureaucratic apparatus, Japan in the last decade introduced an economic statecraft function in its National Security Council, and recently went a political step further and created a cabinet-level position — the minister for economic security — that will counter technology theft by China, coordinate government efforts to shore up supply chains, protect critical infrastructure and counter economic coercion. In late 2021, Japan also began preparatory work toward new national economic security legislation. The four priority areas of consideration are: securing resilient supply chains, securing safe and trustworthy infrastructure, enhancing government/business partnerships for boosting disruptive innovation, and preventing theft of sensitive innovation by making patents confidential.
Overall resilience of the economy
Pandemic-borne challenges to global transport, coupled with the persistent threat of Beijing using China’s manufacturing sector as a means of economic coercion, reveal the vulnerability of the supply chains on which individual states’ security and prosperity depend. Therefore, national governments and the EU need to review their economic exposure to individual non-EU countries and carry out supply chain security audits. Then the EU and its member states should agree on a strategy to diversify away from overreliance on Chinese suppliers in strategic sectors and pursue investment and free-trade agreements with as wide a network of like-minded partners as possible to strengthen the EU’s economic resilience and security.
Lithuania is a good example of how to engage Taiwan and gain practical economic and technological benefits while also taking a principled stance politically.
Push Back and Hold Accountable
Measures do not have to be merely protective but can also be retaliatory and pursue the aim of deterrence. In effect, the measures adopted by several countries can push back against coercion, hold China accountable and impose a cost on pursuing malign economic practices.
Sanctions
After years of long debates, the EU passed its version of the Magnitsky Act, a global human rights system of sanctions that allows the EU to freeze the assets of, ban entry to, and prohibit dealings with human rights abusers. The EU joined other jurisdictions such as Australia, Canada, the U.K. and the U.S. The U.S. and Australian versions of this act also allow for targeting corrupt actors. On top of that, Australia can target cyberattackers. Some EU member states, such as the Baltic states, adopted their own versions alongside the EU system and made them more stringent.
Another example of an effective instrument is the U.S. Countering America’s Adversaries Through Sanctions Act. This legislation allows the U.S. to block the Chinese military’s Equipment Development Department from applying for export licenses and participating in the U.S. financial system. Another powerful instrument in the U.S. toolbox is the Entity List, administered by the Department of Commerce’s BIS. Huawei and dozens of its affiliates were added to the list in 2019, prohibiting the export and reexport of U.S.-origin goods and technology to those entities without a license from the Department of Commerce.
Strict rules enforcement
The Holding Foreign Companies Accountable Act, adopted by the U.S. in 2020, delists foreign companies traded on U.S. stock exchanges unless their auditors submit to a regular inspection. The act also requires companies to establish that they are not owned or controlled by a foreign government, among other disclosure requirements. Delisting CCP-linked companies may fundamentally damage China’s financial interests, since these companies, intertwined with the communist regime, depend on raising funds in the world’s most liquid capital markets.
Overcoming Challenges
In the medium to long term, protective and reactive policies will not be sufficient. Sound strategies are needed to spearhead technological development and retain global economic leadership. If allied and like-minded partner countries are to set the direction for the evolving global order and the liberal rules-based, free-market model is to be ultimately successful, these countries must have sound economic positions, potential for innovation and strong technological sectors and industries.
Technology alliances
In response to the China challenge and the increasing importance of the Indo-Pacific region, new coalitions emerged after the U.S.-led Trans-Pacific Partnership initiative was not ratified. They include the Quadrilateral Security Dialogue (Quad), consisting of Australia, India, Japan and the U.S., and AUKUS (Australia, U.K. and U.S. trilateral security pact). The Quad should be an important forum for collaborative policies in critical technologies and could develop into a comprehensive strategic technology partnership. AUKUS, too, is set to become much more than just a submarines deal — it is expected to cover technologies such as cyber, AI, quantum and additional undersea capabilities. Australia also inked deals with Germany and Japan to enhance collaboration in technology innovation and research and development in sensitive technologies.
To address the opportunities and risks presented by technology and harness its potential, Denmark elevated technological trends to a foreign and security policy priority in 2017. Through technological diplomacy (TechPlomacy) and its apparatus, Denmark engages with the tech industry in a new form of domestic and international coalition building. TechPlomacy deals with issues such as cybersecurity and disinformation, protecting privacy online, responsible AI and data ethics.
A new EU-U.S. platform, the Trade and Technology Council, is set to coordinate work on issues related to economic security and technology policy, including harmonizing definitions of sensitive technologies. This tech alliance presents an opportunity to connect on common challenges and let the world’s tech-leading democracies spearhead the creation of a multilateral architecture for technology policy, as argued by the Center for a New American Security in its 2020 policy report “Common Code: An Alliance Framework for Democratic Technology Policy.”
Focused and coordinated support for technology strategies
Senior management positions should be responsible for implementing the technology strategies developed by nations to ensure their strategic sectors can develop in a secure environment. Denmark is the first country in the world to appoint a dedicated ambassador for technology with an appropriate apparatus at the Ministry of Foreign Affairs and several offices worldwide to address the risk of emerging technologies, support technological development and innovative industries, promote investment, and build international alliances. Australia has made cyberspace and critical technology a foreign policy priority, too. Its ambassador for cyber affairs and critical technology is tasked with leading Australia’s whole-of-government international engagement to advance and protect its national security, foreign policy, and economic, trade and development interests in cyberspace and critical technology.
Focused investment is also needed, ideally conducted in a coordinated manner among the members of technology alliances. Government investment in military R&D needs to be stepped up to co-develop technologies through military procurement, as argued by The Hague Centre for Strategic Studies in its 2021 policy report “Taming Techno-Nationalism.” For example, Australia pledged to invest 89 million euros in quantum technology, which includes building strategic partnerships with like-minded countries to commercialize quantum research. This initiative should complement AUKUS in strengthening cooperation on critical technologies development and fostering greater integration of security- and defense-related science, technology, industrial bases and supply chains.
The U.S. Innovation and Competition Act (also known as the Endless Frontier Act) of 2021 is a $250 billion legislative package of investments in R&D and innovation in a range of emerging technologies that also includes fostering a domestic microchip supply chain. Other programs cover the development of critical technologies, energy demonstration projects, secure domestic supply chains in critical fields, and the acceleration of domestic vaccine development and production.
In 2019, the member countries of the Three Seas Initiative (Austria, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia) launched an investment fund to attract private capital and focus on projects to develop infrastructure in the energy, transport and digital sectors in Central and Eastern Europe. This initiative also stands to make the region resilient to Russian bullying and Chinese meddling and create an opportunity to keep Huawei out of the region’s fledgling 5G networks.
In terms of safeguarding economic and national security, incentives for companies to relocate from China could be considered. For example, in the context of the U.S-China trade war, Taiwan provided incentives for companies in China to move back to Taiwan, including the relaxation of Taiwan’s strict land-use regulations and expanded tax breaks for equipment upgrades, R&D and manufacturing automation. The policy reportedly added up to 34 billion euros to the Taiwanese economy.
Values-based approach
It needs to be underlined that the free world’s emphasis on values is not a handicap in the global competition with authoritarian powers and centrally controlled economies. Universal values, such as human rights, individual liberty and dignity, democracy and rule of law, are not only correct per se, but are also powerful tools that appeal to large masses willing to sacrifice a great deal for them.
Therefore, human rights and universal values must be upheld across the measures and countermeasures being considered and adopted. For example, supply chain audits, as well as general economic vulnerability reviews, should be performed not only to mitigate national security risks, but also to ensure that human rights are protected throughout. Specifically, European businesses should integrate responsible business conduct into policies and management systems, in line with the European Commission’s 2021 business guidelines concerning the use of forced labor in operations and supply chains. This conduct should also govern the export of cyber-surveillance technologies.
Businesses operating from EU territory would further benefit from applying the Organisation for Economic Co-operation and Development’s Due Diligence Framework. Human rights and security-minded due diligence should also be performed with regard to companies active in capital markets, as the Prague Security Studies Institute’s Roger W. Robinson has long emphasized. Likewise, in the area of technology policy, like-minded liberal democracies should strive to ensure that global technology rules and norms reflect liberal democratic values.
Conclusion
China represents a great challenge for the coming decades. Sound and effective policies are therefore needed not only in the EU, but in all countries throughout the free and democratic world to protect their economies and strategic assets from malign economic influence and ultimately succeed in the global strategic competition.
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