It’s time for a US-EU industrial strategy on China – even if it costs industry.

Airbus is one of many companies with strong industrial ties between Europe and China. (Guang Niu/Getty Images)

China has never been shy about using its economic ties to try to achieve geostrategic goals, and for many years it found a willing partner among European nations. But in 2022, that ground has changed, and skepticism in Europe towards Beijing is now growing. Nathan Picarsic and Emily de La Bruyere, senior fellows at the Foundation for Defense of Democracies, argue below that now is the time for the United States and Europe to come together for an industrial/geopolitical strategy to deal with China.

On June 27, Airbus announcement that it would establish an innovation center in Suzhou, China, to cooperate with local players on cutting-edge technologies ranging from hydrogen energy infrastructure to aerospace intelligence. Four days later, China’s three major state-owned airlines engaged the purchase of nearly 300 Airbus aircraft, the largest order placed by Chinese carriers since 2020.

These recent developments reflect a broader trend of Airbus commitment with China, the Chinese government’s science and technology development and Beijing military-civilian fusion system. Such entanglement underscores the uphill battle Washington faces in coordinating with its allies, including those in the EU, to compete with Beijing. Airbus’ footprint in China also makes it clear that for the United States and Europe to be competitive, they will need to recognize that today’s international competition is competition for and by industry – and react accordingly, together.

In recent years, the United States and Europe have made remarkable progress in coordinating to resist China’s global offensive. Take, for example, NATO’s new strategic concept and the Board of Trade and Technology established under the Biden administration. But that progress risks being hollowed out by Beijing’s decision indirect influence on key industrial champions, as China uses its huge domestic market and production base both to acquire technologies, including dual-use technologies, and to develop coercive leverage in critical sectors and chains supply chains that underpin the globalized system.

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Washington, Europe and NATO are becoming aware of this reality. But, as the case of Airbus proves, none can react effectively without coordination – among themselves and with their industrial bases. List of US entities and identification of Chinese military companies could prevent Boeing, Lockheed and Raytheon from doing business with AVIC, Huawei and China Mobile. But these measures do not stop Airbus. They might even encourage it: Airbus’ incentive to dive headfirst into the Chinese market increases as US companies pull out, regardless of the long-term costs of doing so.

If the United States and Europe want to be on the same page when challenging China’s geopolitical goals, they need to make sure their industrial bases are too. It’s a big challenge, but there are many ways to approach this issue.

Airbus and China: A Case Study

According at Airbus management, the company delivered 142 aircraft to China in 2021, accounting for 23% of global deliveries that year. Also according to Airbus, all of its current civil aircraft models use components produced by Chinese companies, and Airbus operates at least 12 subsidiaries or joint ventures in China. These run the gamut from production and assembly facilities to a satellite technology joint venture with the Chinese Academy of Sciences that provides imagery to the Chinese government.

Airbus and Chinese government research institutes have jointly launched at least 10 research and development projects and six laboratories covering areas ranging from advanced materials to digital solutions, from image recognition to 3D printing and 5G and the Beidou satellite system. In addition to the recently announced Suzhou Innovation Center, Airbus has an Innovation Center in Shenzhen, China, and has used it sign partnerships with military-linked Chinese companies like Huawei and China Mobile.

Most of Airbus’ footprint in China is operated in partnership with AVIC, a state-owned aerospace conglomerate that the Defense Ministry has identified as a communist Chinese military company and the Commerce Ministry has placed on list of entities, restricting the export of business-critical technology. The Airbus-AVIC partnership includes at least three joint ventures engaged in aircraft engineering, manufacturing and assembly; extended supply relationships; and technology sharing. Airbus and AVIC subsidiary XAC are cooperating on aircraft wings, making China the only country outside of Europe with which Airbus partners on wing technology.

But the real icing on the cake of the AVIC-China partnership is this: Airbus directly owns a 5% share of AviChina, the Hong Kong-listed subsidiary of AVIC. Simply put, Airbus is a major shareholder in a Chinese state-owned defense conglomerate. American companies are not allowed to do business with this entity, but Airbus, a global champion and market leader in its own right, enjoys a substantial – and growing – connection with this entity. basic military player which directly materializes the international industrial ambitions of Chinese President Xi Jinping.

Speak CEO of Airbus China, “Airbus is part of the Chinese aviation industry family. We will always be committed to developing China’s power to achieve a win-win situation. »

Consequences: critical and military technology may easily be transferred to the Chinese government. So is capital. Additionally, key elements of the US and allied defense industrial base are increasingly dependent on China.

This dynamic is very good for China. It is very bad for the security of the United States, as well as for American workers and the American industrial base. It’s just as bad for Europe.

Beijing’s bid for global control involves subverting the West as a whole, not just Washington. An integral part of this ambition is a plan to cannibalize market share in key industrial sectors, including aerospace. Beijing is not acquiring the expertise and influence of Airbus simply to be able to outcompete the US military. It also does this to prop up its domestic champions — think COMAC and AVIC — so they can dominate the protected Chinese market and eventually gobble up global markets.

A united political-industrial front

In today’s international competition, industry — including civilian industry — is synonymous with security. This reality is reflected in the desire to provide more commercial sources of technology in the American defense industrial base, as well as in Beijing’s military-civilian fusion strategy. If the United States, Europe and their vast network of allies and partners want to resist China’s global offensive, they must learn to coordinate in trade areas and form a united industrial front, and not only a diplomatic, informational or military front.

Defensively, this means better alignment on technology export controls, foreign investment screening and outbound investment monitoring. The EU and the UK should take the lead in imposing restrictive measures on Chinese military and military-civilian fusion companies. U.S. processes for identifying these – such as, for example, the indicators detailed in section 1260H of the National Defense Authorization Act of 2019 — and the information that accompanies it must be shared and acted upon by allies and partners.

There is also a more proactive angle. Allied regulators and private sectors must coordinate to condition capital markets to reward positive behavior – behavior that supports the long-term interests of US and European industrial bases rather than pledging them to China in return for short term benefits. Today, the markets are rewarding Airbus for signing a new sales or supply agreement with China. They fail to assess the future costs of doing so; costs that begin with industrial dependence and technology transfer and end with a stronger COMAC and a weaker Airbus. Greater corporate transparency about long-term shareholder risks – as might be compelled, for example, by regulatory requirements to disclose supply chain dependencies – could help reverse this dynamic. So would allied regulations prohibit investment in Chinese military companies, which could help align short-term interests with long-term ones.

The United States and Europe must also invest, in a coordinated way, in upstream production to ensure that industrial champions – including, but not limited to, the civil aviation sector – are not dependent on Chinese inputs. Upstream entries of interest include known and urgent dependencies, as critical minerals. They also include aluminum, iron and steel; wing flaps and machine tools; and the industrial infrastructure that underpins it all.

That sounds like a lot to do, but there are reasons for optimism. The US and Europe have managed to put themselves on the same page when it comes to Huawei and 5G. Yes, it was done with lots of kicking and screaming. Yet it happened. And given China’s support for Russia in the wake of Moscow’s invasion of Ukraine, European nations are eyeing Beijing with more skepticism than in the past.

It won’t be easy, but the important things never are. Leaders in Washington and Europe seem to agree that the global competition for the next 50 years will be industrial; now they must slide their industrial bases towards consensus.

Nathan Picarsic and Emily de La Bruyere are co-founders of Horizon Advisory and Senior Fellows at the Foundation for Defense of Democracies.