US, EU Still Too Far Apart on China Restrictions, Panelists Say

While the U.S. and the EU are increasingly aligning their views on China, the two sides still don’t yet fully agree on how to use export controls, investment restrictions and other economic security tools to respond to economic and national security threats posed by Beijing, panelists during a Center for a New American Security event said last week. They also said they expect challenges facing American businesses in China to continue to grow, particularly if the U.S. pursues more trade restrictions and as Beijing builds out its anti-foreign sanctions laws.

Both Emily Kilcrease, a senior fellow at the Center for a New American Security, and Peter Harrell, a former National Security Council official, said the U.S. and European governments agree more now on threats posed by China than in years past, particularly as China continues to allow its companies to supply Russia’s military. Harrell specifically pointed to recent statements made by the Group of 7 countries as evidence.

“I remember at the beginning of the Biden administration, it was essentially impossible to get the G7 statements to say the word China,” Harrell said during the CNAS event, adding that the most recent G7 statement referenced China about 30 times. Harrell said China's “deepening its ties to Russia has contributed to this kind of G7 strategic alignment.”

Kilcrease agreed that China’s continued trade relations with Russia is “sharpening attitudes in Europe” toward Beijing. But she said there’s still “divergence” between the U.S. and the EU around how to respond to China. “I think we're having a harder time than we would like on things like alignment on export controls,” she said.

She pointed to the Biden administration’s efforts to convince the Netherlands, along with Japan, to impose strict export controls on shipments of advanced semiconductor equipment to China. The Netherlands eventually imposed some restrictions, but the U.S. has been pushing for more (see 2403270038).

“It took the administration a lot of energy and political capital to get some alignment with the Dutch and the Japanese on the tooling controls in the semiconductor space,” Kilcrease said. "That took a while, and that is one set of technologies.”

She said she envisions similar challenges convincing the EU to follow the U.S. in implementing restrictions on certain outbound investments in sensitive Chinese technology sectors (see 2406210034). “I think there are promising signals here and there, but I think there's also a lot of skepticism, candidly,” she said. "You go to Europe and you talk to them about outbound investment, and their response is basically: ‘Well, we don't have venture capital, so what's the problem? We don't have a Silicon Valley the way that you guys do.’”

Harrell also said the “mechanics of what to do about” China “continue to vary quite a bit” between the U.S. and the EU. Part of that may be because Europe’s “commercial interests” in China are “quite significant," he said, “and so they just aren't quite where we are in terms of many of the specific policy measures that we'd like to take.”

He said more U.S.-EU alignment will depend on the success of future U.S. diplomacy. “I think we're going to continue to see that dynamic where some of our allies are closer to us in the mechanics than some others,” Harrell said. “It's just going to be incumbent on diplomats moving forward to kind of keep pushing the rock up the hill.”

Kilcrease said she thinks “there's a lot of work still to go” on “increasing strategic alignment,” but “at least it's heading in the right direction.”

Asked how she views the future of U.S. businesses operating in China, she said she’s expecting a “bumpy” road. “I think many of them realize that," Kilcrease said. "That's something that the chip companies and I think the financial companies have been awake to for at least a few years now."

“But I think all companies are now starting to realize that whether it's because of geopolitics or, just candidly, China's own management of its domestic economics, China is a much more difficult, much riskier market than it used to be.”

Adam Tong, an associate fellow with CNAS, said China will likely continue “building up its arsenal” of regulatory tools it uses to respond to U.S. export controls and sanctions. Beijing in recent months has added various American defense companies to its Unreliable Entity List (see 2405200055) and sanctioned others for arms sales to Taiwan (see 2404120011). China can also use its anti-foreign sanctions law, which gives the government broad discretion to penalize companies for obeying U.S. and other countries' restrictions against Beijing (see 2309270039 and 2310230032).

Tong said China has had a “hard time trying to figure out an effective way to respond” to aggressive U.S. trade restrictions, and it has “landed on building out its own arsenal of regulatory tools to put pressure on business with still strong commercial interests in the Chinese market.”

Kilcrease said U.S. companies should be doing a “range of scenario planning” so they’re prepared for potential business disruptions caused by rising U.S.-China geopolitical tensions.

“What does that look like for your business? And is that [business] calculus worth it anymore?” she said. “I do think companies are starting to take that much more seriously.”