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Energy & Economics
Chinese Yuan on the map of South America. Trade between China and Latin American countries, economy and investment

Ahead of the curve: Why the EU and US risk falling behind China in Latin America

by Ángel Melguizo , Margaret Myers

한국어로 읽기 Leer en español In Deutsch lesen Gap اقرأ بالعربية Lire en français Читать на русском As Beijing’s investment approach to Latin America focuses on industries of strategic importance, the EU and US will need to contend with growing Chinese competition China is pouring less foreign direct investment (FDI) into Latin America. But while this may seem like a sign of Beijing’s disinterest in the region, data suggests that Chinese companies are simply recalibrating, not retreating. In doing so, they are becoming important players in sectors key to Western interests: critical minerals, fintech, electric vehicles, and green energy. While the European Union and the United States have long been top investors in Latin America, increased competition with Chinese investment now jeopardises their interests in the Latin American industries that will become most crucial to the digital and green transitions. The number of Chinese projects in Latin America grew by 33 per cent from 2018-2023, compared with the previous five-year period of 2013-2017, even as the total value declined. In other words, Chinese companies are making more investments in the region but are pursuing smaller-scale projects on average. These investments are also more focused on what China calls “new infrastructure“ (新基建), a term which encompasses telecommunications, fintech, renewable energy, and other innovation-related industries. In 2022, 60 per cent of China’s investments were in these frontier sectors, a key economic priority for the country. Beijing also views smaller projects in these industries as incurring less operational and reputational risk, especially compared to some of the large-scale infrastructure investment projects often associated with the Belt and Road initiative. Like China, the investment priorities of the G7 grouping – particularly the US and the EU – are centring on critical minerals, fintech, electric vehicles, and green energy as they aim to grow and reinforce existing economic and political partnerships in Latin America. However, both the US and the EU risk falling short of China’s investment strategy in the region. The US has signalled want for greater economic engagement with the region, especially in sectors of strategic interest. However, to date, US efforts to compete with China remain largely focused on building US domestic capacity in these strategic sectors, even as some US companies, such as Intel, are increasingly focused on including regional partners in their supply chains. Some see opportunity for Latin America in Joe Biden’s landmark legislation, the Inflation Reduction Act (IRA), which is aimed at incentivising the energy transition while also de-risking critical supply chains. For example, certain countries in the region may benefit from preferential market access for their lithium or other key inputs to new energy and technology supply chains. However, the reach of the IRA – which remains a largely domestic policy – does not stretch as far as China’s current investment reshuffle. The Americas Act, announced by members of Congress in March could generate promising new investment opportunities for the region, as it encourages US companies and others to move their operations out of China, to which Latin America stands as a promising replacement. But Americas Act reshoring would primarily incentivise textiles and potentially medical equipment manufacturing, with less overall focus on the range of “new infrastructure” industries that China is prioritising. Chinese interests in information and communication technologies reveal a similar story. While the US has focused its policy on 5G equipment sales, China is undertaking a process of vertical integration in Latin American tech sectors that will dramatically boost its competitiveness. For instance, Chinese company Huawei is rapidly expanding its focus to include data centres, cloud computing, cybersecurity, and other services, especially in Argentina, Brazil, Chile, Colombia, Mexico, and Peru. (Computing accounted for a sizable 41 per cent of total Chinese information technology investment in the region between 2018 and the first half of 2023.) At the same time, Global Gateway, the EU’s proposal for a global investment initiative is yet to reach its potential in the region. Brussels is looking to be Latin America’s partner of choice by building local capacity for making batteries and final products like electric vehicles, as European Commission president Ursula von der Leyen noted last year. Yet even as the EU signals renewed commitment, China is becoming increasingly dominant in the electric vehicle market in Latin America and other regions. China surpassed the US in electric vehicle sales in 2023, with Chinese companies accounting for 45 per cent of total global sales and three times that of Germany’s. What is more, China has invested $11 billion in lithium extraction in the region since 2018, as part of a bid to control a third of global lithium-mine production capacity. Meanwhile the EU has secured some access to lithium as part of trade deals with Chile, alongside other nations, but this pales in comparison to what will be required to fuel the future of EU battery production. Latin America as a whole accounts for an estimated 60 per cent of the world’s lithium reserves. Based on its current levels of engagement in the region, the EU risks falling short of lithium, stalling its battery production and subsequently, its electric vehicle sales, just as China advances in this field. The window is closing for the EU, the US, and other partners looking to both maintain market share and compete with China in these Latin American industries, despite still-high rates of US and EU investment in and trade with the region. Indeed, US automakers increasingly see Chinese competition across the globe as an “extinction-level event.” Ensuring competitiveness in “new infrastructure” and related sectors will require a continuous commitment by partners to building and supporting project pipelines, and to delivering products and services at price points that can compete with China’s subsidised offerings. Both the EU and the US remain critical economic partners for Latin America and are contributing in ways that China is not. Still, complacency risks allowing China to take the lead in emerging industries in the region, some of which weigh heavily in the EU’s green and digital transformation. To protect their own future industries, the EU and the US need to first take a longer look at Latin America’s – especially as China vies for a dominant position.

Energy & Economics
SHENZHEN, CHINA - CIRCA NOVEMBER 2019: ZTE room at the High-Tech Fair China 2019 at Shenzhen Convention & Exhibition Center.

What should Europeans do about the U.S.-China Rivalry in key strategic technologies?

by Roberta Haar , Hengyi Yang

한국어로 읽기Leer en españolIn Deutsch lesen Gap اقرأ بالعربيةLire en françaisЧитать на русском In October 2023, the EU Commission identified four technology fields as critical: advanced semiconductors; artificial intelligence (AI); quantum, and; biotechnologies.[1] All four areas are greatly impacted by the U.S.-China rivalry in technology, making it essential for Europeans to understand the Sino-American competition. This article examines this rivalry from the Chinese and U.S. perspectives. It recounts their prevailing attitudes, which are shaped by recent events, and that, in turn, mold Chinese and American strategic approaches. From the Chinese policymakers’ perspective, its geo-technological competition with the U.S. is novel and passively learned. During Xi Jinping’s first term, the Chinese government still positioned technology under the economic-oriented strategy of innovation-driven development. This stance followed the idea that ‘science and technology constitute a primary productive force’ and the ‘peaceful development’ principles set during Deng Xiaoping’s era. However, around 2018, two sanctions incidents that targeted Chinese telecommunications giants shifted Chinese leaders’ understanding of tech strategy into the geopolitical context. The first sanction incident involved ZTE, China’s second-largest communications equipment manufacturer. In 2016, the Barack Obama administration accused ZTE of selling telecom equipment containing American chip technology to Iran, which violated U.S. sanctions. In 2017, ZTE pleaded guilty and paid a fine of $1.2 billion. However, in 2018, Trump’s government stated that ZTE did not comply with the settlement agreement, coupling previous sanctions with export controls on ZTE in April 2018. The second incident involved Meng Wanzhou, then Vice-Chairwoman and CFO of the Chinese telecommunications giant Huawei, who was arrested in Vancouver, Canada, during a layover in December 2018. Her detention was at the extradition request of the Trump administration, which levied charges related to alleged violations of U.S. sanctions against Iran. These included bank and wire fraud and outright violations of U.S. sanctions via a subsidiary called Skycom Tech, which allegedly concealed Huawei’s activities in Iran. The necessity of a strategic adjustment These two incidents caused an uproar in the Chinese media, followed by a surge in public patriotic sentiment. However, for the Chinese government, the impact and significance of the two cases were quite different. The essence of the ZTE case was commercial sanctions, which meant that ZTE violated business norms and deserved economic punishment. The official Chinese government stance was that ‘this is just an individual case of corporate violation.’ Despite this position, the fact that the government was actively involved nonetheless politicized the incident within China. It was Xi Jinping himself who negotiated with Trump to save ZTE from bankruptcy after which ZTE became a state-owned enterprise with absolute state control—a move that ultimately resulted in ZTE gaining a greater domestic market share than Huawei. At the international level, the top-level nature of negotiations prevented the ZTE incident from overly politicizing then-ongoing trade frictions between the U.S. and China. While the ZTE episode was resolved with little rancor, Chinese senior officials became concerned about the impact that the U.S. might have on China’s strategic technology companies.[2] In November 2018, Tan Tieniu, then Deputy Secretary-General of the Chinese Academy of Sciences, reported to China’s top leaders that they should learn from the ZTE incident. They should avoid overreliance on imports of core electronic components and chips, and they should not repeat mistakes made by ZTE. In the same month, Xi Jinping mentioned in a speech that ‘internationally, advanced technology and key technology is more and more difficult to obtain… forcing us to travel the road of self-reliance.’ Terms like technological security, technology ‘chokepoints’ (卡脖子), and core technologies in key fields (关键核心技术) began to appear frequently in Chinese official discourse. These reflected Chinese leadership’s views about the ZTE incident that were in turn shaping strategic thoughts on the geopolitical technology competition with the United States. It was the Meng Wanzhou incident at the end of 2018 that for Chinese leaders confirmed the necessity of a strategic adjustment. As in the ZTE case, Huawei was involved in a business violation that from the Chinese perspective should have resulted in corporate punishment. Instead, a personal arrest warrant was issued for Meng, thereby escalating a commercial sanction into a political and diplomatic incident. Le Yucheng, then Deputy Minister of Foreign Affairs, urgently summoned the U.S. and Canadian ambassadors to China and issued a stern protest. The Chinese government also arrested two Canadian citizens in China, sentencing one to 11 years in prison. The Chinese Ambassador to Canada wrote that the Meng Wanzhou case was a ‘premeditated political act in which the United States wields its regime power to hunt a Chinese high-tech company out of political consideration.’ Chinese Defensive Deterrence These two episodes shaped and reinforced Chinese leaders’ strategic thinking about its geopolitical technology competition with the U.S. The 14th Five-Year Plan issued by the CCP in 2020 proposed ‘making technological self-reliance’ a strategic goal. Soon all official documents established a new tone for China’s technology strategy based on self-reliance. Previously, China pursued a reassurance strategy, a strategy that showed goodwill towards the U.S. and the system it led. Thus, in theory, China had two strategic options: reassurance and/or deterrence. The former strategy involves showing friendliness towards the U.S. and its allies, thereby releasing tension, and maybe re-joining the U.S.-led system. A reassurance strategy allowed China more time for stable development—the logic of ‘keeping a low profile’ of the Deng Xiaoping era. The Xi Jinping government picked the second option, deterrence, which is to show strength or use countermeasures to reduce the likelihood of further U.S. trade or coercive action. To make a deterrence strategy work, however, Xi further believed China needed to gain strong capacity in key tech fields. Therefore, Xi first mobilized domestic R&D resources and tried to acquire advanced technologies before using diplomatic countermeasures. The core logic underlying this geopolitical technology strategy is one of ‘defensive deterrence.’ A typical example of this strategy in play concerns the semiconductor industry. Facing export controls on semiconductor equipment from the U.S., the Netherlands, and Japan, the Chinese government first increased R&D investment in the sector, trying to overcome ‘chokepoint’ technologies. As a result, China’s investment in semiconductor R&D grew from $10 billion in 2018 to $25 billion in 2022, an increase of 150%. At the same time, the Chinese government increased investment in the production of key raw materials (silicon, gallium nitride, etc.) and semiconductor production bases. It also guided industries upstream while also pushing for downstream integration through policies to improve and strengthen supply-chain security. Chinese policy also moved to increase international supply-chain dependence on China through its comparative advantages in the semiconductor industry (and even other industries) in a hedging move against the U.S. and its allies. For example, in the automotive chip sector, in the supply of vital raw materials, and in the semiconductor equipment markets, China sought to utilize its significant comparative advantages. In August 2023, the Chinese government announced export controls on gallium and germanium, two key materials for manufacturing semiconductors. China Seeking More Regulatory Power But in addition to responding to what was perceived as U.S. containment policies in the area of technology, China’s strategic use of technology followed another approach, one led by the Ministry of Foreign Affairs (MFA) and the Ministry of Industry and Information Technology (MIIT). This third approach sought more regulatory power, for example, in the areas of civilian AI where China has huge potential.[3] Starting in 2018, the Chinese government showed a strong determination to introduce and study AI ethics and technical standards.[4] Based on these domestic framework policies, various diplomatic initiatives, and standards proposals, the MFA and MIIT expanded China’s regulatory influence in the field of AI. For example, the MFA proposed the ‘Global Data Security Initiative’ in 2020 and the ‘Global Artificial Intelligence Governance Initiative’ in 2023. Minister Wang Yi explicitly stated ‘We hope to provide a blueprint for related international discussions and rule-making.’ The China Electronics Standardization Institute, affiliated with the MIIT, also actively participates in the formulation of international new technology standards. Selectively decoupling: U.S. Attitudes and Strategies When it comes to strategic technologies, the Joe Biden administration has generally maintained a stance toward China that aligns closely with the previous administration led by Donald J. Trump. This is especially the case concerning competitive technologies such as 5G/6G, the specialized processors designed to handle the computational demands of AI, quantum computing, and electric vehicles (EVs). Taking a page from U.S. President Ronald Reagan’s Cold War playbook of outspending the Soviet Union, president Biden initiated a $2.25 trillion infrastructure plan. This plan, not unlike China’s policy to increase domestic innovation and strength, allocated funds for sectors such as transportation, manufacturing, renewable energy, clean water, and high-speed broadband for both wired and wireless technologies. The justification for these investments, part of the Build Back Better Act (BBB) policy and later incorporated into the Inflation Reduction Act (IRA) and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, was that they were a response to Xi Jinping’s ambitious goals of doubling China’s economy by 2035, intending to establish China as a global leader in biotechnology, green energy, and AI. In addition to a spending strategy to boost U.S. competitiveness in strategic technologies, the Biden administration continued with some of Trump’s punitive measures. For example, Biden maintained tariffs amounting to approximately $300 billion. He also continued action against Huawei, which has the potential to outcompete in 5G/6G mobile network technology. The Trump administration used the Bureau of Industry and Security to exclude Huawei from global semiconductor supply chains and it placed the company on the Commerce Department’s Entity List, thus requiring U.S. companies to obtain a license before exporting to Huawei. As discussed above, Trump’s executive branch also brought fraud allegations against Huawei’s Chief Financial Officer Meng. While Biden kept in place Trump-era prohibitions on sales of U.S. goods to companies like Huawei, as well as maintaining restrictions on exports of U.S. critical technology, he did quickly resolve the dispute over Meng. Within hours of the deal for her release, the two men caught up in the game of hostage diplomacy left China on a flight back to Canada. Highlighting the political nature of the incident, when Meng returned to China, senior local officials at the airport met her. Encourage Multilateralism to meet Global Challenges Along with strident measures, the Biden administration also sought a more nuanced stance. Indications that suggest a less hawkish approach to China include emphasizing a collaborative approach toward global challenges like climate change and future pandemics. Biden further pushed for engagement in high-level meetings with, for example, Secretary of State, Antony Blinken, and National Security Advisor, Jake Sullivan, who held talks with their Chinese counterparts, Yang Jiechi and Wang Yi, in Anchorage, Alaska, in March 2021. These talks were frostier than U.S. officials would have preferred but they got the two sides to engage in some dialogue. Similarly, Biden sought to engage with China in multilateral forums and organizations where both countries are members, such as the recent Asia-Pacific Economic Cooperation (APEC) forum that Biden hosted in November 2023. Even the choice of San Francisco as the venue was designed to be conciliatory as it has historic ties to Asia as well as a central role in global technology as the home of Silicon Valley. Still, one must keep in mind that in deciding on a strategy towards China, Biden must also contend with a Congress and public opinion that are growing increasingly skeptical of doing business with China, which they believe steals good jobs and sends balloons over American territory to spy on U.S. critical infrastructure. One primary shaper of U.S. attitudes towards China are the leaders of the House Select Committee on the Chinese Communist Party, Republican Representative Mike Gallagher and Democratic Representative Raja Krishnamoorthi, who lead one of the last bastions of functioning bipartisanship in Washington, D.C. With their many investigations, subpoenas, and policy recommendations, the House China Committee has become the ‘beating heart’ of U.S. Congressional policy, which, with regards to technology, argues for selectively decoupling from China for national security reasons.[5] A way forward Faced with the U.S.’ decoupling or blunting strategies and China’s defensive deterrence strategy, what steps might European nations take to navigate through the choppy, contentious waters of strategic technologies? Are there also steps that Europeans can take to mitigate the impact on their own strategic technology vulnerability? First, recognizing the pivotal role of technology in the rapidly digitizing global economy, Europeans need to stress that it is in the collective interest of everyone to establish institutions, norms, and policies for effective global governance. Rather than engaging in reactive geopolitical maneuvers resembling a chess game, these institutions could concentrate on constructing a more cooperative foundation for crucial technology sectors. Second, along with this recognition, efforts could be directed toward the development of future institutions, policies, and norms that set standards for next-generation and sensitive technologies. Such efforts should take into account initiatives already made by the Chinese and the Americans. Such efforts could also coincide with a third approach of encouraging the Biden administration to adopt a comprehensive multilateral approach. The U.S. needs to push for collaboration beyond issues such as climate change and economic inequality to encompass the intensely competitive areas in technology like those discussed in this article. For one, Europeans could point out that U.S. blunting strategies are simply not working and may even be backfiring by accelerating Chinese technological advances. In September 2023, Huawei released the Mate 60 Pro smartphone equipped with a 7nm domestic chip, revealing that China has overcome some hurdles that U.S. bans were designed to stymie.[6] Since no one knows how long China’s defensive deterrence strategy will hold (and shift to what Chinese leaders believe is a more offensive deterrence), nor whether Trump or someone as equally anti-multilateral as Trump will be (re)elected, Europeans have many incentives to encourage a softer engagement between China and the U.S. Changing the narrative is a fourth important recommendation. It is essential to recognize that the essence of the Sino-American technology competition is more about narrative construction than a description of the current situation. One indication of this is that both sides believe that the other side started what has been described as the ‘new Cold War.’[7] It does not help that both sides have engaged in behavior that supports the other side’s narrative with some hawkish actors employing similar bash-the-other tactics to gain political advantage.[8] Typically, the factual basis for technological competition is grounded in industrial competition, corporate rivalry, or intellectual property disputes. However, the high-tech relationship between China and the United States has been one of complementarity as well as rivalry. Both China and the United States, as well as European stakeholders, need to be careful of the narratives they espouse, lest they become a self-fulfilling prophecy. This work has been funded by the REMIT project, funded from the European Union’s Horizon Europe research and innovation programme under grant agreement No. 101094228 Footnotes [1] EU Commission Recommendation of 3.10.2023 on critical technology areas for the EU’s economic security for further risk assessment with Member States. [2] Gregory C. Allen. 2023. ‘China’s New Strategy for Waging the Microchip Tech War.’ csis.org, May 3. [3] Jing Cheng and Jinghan Zeng. 2023. ‘Shaping AI’s Future? China in Global AI Governance.’ Journal of Contemporary China 32(143): 794-810. [4] See White Paper on AI Standardization, a Guide to the Building of a National Standard Framework for New Generation AI, a report on Ethical Norms for New Generation AI, a White Paper on Trustworthy AI as well as other regulatory documents. [5] Robbie Gramer. 2023. ‘The Masterminds: Washington wants to get tough on China, and the leaders of the House China Committee are in the driver’s seat.’ foreignpolicy.com, November 27. [6] Weiwen Wang. (2023). ‘China Breaks Through 7nm Chip Technology, Has the China-U.S. Tech War Entered Phase 2.0?’ (中国突破7纳米芯片技术 中美科技战进入2.0阶段?). Lianhe Zaobao (联合早报), September 17. Retrieved from https://www.zaobao.com.sg/news/china/story20230917-1433739 [7] Patricia M. Kim, Matthew Turpin, Joseph S. Nye Jr., Jessica Chen Weiss, Eun A Jo, Ryan Hass, and Emilie Kimball. 2023. ‘Should the US pursue a new Cold War with China?’ Brookings.edu, September 1. [8] Roberta N. Haar. 2020. ‘Will China replace the U.S. as the world’s predominant power?’ Atlantisch Perspectief 44(3):9-13.

Defense & Security
Hanoi Vietnam - Jan 30 2023: People go about daily life under Vietnamese flags in a narrow residential alleyway called Kham Thien Market in Hanoi, Vietnam.

Convergence in Vietnam, EU Interests a Harbinger of Indo-Pacific Order?

by Richard Ghiasy , Julie Yu-Wen Chen , Jagannath Panda

In March and April, Vietnamese Foreign Minister Bui Thanh Son’s nearly back-to-back visits to the U.S. and China highlighted Vietnam’s increasing penchant for delicate diplomacy with major powers amid the U.S.-China strategic competition in the Indo-Pacific and Vietnam’s territorial tussles with China especially in the South China Sea (SCS), which Vietnam calls the East Sea. Much of the (perceived) disorder in the Indo-Pacific hails from the SCS, and one of Vietnam’s principal challenges is fostering order on its maritime borders. Therefore, Vietnam—historically distrustful of major powers—has been diversifying its relations by seeking security and defense ties with Indo-Pacific partners like the European Union (EU), India, and Japan, as well as with Russia, a country that poses an “existential threat” to the transatlantic allies. At the same time, Southeast Asia is battling disunity within the region for resolving disputes in the SCS, for instance. The regional multilateralism embodied by the Association of Southeast Asian Nations (ASEAN) seems to lack teeth even as China ‘controls’ some of its members using its financial and economic heft. So clearly, efforts beyond Vietnam’s “bamboo diplomacy” that deepen international solidarity are required. In a similar vein, Europe’s reluctant rapprochement with China in recent times amid the EU calling China a strategic challenge but continuing to look for economic engagement is reminiscent of Vietnam and much of Asia’s predicament vis-à-vis China. Moreover, like in Southeast Asia, not every member-country of the EU is embracing the Indo-Pacific construct, led by the U.S. Or even if a member does, like France or Germany, it does not spell the end of a productive relationship with China. Nonetheless, it is clear that the EU has started to take a greater interest in the growing geopolitical situation in the Indo-Pacific, even as the disunity over the extent of the Indo-Pacific priorities, including China, is as apparent. In such a scenario, is it possible for the EU and Vietnam, and by extension ASEAN, to have greater convergence, if not congruence, in their policies? Revisiting Vietnam’s Lack of an Indo-Pacific Tilt The Indo-Pacific, the maritime space and littoral between the western Indian and Pacific Oceans, has become the world’s most geopolitically critical region. In this region, much of the focus and debate among the EU’s more proactive members, such as France, the Netherlands, and Germany, is in response to Chinese unilateralism, trade dependency, and unchecked Sino-U.S. contestation. Several of these EU members have come to understand each other’s positions on the Indo-Pacific. Gradually, there is a realization that it is not just about what the EU and its members seek to accomplish in the region but just as much the perspectives and priorities of key Indo-Pacific resident actors—and their views on European strategies and contributions. Vietnam is one such country that is worthy of greater European strategic attention. Vietnam is known for its “bamboo diplomacy”—a reference to the bamboo plant’s strong roots, sturdy stems, and flexible branches—balancing ties with the two big powers, the U.S. and China. In the words of Foreign Minister Bui Thanh Son, Vietnam’s foreign policy caters to “independence, self-reliance, peace, friendship and cooperation, and multilateralization and diversification of external relations and proactive international integration.” However, Hanoi has never officially and fully embraced the term “Indo-Pacific” nor the U.S.-led Indo-Pacific construct although it does recognize that some aspects of the Free and Open Indo-Pacific tenet advocated by the U.S. and its allies are compatible with its national interests. For instance, the order in the Asia-Pacific, a term that Hanoi prefers to use, should be rule-based. This speaks to one of Vietnam’s most important foreign policy priorities: finding peace and stability in the SCS disputes with China and other claimants. However, the order that Vietnam seeks is in more than just the security domain. The goal of development has been the highest priority since Doi Moi (renovation) in 1986. Economic growth is considered the backbone of national security and regime legitimacy. Hanoi’s development of foreign relations can be said to be grounded in its national development experience, with the stress on economic priority leading to national stability and international standing. Vietnam chooses to engage in the Indo-Pacific construct on its terms. Vietnam and EU Convergence On both economic and security fronts, Vietnam and the EU can find converged interests that align closer to each other. Even as Hanoi has not officially adopted the term “Indo-Pacific,” the EU’s Indo-Pacific strategy, if implemented well, could address both Vietnam’s economic and security needs. Despite its security and military power limitations in the Indo-Pacific, the EU can still play a crucial role in effectively addressing these needs, which are vital for the EU’s strategic interests as well. The two already have a Framework Participation Agreement. Vietnam is also part of the EU’s Enhancing Security In and With Asia (ESIWA) project, which covers crisis management and cyber security. This also aligns with the EU’s Indo-Pacific Strategy, where Vietnam is considered a “solid” partner. Notably, both the EU and Vietnam face (potential) economic coercion from China. As China is now Vietnam’s largest trading partner, sudden trade restrictions hindering Vietnamese exports to China would dramatically hurt the Vietnamese economy. In this vein, Hanoi welcomed the EU-Vietnam Free Trade Agreement (EVFTA), hoping it would give opportunities to diversify its trading partners and thus mitigate the risks of economic coercion from China. On the other hand, the EU and its member-states are also trying to increase economic resilience by diversifying trading partners as they wrestle with economic overdependence on China. So, strategically, Brussels presents an excellent opportunity for Hanoi and vice versa. However, challenges remain. For example, all the EU member-states are still to ratify the Investment Protection Agreement signed along with the EVFTA. Even though this is usually a time-consuming procedure, the imperative to reap benefits as soon as possible has taken a setback amid a challenging geopolitical landscape. Nonetheless, the two sides are concerned about more than just traditional economic development; they are concerned about sustainable development and green transition. For instance, under the EU’s Global Gateway framework, the EU and Vietnam have signed the Just Energy Transition Partnership (JETP), which looks to provide a multi-projects credit facility worth €500 million. This is supposed to be the EU’s primary focus in Vietnam now. Yet, Hanoi’s cautious approach for fear of falling into any potential debt trap could stymie smooth cooperation. Projects involving vast sums of money, such as the JETP, are also practically challenging to push at the moment as officials are afraid to be the targets of the Communist Party of Vietnam’s anti-corruption campaigns. Vietnam would also be keen for ASEAN and the EU as blocs to reinvigorate multilateralism and shore up security cooperation, particularly in the SCS disputes. ASEAN states, in general, are looking to the EU as a non-threatening balancing power to reduce the impact of the China-U.S. strategic competition. Among the potential areas of cooperation between the EU and Vietnam within the ASEAN are regional climate action measures, food security, digitalization, and tech innovation. The two sides must also use their partnership to realize an ASEAN-EU FTA. EU as a Security Balancer? The EU and Vietnam also share their commitment to upholding the rules-based order—an essential component of security cooperation because of the region’s strategic importance. However, improving communication and understanding of maritime incidents more effectively is challenging. The SCS territorial conflict is simmering, particularly between China and the Philippines. In 2016, an arbitration tribunal constituted under the United Nations Convention on the Law of the Sea (UNCLOS) overwhelmingly ruled in favor of the Philippines, which China rejected. However, the ruling bolstered Vietnam’s claims, which were not openly welcomed by other ASEAN states besides the Philippines. In the absence of an agreement for a code of conduct (CoC) between China and ASEAN, which has been dragging on for years, China’s violations of international law in the SCS, including the latest against Vietnam in the Gulf of Tonkin, have increased. Against this scenario, Vietnam and the Philippines have signed maritime security deals. At the same time, Vietnam would be reluctant to do anything more drastic, such as support the Philippines in its attempt to draft a “separate” CoC for fear of Chinese retaliation. While Vietnam is less discussed in major global media than the Philippines on the issue, Hanoi is actively using diplomatic means to internationalize the problem, bringing in more players to address complex territorial disputes to safeguard its sovereignty and promote regional peace. In this context, winning the support of the EU and its member-states would be strategically important for Vietnam. The Vietnamese side can facilitate this by providing foreign entities, including the EU, with more transparent and timely information when incidents occur. Naturally, using a media strategy like the Philippines might sensationalize the issue, which might be different from what Hanoi prefers as it walks a tightrope to balance its complex relations with China. However, Hanoi can at least offer foreign diplomats transparent and detailed information in a timely fashion to help them verify and assess the situation on the ground. This will speed up the EU’s and other potential like-minded states’ response to sea incidents and foster ways forward for more multilaterally agreeable forms of modus vivendi in the South China Sea. Ultimately, such a modus should serve China too. EU No Longer a Bystander The EU’s recent stance on the SCS issue has been its respect for a rule-based order and freedom of navigation, strong opposition to unilateral actions, and supporting the ASEAN-led “effective, substantive and legally binding” CoC while mentioning China but not singling it out. This is a change from the EU’s pre-Indo-Pacific embrace when it was a more divided, neutral house. The EU’s heavy dependence on maritime trade through the SCS mandates that the EU can no longer stand as a bystander. However, ASEAN claimant states, particularly Vietnam, would perhaps expect a sharper or clearer position, which the EU has indeed been moving toward. For example, in March 2024, the EU released a statement expressing concerns about the incidents involving “repeated dangerous maneuvers” by the Chinese Coast Guard and Maritime Militia in the SCS. This tilts to the U.S. line, even as the U.S. has been more vocal in directly criticizing China on the SCS, by calling China’s claims “completely unlawful” even before the current events. One could argue that despite the U.S. and its allies having been vocal, this has yet to lead to a concrete resolution of the conflict. However, if the EU cannot send clear signals on the issue, the division among like-minded countries will be seen as weak and exploitable in China’s eyes. Importantly, this is true not just for the SCS disputes but also for China’s coercive activities in general. Therefore, given the convergent non-confrontational, inclusivity-, and economic interests-oriented attitudes of both Vietnam and the EU toward the Asia-Pacific/Indo-Pacific region, both sides are primed to embrace the other’s strategic outlook and up their game in the face of a challenging China and efforts to foster order.

Defense & Security
Shenzhen, Guangdong, China - Apr 27 2023: A China Coast Guard boat is cruising on the sea.

Philippines: Calming Tensions in the South China Sea

by International Crisis Group

“This article was originally published here by the International Crisis Group”Tensions between China and the Philippines are increasing the risk of armed conflict in the South China Sea. In this excerpt from the Watch List 2024 – Spring Update, Crisis Group looks at how the EU can support regional diplomacy to mitigate maritime disputes. Rising maritime tensions between China and the Philippines have highlighted the risk of armed conflict in the South China Sea and the dangers it would pose to global trade. Several countries are implicated in the set of complex sovereignty disputes in the sea, which stem from rival claims to various features and the maritime entitlements they generate, but recent incidents involving Beijing and Manila have triggered the greatest concern. The Philippines controls nine outposts in the Spratlys, a contested group of land and maritime features at the heart of the South China Sea. A submerged reef known as Second Thomas Shoal has become a dangerous flashpoint, with Chinese boats continually trying to block Manila’s efforts to resupply the BRP Sierra Madre, a rusting ship housing a handful of soldiers that a former Philippine government purposely grounded in 1999 in a bid to assert sovereignty over the atoll. China, which also claims the shoal, first started interfering with these missions in 2014, but relations between the two countries in the maritime domain have never been as volatile as during the last seven months. Chinese boats have regularly rammed the Philippine supply vessels or doused them with water cannons, occasionally wounding the sailors on board. Manila has a Mutual Defence Treaty with Washington, making this burgeoning maritime dispute part of the geopolitical competition between the U.S and China. In effect, the South China Sea has become a zone where conflict risks are rife – and where Washington and Beijing could be drawn into direct confrontation. Considering these developments, the EU and its member states should: • Seek greater diplomatic engagement with both Beijing and Manila to keep tensions in check. They should also expand their diplomatic presence across South East Asia and, where relevant, establish reliable channels through which they could communicate with high-level authorities in China and other claimant states should disputes at sea escalate; • Work to promote respect for international law, particularly the law of the sea, as a source of neutral rules for dispute resolution and conflict prevention, for example by organising public events, roundtables and dialogues in Manila and elsewhere. While this measure may not bridge the divides between Manila and Beijing, it could at least help establish a level of mutual support and understanding among the other South China Sea claimant states; and • Strengthen coast guard cooperation with the Philippines, focusing on building capacity in areas such as environmental protection, safety and search-and-rescue procedures. Troubled Waters The sovereignty disputes that underpin the tensions between China and the Philippines in the South China Sea go back decades. But it was Beijing’s manoeuvres to take control of Mischief Reef (in the east of the Spratlys) from Manila in 1995 that altered the perceived balance of power between the two states and in the region, setting off the territorial dispute that has now taken a turn for the worse. China’s assertiveness in the sea has grown in the past few years, along with its military capabilities. The brewing territorial dispute made headlines in 2012 when Beijing in effect took control of Scarborough Shoal, an atoll 220km west of the Philippine mainland but within Manila’s exclusive economic zone (EEZ), after a maritime altercation. The incident prompted then-President Benigno Aquino to file a case challenging China’s territorial claims under the UN Convention on the Law of the Sea (UNCLOS). On 12 July 2016, the presiding arbitral tribunal ruled in favour of Manila, dismissing China’s claim to all the waters within its “nine-dash line”, which constitute almost the entire South China Sea. But it was a Pyrrhic victory. Beijing not only rejected the adjudication and the subsequent ruling, but it had also already undercut efforts to settle the dispute through legal channels by building and fortifying seven artificial islands in the Spratlys while the case was winding its way through the system. This move fundamentally changed the status quo, enabling Beijing to post permanent garrisons in the area for the first time. By many accounts, China has thus ensured itself control of the sea in any situation below the threshold of armed conflict. A short lull in the maritime dispute appeared to follow. After coming to power in 2016, Aquino’s successor, Rodrigo Duterte, pursued a pragmatic policy toward Beijing. Duterte downplayed the tribunal’s decision and cast sovereignty issues aside, hoping to benefit from Beijing’s economic largesse in exchange. Yet his ambitious gambit did not pay off. Tensions at sea continued in the form of regular standoffs between the country’s coast guard and Chinese vessels. Filipino fisherfolk struggled to reach their traditional fishing grounds, and Manila could not exploit the precious oil and gas reserves within its EEZ to which it is entitled under international law. In March 2021, Chinese ships massed around Whitsun Reef, an unoccupied feature in the sea, ringing alarm bells in Manila, where senior officials voiced public criticism of China’s behaviour for the first time in years. By the end of the Duterte administration, the Philippines had revived its ties with the U.S. and become more assertive still, filing several diplomatic protests with the Chinese government. Elected in 2022, President Ferdinand Marcos, Jr., Duterte’s successor, was initially disposed toward friendly relations with Beijing, but the relationship soured only a few months into his presidency. Although China remains the Philippines’ top trading partner, Marcos, Jr.’s meetings with President Xi Jinping did not achieve the desired results: Beijing neither agreed to make major new investments nor curtailed its “grey zone” tactics in the South China Sea, understood as coercive actions that remain below the threshold of armed conflict. These rebuffs have helped push Marcos, Jr. toward strengthening ties with Washington, and the Biden administration has, on several occasions, publicly committed that the countries’ Mutual Defence Treaty would be deemed triggered in the event of an armed attack on Philippine warships, aircraft or public vessels. In perhaps the most significant recent development, after a series of high-level visits by U.S. officials to Manila, the two countries agreed to scale up implementation of their Enhanced Defense Cooperation Agreement, which gives U.S. troops rotational expanded access to Philippine military bases, and which China perceives as a provocation, especially given these bases’ proximity not just to the South China Sea but also to Taiwan. Manila has also received defence and diplomatic support from a host of other countries, particularly Japan and Australia. Despite the dispute it has with Vietnam over parts of the South China Sea, it has engaged, more quietly, with Hanoi, and acquired maritime defence equipment from India, thus expanding its circle of partners. Joint naval exercises with various countries have included large-scale ones with the U.S. in April, which involved the deployment of missiles that can reach targets almost 1,600km away – something that was sure to draw Beijing’s attention – and took place just after Manila wound up its first-ever trilateral presidential summit with Washington and Tokyo. In the meantime, the Marcos, Jr. administration has pursued what it calls a “transparency initiative”, publicising information about maritime incidents by inviting journalists to join its coast guard ships or posting video recordings of events almost as they are happening. Dramatic footage of Chinese vessels blocking, ramming or attacking its resupply missions to Second Thomas Shoal with water cannons has generated widespread condemnation in the Philippines and abroad. Many consider these tactics to be bullying. For its part, and despite the 2016 ruling, Beijing asserts that Manila is intruding into its waters and maintains that it is demonstrating maximum restraint. China has also recently referred to a so-called gentleman’s agreement under former President Duterte that it says foresaw preserving a status quo in the South China Sea, with Manila ostensibly agreeing to supply only humanitarian goods and no construction materials to the BRP Sierra Madre; Manila denies that there was any such arrangement. Given the Philippines’ determination to continue resupplying its troops on the BRP Sierra Madre, Second Thomas Shoal will likely remain a flashpoint. Due to the constraints imposed at sea by the Chinese maritime militia and coast guard, Manila is starting to look into other means of provisioning its outpost, some of which are likely to irk Beijing even more, such as airdrops or closer U.S. naval escorts. In September 2023, a U.S. plane was in the shoal’s vicinity during a resupply mission, while a U.S. warship passed through waters nearby in December. But the shoal is not the only possible source of tension. Chinese vessels, both official and non-official, sail through many areas where Philippine fisherfolk traditionally work, while other features, such as Scarborough Shoal, are also points of friction. A large-scale encounter or accident at sea could be especially dangerous. Should a Filipino or Chinese national die during such a confrontation, it could stir nationalist sentiments in Manila and Beijing and heighten threat perceptions on both sides. In case of loss of life on the Philippine side, Manila would expect its U.S. ally to assist under the Mutual Defence Treaty, especially given the recent exchanges with Washington on that topic, although the U.S. has not said precisely how it would come to the Philippines’ aid. How such a dangerous situation would evolve depends in large part on Manila’s political decision to invoke the treaty and the choices Washington makes about how to fulfill its commitments. In principle, Beijing and Manila remain open to negotiations. But the bilateral consultative mechanism, a confidence-building measure designed in 2017 to manage maritime issues between the two countries, among other things, has generated no results of note. Meanwhile, efforts to create a Code of Conduct, which aims to reduce tensions at sea by setting up norms and rules between claimants and has been under discussion between China and the Association of Southeast Asian Nations (ASEAN) for over two decades, have stagnated. Why the Sea Matters The South China Sea is a vital waterway through which around one third of global shipping passes. Peace and stability in the sea are a prerequisite for safe trade and are demonstrably in the interest of the EU and its member states. At over 40 per cent, the share of the EU’s trade with the rest of the world transiting the sea is even higher than the global average. Instability in the area would deal a major blow to the European economy; even a slight disturbance of shipping routes could result in higher transport costs, shipping delays and acute product shortages. Should there be an escalation that pits China against the U.S. in a direct conflict, the consequences could be catastrophic and global. European positions toward South China Sea disputes have traditionally highlighted the importance of all parties respecting international law and the need for peaceful resolution, while being careful not to take sides. But over the last few years, China’s assertiveness and expanding military capabilities have driven a greater sense of urgency and something of a shift in European thinking. First, the EU and several of its member states have developed “Indo-Pacific” strategies, designed to guide and promote cooperation with countries throughout the region. Secondly, Brussels has increased its diplomatic support for the Philippine position following maritime altercations, offering supportive statements in December 2023 and March 2024. Brussels and several European capitals now back Manila in regularly underlining the importance of UNCLOS and maritime law in the South China Sea context. Meanwhile, Europe’s presence in the region is growing, if slowly and in part symbolically. In 2021, the EU appointed a special envoy for the Indo-Pacific for the first time, while European Commission President Ursula Von der Leyen visited Manila in July 2023, the first trip to the Philippines by someone holding that office and an opportunity to express, at the highest level, the EU’s readiness to strengthen cooperation with the government in maritime security, among other areas. A German frigate entered the South China Sea in 2021, and French and Italian ships made port calls in Manila in 2023. In March 2024, the EU and the Philippines agreed to resume negotiations over a free trade agreement, while a month later France announced talks regarding a Visiting Forces Agreement with the Philippines. While EU interest in the region is rising, European stances on the South China Sea are complex, with member states harbouring different views on maritime disputes in the region and, more broadly, on big-power competition. Some, such as France – which is the only EU member state to have overseas territories in the region (and which has significant EEZ interests there) – see themselves as having stakes higher than others and are keen to participate in the region’s discussions on security. Others, such as Greece and Hungary, are less concerned with maritime flare-ups so far away and tend to ascribe greater importance to maintaining good relations with Beijing. What the EU and Its Member States Can Do As the EU and its most powerful member states are drawn deeper into the South China Sea, they should raise their diplomatic game in the region – both to ensure awareness of mounting tensions and to look for ways to manage corresponding risks. As a practical matter, Brussels could leverage its status as an ASEAN Strategic Partner to seek more participation in that bloc’s security mechanisms and regional forums; the EU and member states could seek higher levels of engagement with regional powers such as Japan, Australia, and South Korea on matters concerning the South China Sea; and Europe could post more diplomats to the region, including permanent defence attachés who speak the language of naval diplomacy. Of particular importance will be maintaining strong lines of communication with Beijing, where Europe is seen as still having some distance from the U.S.-China strategic rivalry, which works to its diplomatic advantage. While to some extent this communication will be traditional bilateral statecraft, it may also mean looking for new opportunities and new channels for dialogue. For example, some member states could also seek to follow the precedent set by France and China in establishing a coordination and deconfliction mechanism between their militaries. Brussels should also continue raising the South China Sea in its engagement with Beijing as it did during the EU-China summit in 2023. Maintaining these channels will become both more difficult and more important if and when the EU and member states expand their operational presence in the region – for example, if they decide to establish a calibrated maritime presence in the South China Sea, as proposed by the EU envoy to the Indo-Pacific. Such a move is still deemed unlikely for now. As for public diplomacy, Brussels and EU member states should consider practical ways to promote principles of the law of the sea in the region, making the case that broader regional support for and adherence to these principles would provide neutral ground for peacefully avoiding and resolving disputes. While it is hard to see this approach appealing to Beijing, which has rebuffed the UNCLOS tribunal’s decision, there could still be benefits in forging closer cooperation among other claimant states. Convenings in Manila and other regional capitals could cover topics related to the continuing disputes but also to cross-cutting themes of regional interest such as fisheries. With negotiations over a regional Code of Conduct stuck, like-minded countries in the region could use these occasions to at least develop common positions on discrete issues that might be addressed by the Code or that could foster regional confidence-building in the South China Sea. Finally, in the realm of capacity building, European governments should continue to strengthen coast guard cooperation with South China Sea claimant states, helping them develop tools and protocols that might be used where appropriate to avoid confrontation and conflict. Since Aquino’s administration, Manila has tried to boost its coast guard capabilities. Given that many of the other claimant states’ vessels in the South China Sea are coast guard ships, and find themselves embroiled in maritime confrontations, a common approach on rules of engagement could help avoid misunderstandings at sea. Building on the EU’s integrated coast guard system, the EU could host or sponsor joint workshops to develop operating principles for the region’s law enforcement vessels and exchange best practices with Philippine authorities. Brussels could also fund agencies such as the UN Office on Drugs and Crime to strengthen coast guard expertise on issues such as environmental protection, safety and search-and-rescue procedures. European member states could also participate in joint activities with the Philippine and other ASEAN coast guards to strengthen fisheries control and maritime border protection and deter piracy or smuggling.