The new global economic order and what it means for Europe

shutterstock_358671599Trade wars, sanctions, hostile company takeovers, currency manipulations — a new economic order is emerging. To paraphrase Clausewitz: the economy is the continuation of war by other means. The world economy has become the key battleground for geopolitical hegemony between the US and China. And Europe is stuck in the middle. It better find a strategic orientation in this new economic landscape, before it turns from being an economic player into an economic playground for great powers.

The international economic order is in the midst of a tectonic shift. Having built and dominated the global economic landscape for centuries, the West is steadily losing influence. The economic centre of gravity is moving to the East. China is the main force behind this development. In three core economic areas, China is making a run for economic hegemony.

First up: trade. Back in the 1980s China’s share of world trade amounted to a meagre one percent. Fast forward to today that one percent has grown into double-digits (12%). China has become the world’s eminent trade power and is displacing the United States. For more than 130 countries in the world it is the most important trading partner. By next year, it is expected that China will even supersede the United States as the European Union’s most important trading partner. The People’s Republic is the world’s workshop. It is the biggest producer of hundreds of industrial products and a key exporter of important natural resources. In this context, the Middle Kingdom is the engine of global economic growth. In 2016, this one country alone was responsible for a third of worldwide growth. China has penetrated every country on earth economically.

And this trend is continuing because, secondly, China is pursuing an active foreign economic strategy. Its foreign direct investment has dramatically increased over the years. 2016 over 180 billion euros was invested abroad, a rise of 40 per cent compared to the previous year. Europe in particular saw many of these investments. Over 35 billion euros — a 77 per cent increase — flowed into European companies back then. And the vast majority of all of these Chinese investments was undertaken by state-owned enterprises that enjoy cheap access to Chinese capital to fund company takeovers. This chequebook diplomacy abated in the last two years, as Chinese investment came under increasing scrutiny and China tightened capital controls but economic interdependence is increasing.

Its grand infrastructure plan — the Belt and Road Initiative (also known as the new Silk Road) — is similarly about expanding its economic influence. This Chinese investment offensive is a geoeconomic bear hug strategy. It aims to ultimately connect more than 60 countries across three continents to China. It will bring together more than 60 per cent of the world’s population, the majority of the world’s energy resources, and a substantial share of the world’s gross domestic product. This flagship project intensifies China’s economic reach into Eurasia and Africa, deepening economic ties and economic dependencies, thereby carving out a new Chinese-dominated economic space. With this initiative all roads will literally lead to Beijing. Joe Kaeser, CEO of Europe’s largest industrial manufacturing company Siemens, has warned that “China’s One Belt, One Road, is going to be the new WTO — like it or not”.

Thirdly, China is gunning for technological superiority. The days that China used to be belittled as the workshop of the world that produces cheap, low quality products are over. The world’s workshop is becoming the world’s research centre. The era of Western technological supremacy seems to be coming to an end. China is returning to the technological world stage. While Europe’s R&D spending was still on an equal footing with China in 2014, the Middle Kingdom has now overtaken Europe; China is now responsible for 20 per cent of global spending on research. Huge amounts are invested in key technologies such as artificial intelligence, quantum computing and biotech. And unlike in Europe, the venture capital market is also booming. Start-ups are popping up like mushrooms, with one third of all ‘unicorns’ based in China.

By 2035, China wants to become the world’s most important force for innovation, and the ‘Made in China 2025’ strategy sets the course for this. China wants to be an international leader in ten key sectors — from biomedicine and robotics to artificial intelligence and alternative car technologies. And this isn’t just about surpassing the West. China wants technological self-sufficiency. As stated by Chinese premier Xi Jinping, “In order to become an internet superpower, we need our own technology. And we have to master it completely”. As early as 2020, the share of domestic components in technologically important key sectors is mandated to be between 50% and 70% of the national market. China is striving for technological autarky, because it knows that’s its Achilles heel. The country is now importing more semiconductors for its digital industry than oil. But it is also exporting its digital technologies to strengthen authoritarian regimes abroad. Beijing is hosting numerous capacity-building workshops for countries in Africa, teaching them how to regulate their digital space, many of which have gone onwards to enact Chinese-style internet controls and cybersecurity laws. And its tech companies are a dictator’s wet dream. Guangzhou-based Cloudwalk Technology, for example, has inked a deal with Zimbabwe to provide the country with a massive facial recognition infrastructure. China’s big brother is coming to Africa.

These three developments are rocking the world economy. That’s tough for the West. China is escaping the traditional division of labor, where the West is responsible for high added value products and China for the rest. Beijing knows that if it wants to keep its economic dynamism going (and thereby keep its population content and autocratic political system stable), it must secure export markets and escape the middle-income trap by becoming a technology leader.

Its economic expansion is changing the international economic order. And in the end, it is also a power play. Firstly because economic dependencies translate into political influence and secondly, because China’s increasing economic penetration abroad is creating an economic sphere of influence that is marginalizing the US in the broader struggle for geopolitical hegemony. It is no wonder that North America is the only continent that is not included in China’s One Belt One Road initiative. China is following Sun Tzu’s Art of War: avoid the main power, penetrate the open spaces. It is playing Wei Qi, the strategy board game better known as Go, in which it is important to encircle territory and control empty spaces, rather than attack your opponent head-on as in chess.

America’s answer to China’s economic expansion

The geopolitical struggle between the US and China is being played out in the economic sphere. That’s why the US-China trade war, isn’t just a trade war. It’s one theatre in the grander competition over who will be the world’s economic hegemon. The United States doesn’t just want to address its trade deficit with China, it wants to halt China’s economic and technological expansion, reverse China’s economic interconnections and isolate it.
To provide some examples: In the NAFTA re-negotiations, Trump included a caveat that would allow the US to terminate NAFTA, if Canada or Mexico would sign trade agreements with non-market economies, read: China. Second, the United States is pursuing a policy of decoupling. It aims to reorient supply chains away from the Middle Kingdom and promote foreign companies leaving China due to the extra tariff costs. Some export-oriented manufacturers are already leaving. A UBS survey showed that a third of manufacturing respondents in China had already moved some production out of the country last year and that another third intended to do so this year. Third, it wants to halt China’s technological rise by tightening restrictions on technology exports, limiting Chinese takeovers of high-tech companies, restricting visas for Chinese students studying in high-tech areas, and increasing funding for strategic technologies such as artificial intelligence.

Europe stuck in the US-China competition

Former Treasury Secretary Hank Paulson warned that an “economic iron curtain” is descending. The question is: on which side of that economic iron curtain will the European Union end up? The EU is stuck in the middle of the US-Chinese economic competition.

China is offering economic carrots — foreign direct investment and access to its massive market. Prior to the EU-China Summit, China inked investments deals with France and Italy, and it’s now allowing foreign companies to take majority ownership of joint ventures in China, which German firms are particularly making use of.

The US is carrying an economic stick. Washington sees the danger of the EU slipping ever more into Chinese economic dependence. It is no wonder that on the very same day the EU held its EU-China Summit, Trump announced tariffs on French, Italian and EU goods — namely cheese, wine and Airbus planes. And he continues to threaten to put tariffs on the EU car industry. Beijing pays, Washington punishes. Trump, in his grander competition with China, is demanding EU fealty, wishing to circle the Western wagons against China.

The EU has already toughened its stance on China. Macron announced that the era of a naivety towards China is over. The EU has strengthened its foreign direct investment screening mechanisms and in a recent strategy paper, the EU has labelled China a “systemic rival”. It also signalled to China that it was willing to walk away from the EU-China Summit without a declaration, if it didn’t get Chinese assurances on key issues such as reciprocity in market openness, the end of technology transfer, and the reform of the WTO.

The EU is facing a tough balancing act. Both markets — the American and the Chinese — are crucial to the EU economy. And in countless scenarios the EU could lose out economically. If the US-China trade war escalates, European industry could suffer. Likewise, if there is a trade deal. Economists at Barclays estimated that a trade deal could cost the EU 50 billion euro in exports.

Europe shaping the new economic order

Europe’s challenge lies in finding a strategic orientation in this new economic order; an order determined more by realpolitik than rules, power politics than partnership, and where economics and foreign security policy are inseparable. It must face up to the new economic reality and define its economic place in the world.

First and foremost, it needs to be self-confident, promote its interest and be willing to take the necessary measures. It is one of the largest markets in the world — that gives Europe economic weight. It doesn’t need to be swayed by the siren song of China’s market and should be more confident when dealing with China. China has copied products, stolen trade secrets, forced companies to engage in technology transfer and conducted cybertheft. It’s great that Europe got China to commit to ending such practices but actions speak louder than words. Europe should be ready to take economic measures, if China doesn’t follow-up on the commitments it made in the EU-China Summit declaration. Otherwise Europe would be nothing less than a sheep in wolf’s clothing. Economic relations are a two-way street. Without the EU, China would have not enjoyed its massive growth rates and technological development over these last years. The EU shouldn’t forget that.

Second, the EU needs to open up alternative markets. Africa is a high-growth potential partner right on the EU’s doorstep. An economic perspective for Africa together with the EU, would open up massive mutual benefits. India, likewise, is a sleeping giant. A democratic country waiting for an economic break-out moment, which could also be a geopolitical bulwark against China.

Third, Europe needs to stay a technological leader, which means investing in groundbreaking technologies such as artificial intelligence, quantum computing and biotechnology. If Europe fails to invest in the technologies and innovations of the future, if it no longer plays in the technological ‘premier league’, then what will be left for it? “Once we have been excluded, there is no second chance”, says Germany’s former Green Foreign Minister Joschka Fischer.

Europe should also consider tightening its regime for high-tech exports to ensure that strategically important technologies don’t flow to countries where they are used to suppress human rights or advance a digital authoritarianism. And it must seriously consider a policy advancing technological sovereignty. Europe shouldn’t let its 5G network, the nerve center of the future digitally-connected world, be built by China’s Huawei but let it be built by the European alternatives available. This is also about our democratic and social model. If we don’t invest and develop the groundbreaking technologies, regulate and standardize them according to our moral values and democratic principles, others will. That’s why we need to develop an ethical framework for such technologies, but it also means actually developing the technologies itself and use them in a way where they solve grand societal challenges such as climate change.

Fourth, Europe must be at the forefront of reforming the emerging economic order into a multilateral, rules-based one. It must find partners, such as Japan, Canada, South Korea and others for such an endeavour.

The world is undergoing an economic upheaval. Long-held rules and institutions are losing strength. Economies are being weaponized and economic spheres-of-influence established. Europe needs an answer to this new world — and it better come up with one fast, if it wants to continue being an economic player rather than playground for great power.

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Germany’s geo-economic challenge

Germany is an economic powerhouse. It got this far by undergoing two successive economic phases. The first, following the end of the Second World War, was inward-looking, defined by reconstruction and industrial consolidation. Benefitting from the political and military protection of the United States, the West German economy experienced a period of rapid development known as the Wirtschaftswunder, while ‘Deutschland AG’ (Germany, Inc.) – a system of informal coordination between major banks, insurance companies and industrial conglomerates – limited foreign competition and allowed the further consolidation of German industry.

Towards the end of the Cold War, Germany entered its second economic phase. Benefitting immensely from economic and financial globalisation, it turned outwards. Its companies internationalised, expanding into rapidly growing foreign markets. This second phase has been categorised by hard-nosed commercial realpolitik in which the US took care of geopolitics, providing Germany with the freedom to focus exclusively on economic matters.

This approach, however, is no longer tenable. The political and economic tectonics on which Germany built its prosperity are shifting. In the words of Robert Kagan, ‘the jungle is growing back’. Great power politics has returned. The international order is breaking down, and the United States and China are locked in a conflict over its reconfiguration. The WTO is facing an existential crisis, protectionism and economic sabre-rattling are on the rise, and NATO and the transatlantic relationship, under President Trump, are being questioned.

In this new world order, business-as-usual is not an option. Germany cannot afford to stand on the sidelines and simply pursue its own commercial interests. For the sake of Europe, indeed of the liberal international order, what is now needed is a third economic phase. Geostrategic considerations must be brought into German economic policy.

This will be a steep learning curve. German politicians have repeatedly cautioned against letting economic policy be determined by geopolitical factors. Some, such as former German President Horst Köhler, have even gone so far as to advocate the use of geopolitics to further economic interests. The long-held German policy of Wandel durch Handel (change through trade) vis-à-vis countries such as Russia and China is a rare case of an economic policy claimed to pursue geostrategic ends. However, it has turned out to be a mere fig leaf for chasing commercial interests as the policy has not led to greater liberalisation and democratisation in those countries.

This is not to say that Germany should introduce a policy of large-scale statist interference in the economy, nor that it should politicise every economic matter. Rather that in the context of a new international order, geopolitical considerations must feature more strongly in its economic policy. It must learn to pursue economic statecraft, not just commercial economic policy.

This will not be easy. Germany certainly has sufficient economic influence to pursue political ends, but it has in the past lacked the geostrategic culture and the political will to do so. As Europe’s economic hegemon, it has pursued a dogmatic economic policy paying a geopolitical price. Its tough handling of Greece’s debt problems, alienated Europe’s South and invited foreign investors, primarily China, to increase their economic – and thereby political – influence in the region. Its dogged defence of the Nord Stream 2 pipeline, which Chancellor Merkel has labelled a purely economic project, has alienated its Eastern neighbours. And Germany’s national solo effort discussing a possible EU trade deal with the US in spite of the fact that trade is an EU competence, undermined European unity.

Simultaneously, Berlin has allowed China to buy up German companies with strategically relevant technologies and is – unlike the US and Australia – letting China’s telecoms giant Huawei build Germany’s future 5G telecommunications network, without considering possible geostrategic consequence.

There is evidence, however, that the tide is slowly turning. While the United States formerly had to warn Germany about foreign acquisitions by China, as in the case of the German semiconductor company Aixtron, Germany is now starting to stand on its own two feet. In July, Minister for Economic Affairs Peter Altmaier acted decisively to block the acquisition of German electricity grid operator 50Hertz by China’s State Grid on national security grounds. And in August, the German government vetoed a possible acquisition of machine tool manufacturer Leifeld Metal Spinning by a Chinese investor, again citing national security concerns.

Other moves include advocating a European foreign investment screening mechanism and Foreign Minister Heiko Maas’ support for the establishment of a European payment system as an alternative to US-backed SWIFT. But there is still a long way to go. Germany has allowed geopolitical competitors such as Russia and China to build influence in key areas of its economy and has alienated its EU partners allowing these same competitors to increase their geo-economic influence within the European Union. By failing to include geopolitical considerations in its economic policy, Berlin has put itself and Europe at a disadvantage. Economically, Germany might be a giant but geo-economically it’s a sleeping one. It’s time for it to wake up.

Hamburg Summit and the G20

shutterstock_1130256779I have been able to take the last couple of days off to join the Hamburg Summit – China meets Europe. This biyearly summit featured as high-level keynote speakers, Europe’s Competition Commissioner Margrethe Vestager, Germany’s Transport Minister Andreas Scheuer and China’s Vice-Premier Liu He, who is the chief trade negotiator with regards to the US-China trade conflict.

The Summit was particularly interesting in the context of the upcoming G20 Summit in Buenos Aires, where President Trump is expected to meet President Xi Jinping in order to discuss the US-China trade war.

Some initial bullet point thoughts of mine from the Hamburg Summit and the upcoming G20:

  • China wants to convey strength. It tries to show that Trump’s tariffs have no effect. All Chinese speakers sang from the same hymn sheets. They tried to overwhelm you with statistics about growing trade, increasing economic growth and increasing investments. At times it was as if one was listening to a 5-year plan. One speaker even listed how many kilometres of railroad had been built last year. China’s Vice Premier Liu He in his keynote speech extolled China’s economic strength for around 3 and a half minutes. If someone puts that much effort into highlighting ones economic strength, however, he leaves the impression of wanting to hide weakness. It’s also a paradox to, on the one hand, praise ones economic strength and then at the same time call yourself a developing country, as one Chinese speaker did.
  • China’s economic strength narrative is intended to attract Europe into a deeper partnership. It is supposed to show Europe’s companies that they have much to gain if they increase their ties to China. The Chinese speakers occasionally also highlighted Europe as weak, pointing out that China could be the leading force helping Europe in its “economic recovery”.
  • China is – rightly so – very proud of its immense technological progress. It has become a technology leader in countless areas ranging from artificial intelligence and digitalisation to quantum computing and battery technology. Now, they want to digitalise and upgrade their industries. For that, they want Germany as a strategic partner. Several speakers told me that the “Made in China 2025” Strategy should combine with Germany’s “Industrie 4.0” Strategy. I was told, China has the best technology, and Germany has the best industrial products. Therefore this should come together. However, I am sceptical, when it comes to turning Germany into China’s mere product supplier and leave China the more profitable parts of the value chain.
  • There was speculation that Liu He came to Germany in advance of the G20 Summit in order to have a charm-offensive and get Germany on its side in the US-China trade war. Additionally, it could also be a sign that Liu He didn’t want to arrive too early for the G20 Summit in Buenos Aires. Coming slightly delayed to all of the preparatory meetings would again signal that China is strong and has nothing to worry about, in the sense that they can take their time and don’t need to be the first rushing to the G20 in order to sort out the trade mess.
  • The European Commission pursued a clear line: we want free and fair and reciprocal trade. The access that we give China to our markets, we also want to enjoy in the Chinese market. No more hacking or cybertheft, more intellectual property rights protection, more open markets and foreign investment into China, etc.
  • Liu He, however, did not speak of free and fair trade of reciprocity. He focused on “mutual understanding and accommodation”. That ain’t just semantics. That’s a completely different concept and approach to trade relations. Who should accommodate whom? Accommodation is not in line with reciprocity. Liu He clearly emphasised that China is different. He stressed that China has a different social and development model and that this needs to be accepted. This, however, shouldn’t mean that China can simply have its own set of rules, while enjoying the benefits of others.

I fail to see how on the basis of these fundamental different approaches, there will be any kind of progress in the American-Chinese trade war. Europe, in any case, needs to ensure that it doesn’t get into a situation where it has to choose between the American and the Chinese side.
It’s probably gonna get worse, before it gets better.

China’s digital dictatorship goes global

China is the world’s salesman when it comes to information technology. It exports the most cameras, laptop computers, and TV screens. Nearly every smartphone that’s sold around the world was produced in the factories of China.  Nine out of the world’s top 12 smartphone makers are headquartered in the Middle Kingdom.

Increasingly, however, China is not just exporting ICT goods. It’s exporting digital authoritarianism.

The Chinese leadership has used digital technologies to cement its grip on power. Surveillance cameras, autonomous drones, citizens’ data – all are used to advance the communist party’s interests and stifle any opposition. Big data meets Big Brother. George Orwell’s nightmare vision is coming true, and it’s coming from China, the world’s first digital totalitarian state. Now an increasing cohort of authoritarian states is interested in learning from China. And Beijing is happy to teach them.

It has held seminars with representatives from more than 30 different countries on regulating the digital space. It has provided capacity-buildings on how to regulate the digital realm to Uganda and Tanzania, both of which have afterwards introduced Chinese-style internet controls and cybersecurity laws. It has hosted officials from North Africa training them in “cyberspace management” and introducing them to its system of surveillance and censorship. And its companies are happy to provide the digital backbone for authoritarian leaders to exercise their control. ZTE and Huawei are building the internet infrastructure for many African states, while companies such as Guangzhou-based Cloudwalk Technology have inked deals with Zimbabwe to provide it with a massive facial recognition infrastructure. China’s big brother is coming to Africa.

With China’s digital authoritarianism going global, it is no wonder that this year’s Freedom on the Net report highlights the decline of internet freedom and democracy for the eighth consecutive year. According to the report from US-based think tank Freedom House, almost a third of the 65 countries assessed, have come up with new laws to restrict online media. 18 governments have increased surveillance and 26 in total have constricted online freedom.

We are facing a struggle between liberal democracy and authoritarianism in the digital realm. Humanity is “on the highway to digital dictatorship” says Israeli historian Yuval Harari.  Massive surveillance, big data coupled with artificial intelligence is making it ever easier to monitor and control billions of people. AI could allow authoritarian centralised systems to become much more efficient than democratic decentralised systems. Writing in The Atlantic, Harari points out how “the main handicap of authoritarian regimes in the 20th century – the desire to concentrate all information and power in one place – may become their decisive advantage in the 21st century”.

By exporting digital technologies China is not only exporting its digital authoritarianism, it is also establishing a digital sphere of influence run from Beijing. Xi Jinping has called for the creation of a “community with a common future in cyberspace” and wants to create a “digital Silk Road”, establishing fibre optic networks across the developing world, setting technological standards, and cordoning off the digital realm of other countries. Beijing is playing digital Wei Qi, the strategy board game better known as Go, in which one has to encircle territory and control empty spaces.

Controlling the digital infrastructure of other nations, China is able to make use of that strategic position for intelligence operations, electronic surveillance and geopolitical influence. After all, these digital infrastructures usually come with “backdoor mechanisms” allowing China access to crucial data. It wasn’t that long ago that reports uncovered, how Beijing bugged the Chinese-built African Union headquarters, which led to significant data transfers. Most recently, intelligence reports highlight how China’s secret service used the Chinese telecoms giant Huawei to pursue cyber espionage.

It is time for the West to make a comeback in the digital realm and halt the spread of digital authoritarianism. The European Union has recently launched a counter-strategy to China’s One Belt One Road Initiative and put forth a strategy entitled Digital4Development designed to mainstream digital technologies in its development policy. Likewise, the United States is massively increasing development finance and establishing a new development investment agency to counter China’s long arm in the developing world. Yet, both actors need to come together and have a coordinated approach when it comes to advancing liberal democracy in the digital realm. Contours of such cooperation are already emerging. Together with Japan, the European Union and United States have recently formed an alliance to create an international framework on data protection, which could halt China’s unbridled access of international data. Setting international rules on data protection is an important, welcome start. But it is only a beginning. More must be done to halt the digital authoritarian advance.

Digital changes the balance of power

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The road to hell is known to be paved with good intentions. Although digitalisation isn’t devil’s work, it does remind one of this idiom. Not too many years ago the digital world was celebrated. The internet, many believed, would be the key to a brighter future. Technology companies from California became the world’s problem-solvers.

The initial euphoria has passed. Indeed, digital technologies have opened up completely new possibilities. But at the same time their darker sides came to the fore: cyberattacks, fake news, manipulated elections, filter bubbles, a polarised and aggressive public discourse, a collapse in the privacy sphere, massive upheavals in the economy and world of work. The list goes on.

And what about politics? Authoritarian regimes used the digital revolution to advance their interest while in Europe and America, the political arena didn’t do much about. The digital world was, at least in the early years, treated as a mere technological question, a non-political issue. But it ain’t merely a technical matter. Digitalisation is a question of power and is thus deeply political.

Who controls whom? This Leninist Leitmotiv is at the heart of digitalisation ranging from individual users to geopolitics. It runs through all levels, because the digital revolution leaves no stone unturned.

Russia’s President Putin already declared — he who dominates artificial intelligence, controls the world. He’s not wrong. Geopolitical domination was also always based on the control of a significant informational infrastructure. Knowledge is power. The Roman Empire controlled the streets, Great Britain the naval routes. Whoever controls the digital technologies and data flows, can shape the world order. Data is king.

We are already finding ourselves in a technological cold war. The US and China are competing over technological leadership. Numerous nation-states are walling off their digital markets in order to secure their data sovereignty. Laws are enacted to prevent the flow of data into other countries. The Internet is becoming a Splinternet.

Economically, digitalisation is challenging the old, analogue economic order. Especially Europe is affected. Europe is strong in the industries of the 20th century. It’s not certain, whether they will survive. In the 21st century, software dominates hardware. European companies could quickly be degraded to mere hardware parts suppliers for technology companies.

And the world’s biggest companies are young technology players from the US and China. Data is their fuel. And with their platform economies and network effects, they are expanding. China’s Tencent is not only a social media platform, it’s also a travel agency, a search engine, a computer games developer, a music company, an insurance company, and so on. The technology titans are conquering new markets, creating new dependencies and shaping powerful monopoly structures. If Europe does not develop its own strong digital industry, then it will have to decide whether to be a cyber colony of Silicon Valley or Shenzhen, says Germany’s former Foreign Minister Joschka Fischer.

The digital world is also changing the balance of power in the labour market. The pressure on the qualifications of workers is increasing. Digitalisation puts traditional jobs into question. To what extent new jobs will be created is still unclear. Employees are also put under pressure with any rise in wage costs possibly leading to a substitution via robots. Some studies already highlight that a rise in the minimum wage can lead to increased automation. New forms of precarious work are increasing. Risks are being dumped on digital subcontractors. The digital world of work also challenges the modern social state. If workers are replaced by robots, who will finance the social security system?

And of course digitalisation is having a pronounced societal effect. Similar to the invention of the printing press in the 15th century it is radically changing the information landscape. The printing press made information more accessible creating a new public sphere. This promoted reflection, doubt and criticism. This, so Henry Kissinger, provided the base for the age of Enlightenment. Digitalisation, however, puts this into the extreme. Information spreads at breath-taking speed. There is no time for reflection. Everything can be put into doubt. Fake news sweeps through the internet and ever more people are living in a digital echo chamber only being confronted with their very own views and opinions. Artificial intelligence can also lead to more advanced deep fakes, with fake videos and imitated voices. Manipulated information is then spread via bots and reaches millions of people.

This threatens the most basic essential element of society: trust. Trust is the invincible glue that keeps a society together. But trust is dwindling if you can’t trust anything anymore. And Facebook and Cambridge Analytica have shown how some actors are trying to undermine elections and other forms of participation. This creates power. Because power isn’t just the “storm of the Bastille”. It is, according to Gramscis understanding of hegemony, also the battle over ideas and narratives that define a society.

Digitalisation brings us into a systemic conflict. China uses digital technologies to strengthen its authoritarian regime. Beijing has the best facial recognition software and employs a social credit system that rates people according to their actions. Total surveillance and social credit system — Big Brother meets Pavlov’s dog.

In the United States on the other hand, there is a largely unregulated hyper data capitalism. The private sphere is sold on the marketplace. This allows anyone — also unknown entities from Russia — to buy and use data. That’s how democratic elections get influenced.

Several years ago the digital world threatened autocratic regimes. Digital technologies seemed to be a tool for greater democratisation. Social Media accelerated the Arab Spring. But the tables have turned. Now it seems the digital world is threatening democracy.

Digital technologies give power and take power away. They empower and disempower. That’s how it is with many technologies. They contain germs of freedom and of suppression. Digital prophets such as Mark Zuckerberg only saw the potential for freedom. They were, in the words of Reinhold Niebuhr, the “stupid children of light” who were all naïve about the power of self-interest and domination, which made them “inept at defending democracy”.

Digital technologies aren’t created in a vacuum and they aren’t neutral. They are what you make of them. In this context, liberal democracies have to actively shape and regulate the digital world. Lest others do it for us.

US, China and a new economic order

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The trade war between the United States and China isn’t about trade. It’s about global economic dominance. Both are locked in a struggle over the international economic order. This has been a long time coming. In three fundamental economic areas, China is challenging US economic hegemony.

First, in terms of trade. A rapidly growing consumer class with rising demands has turned China into a massive market. Companies are falling over backwards to get a piece of that action. Over the past decade, China has displaced the US in many economies as the top export destination, shifting the centre of world trade.

Second, with regards to economic relations. Its grand infrastructure plan – the Belt and Road Initiative – aims to connect more than 60 countries across three continents to China. This flagship project intensifies China’s economic reach from Asia into Europe and Africa, deepening economic ties thereby carving out a new Chinese-dominated economic space. Joe Kaeser, CEO of Europe’s largest industrial manufacturing company Siemens, has warned that “China’s One Belt, One Road, is going to be the new WTO – like it or not.”

Third, technology. Washington was content with its deep economic ties to Beijing as long as China was playing the subservient role of mere supplier of lower-value goods. But those times are over. The world’s workshop is becoming the world’s innovation hub. We are bearing witness to China’s technological return to the world stage. By 2035, China wants to become the world’s most important force for innovation. Consequently it’s massively investing in key technologies ranging from artificial intelligence to quantum computing. China wants to dominate the industries of the future, the very area where the United States derives its future economic competitiveness from. Hence the economic relationship between the US and China is changing. And the US is unwilling to let it change without a fight.

In all three areas, China is creating economic dependencies, which translate into political influence. It has leverage over foreign companies that depend on its market. Daimler’s CEO Dieter Zetsche had to apologize profusely after the company published an Instagram post showing one of its luxury cars along with a quote from the Dalai Lama. Shortly thereafter, Chinese billionaire Li Shufu bought a sizable share in the company.

It has leverage over many developing countries. The Belt and Road initiative is giving China not only control over strategic infrastructure but is also forcing the recipient countries into a Chinese-fuelled debt-trap.

And lastly, China’s technological ascendancy is giving it an increasing amount of sway in the digital world as well as in future markets, affecting developed economies. China manufactures an estimated 90 per cent of the world’s IT hardware. This doesn’t come without problems. A case in point is the Bloomberg “Big Hack” story, which illustrated that the Chinese secret service had managed to add a tiny chip in the production of servers. These servers had then been used by US companies such as Apple and Amazon and therefore gave China secret access to their data. The world is increasingly finding itself in a Chinese IT chokehold.

Especially Europe seems to be naively letting China build its future digital infrastructure. Europe, and particularly Germany, are all building their 5G networks based on hardware from the Chinese company Huawei. In Germany, there hasn’t even been any public debate on this issue and whether or not it constitutes a security risk if the critical digital infrastructure is based on Chinese hardware. After all, the US, Australia and India have already banned Huawei from participating in their 5G networks and others, such as Japan and South Korea are investigating whether to follow suit.

We are witnessing how China is expanding its economic zone to build influence in Europe, Africa and Asia and the United States pushing back. This isn’t a short-term trade war, this is a fundamental shift in the economic order. The international economic order is breaking down and a scramble for its replacement is underway. In its element, this is about power. Because economic dependencies translate into political influence. And in the end it is also about the supremacy of political systems. Will China’s digital authoritarianism – a kind of gamified 1984 that mixes Big Brother surveillance with a social credit system akin to Pavlov’s dog – fuel future technological revolutions, drive innovation and promote economic modernization and competitiveness, or will free market liberal democracies?

“Russia feels like it’s winning”

The World Cup in Russia, which only very thinly masked the crisis between Russia and the European Union, is over. I spoke with Jens Siegert, former executive director of the Heinrich Böll Foundation in Moscow and head of the Goethe-Institut Moscow’s EU-funded project ‘Public Diplomacy. EU and Russia’, about current EU-Russia relations; Russia’s interests, power politics and the sanctions imposed on it; and the annexation of Crimea.

How would you describe current relations between Russia and the EU?

Poor.

Is this the result of a clash between two different ideological systems?
Not really. The conflict between Russia’s authoritarian, populist system and the liberal democratic model is above all an instrument of Russian self-assertion. Russia is driven neither by a particular ideology, nor by a well-formulated counter-concept to the West as it was during the Soviet era. Its political system revolves around Putin and his desire to stay in power – hence the lack of ideological clarity. And as a result, the debate in Russia is less focused on ideology, instead focusing on geopolitics and power politics.

From Ukraine and Syria to electoral influence, Russia is very active in geopolitical terms. Is there a grand strategy behind this?
I don’t believe Russia has developed some sort of offensive plan to expand its power. Quite the contrary – it’s behaving rather more defensively. But this can certainly include taking advantage of any opportunities that may arise, such as the annexation of Crimea. In today’s Russia the dominant narrative is that the country was weak in the 1990s after the collapse of the Soviet Union and had to make a lot of compromises, but now Russia is strong again and history can be revised.

At the same time, however, the Kremlin fears (and some are convinced) that the West has a grand strategy aimed at overthrowing the Russian regime. The Russians interpreted the Maidan revolution in Ukraine as more than just an intra-Ukrainian affair – more as a kind of dress rehearsal for regime change in Russia. The Georgian ‘Rose Revolution’ with Mijeíl Saakashvili and the end of Slobodan Milošević in Serbia were similarly interpreted. From Russia’s point of view, therefore, interference in the internal affairs of other states, for instance in the US or French elections, is firstly a form of pre-emptive self-defence. And secondly, they believe their actions to be justified because the Kremlin is only doing what the West does. The Russian narrative traces a very Darwinian image of international politics, in which nations fight against each other to survive and where almost anything is permissible.

If Russia considers its actions to be defensive while the West sees them as offensive, would you not say that an escalation in the relationship is inevitable?
No. The West now understands the situation quite well but has nevertheless underestimated Russia. The extent to which this is true, and for how long it will remain the case, is another question altogether in the Trump era. Many mistakenly believed that an escalation in the relationship with Russia could be avoided by simply not responding, or by being conciliatory. But those who don’t fight back are perceived as weak by the Russian mainstream; the understanding is that every compromise must be fought for. Figuratively speaking, you can’t reach a compromise without getting (and giving) a bloody nose.

What role does NATO play in this context? To what extent is NATO becoming less relevant with regard to Russia given Trump’s ambivalence towards NATO?
NATO, or rather the US and NATO, is the only military alliance that is currently able to act as something of a counterweight to Russia’s nuclear weapons potential. Given that the current Russian leadership basically sees international politics as a competition of major powers, with medium-sized and smaller countries playing a subordinate role, we really can’t do without its protection. Russia does not hesitate to use its military capabilities for political purposes, and opposition to this within Russian public opinion is non-existent. As a result, Trump poses a direct threat to the independence of the EU. Not as a possible hegemon, but rather because a US withdrawal or an agreement with Russia over the heads of its European NATO allies would deliver them, rather defenceless, into Russian hands. For historical reasons, this is far better understood in the east and north of the EU than in the west and the south. In the US, as the negative reactions to the Trump-Putin meeting in Helsinki in mid-July have shown, there are still enough opposing forces on both sides of the aisle – for the time being, at least. In these turbulent times, however, this can no longer be held as self-evident. EU member states have no choice but to improve their own defence capabilities as quickly and as sustainably as possible.

Russia’s hardness obviously also comes from the fear of showing weakness. The classic social democrat would say that Russia should be approached for this very reason.
Yes, but this will only work if it is a joint effort. It is only possible to have a sense of security and trust if this is shared. If the West makes concessions to Russia during a period of conflict, this will be interpreted as a weakness and exploited again at the next opportunity. Then the previous compromise doesn’t count anymore. According to the predominant mindset in Russia, a compromise is always only a snapshot of the current balance of power. If the balance of power changes, the compromise is forfeited and the stronger party has the right of appeal, also in moral terms. This is precisely the background to the violation of the Budapest Memorandum on Security Assurances on the denuclearisation of Ukraine in the course of the annexation of Crimea and the war in eastern Ukraine.

In order to find a way out of a possible spiral of escalation, both sides need to be involved – both need to want this to happen. And at present, I don’t see that on the Russian side. Russia feels like it’s on the winning side while the West is falling apart. Why should it compromise? The first task is to counter this impression.

The EU recently prolonged its sanctions for the annexation of Crimea and for the war in eastern Ukraine. What are your thoughts on these sanctions?
The sanctions were imposed after the annexation of Crimea, and when it seemed that military escalation in Ukraine might be possible. At that time, the Russian leadership obviously assumed that a unified reaction from the EU would not be forthcoming, that the EU member states would not be able to agree on a course of action. That was a fallacy. Both rounds of sanctions are important as an expression of a strongly united Europe. I believe that this made a significant contribution to the fact that the war in eastern Ukraine has not spread further. The political signal sent by these sanctions is therefore even greater than their economic impact.

How likely is it that the EU member states will continue to present a united front and stand by the sanctions? Or is their unity crumbling?
Of course, there’s always a risk that the sanctions will be either lifted or weakened. Italian interior minister Matteo Salvini has reiterated that he would like the sanctions to be lifted in December. Austria’s governing ÖVP (Austrian People’s Party) and FPÖ (Freedom Party of Austria) are also steering a course that is not exactly critical of the Kremlin. Germany is also not totally immune to this. If Chancellor Merkel was to resign for whatever reason, then I no longer see Germany standing so clearly by the sanctions. The personal contribution of Mrs Merkel is really significant here.

Any threat to the sanctions would, however, be a huge mistake in my view – it would be a clear sign to the Russian government of the EU’s weakness, and would invite Moscow to do something risky.

But just how realistic is the possibility of getting Crimea back? Henry Kissinger says we should just accept that Crimea belongs to Russia.
It clearly isn’t very realistic to think that something will shift in the short term. The West will not give military support to Crimea and on the Russian side a return is totally unimaginable. The Russian leadership and Putin personally have associated a great deal of prestige with the annexation of Crimea and have had a lot of public success as a result of it.

But this doesn’t mean that the EU’s current position on the recognition of Crimea should simply be abandoned. There’s a whole string of conflicts that have been going on for decades. Let’s just look at Cyprus. The EU does not recognise Northern Cyprus as an independent state and even admitted the south of the island, the Republic of Cyprus, in contravention of its own rule on the admission of states with border disputes. The annexation of the Baltic States by the Soviet Union after the Second World War was never recognised by the West. But that did not stop it having diplomatic and trading relations with the Soviet Union, and, somewhat later, discussing disarmament. We also do not recognise areas such as Transnistria, South Ossetia and Abkhazia, although the likelihood that these conflicts will be resolved in the foreseeable future and that they will be returned to Moldova and Georgia respectively is extremely low.

How is Russia’s foreign policy seen by its population?
The Kremlin has successfully established the narrative that Russia is surrounded by enemies from whom it must defend itself. Add to that the annexation of Crimea, after which Putin could portray himself as the ‘gatherer of the Russian lands’, and as the one who finally ‘showed’ the US (and the West in general) after almost three decades of weakness. As a result, there is a great deal of support for the country’s foreign policy. This also generates much of Putin’s legitimacy, especially against the backdrop of the country’s economic problems.

Does this international prestige fill the legitimacy gap created by the country’s economic difficulties?
There has certainly been a shift. For various reasons, there was a strong economic recovery from 1999 onwards and this lent Putin a large share of his legitimacy. But not only that; Putin brought the Russian state back into operation in a whole range of areas. An implicit social contract developed from this in the 2000s: Putin and his regime saw to it that the economic situation improved, and that the lives of as many people as possible in Russia got a little better every year. In return, the Russian population refrained from getting involved politically. And here, unlike in the Soviet Union, the state did not interfere in the private lives of its people. In the 2000s, you could love, live, work, and travel how and where you liked in Russia. While the Soviet Union demanded ideological loyalty, Russia under Putin did not – and it worked well.

But then came the 2008-2009 economic crisis. This hit Russia very hard, and then sanctions were imposed. Since then, the Russian economy has not really recovered. And the people certainly noticed: wages fell sharply. Putin really couldn’t draw much legitimacy from this economic slowdown – and then came Crimea.

With the annexation of Crimea, the source of Russian national loyalty has shifted from the economic realm to that of foreign policy. This created a sense of national pride, yes, but also pride in the fact that Russia has caught up with the West, and indeed that the West is finally afraid of Russia.

Is this a helpful perspective from which to analyse the 2018 presidential election, and does this explain why there were no protests, unlike in 2012?
Without a doubt. The 2012 protests had a lot to do with the change from President Medvedev back to Putin. In response to the economic crisis of 2008-2009, then-president Medvedev proposed a programme of modernisation; Russia had to modernise. But practically nothing came out of it, and then Putin’s return was announced in autumn 2011. This was a source of great disappointment, especially among what is often called the ‘creative class’ in Russia, the well-educated, urban middle classes. They saw their hopes for change disappointed.

How has the human rights situation changed over this period?
The Kremlin responded to the 2012 protests by re-ideologising politics: an emphasis on ‘traditional values’, the adoption of a law against homosexuals, and the intensified repression of the protest organisers. This was also related to ‘Maidan phobia’. Since then, more than 30 different laws have been passed that restrict civil liberties even further. And now, after a long period without, political prisoners are again being held in Russia: about 150 at present according to human rights organisation Memorial. This has also led to a new wave of emigration. The human rights situation is so bad and there is no improvement in sight. Rather the opposite, in fact.

What can the EU do about this? Especially if supporting human rights organisations is seen as trying to influence Russian domestic politics?
Any help that is given is seen as an attempt to exert influence, but the very worst thing to do is to say nothing. Raising awareness is still the best means we have. People like Oleg Sentsov can’t just disappear silently into some dungeon. Sentsov is a Ukrainian film director from Crimea who protested against the annexation and is now sitting in a camp in the far north. It must be repeated again and again, also during contacts with government officials: these people have to be released. There is, of course, no guarantee that this will work, but the Russian leadership doesn’t like being pilloried, and as a result, every now and then you manage to help individual people. Moreover, we shouldn’t support Russia’s isolationist tendencies. Contacts and exchange at all levels, especially person-to-person, are always good. The World Cup in Russia was certainly very positive in this regard; it was a breath of fresh air for the country. In a more concrete sense, I am still convinced that the EU should dare to go against the grain and introduce a visa-free regime for Russian citizens. That would deprive the Kremlin’s argument that ‘Westerners don’t want us’ of much of its effect.

One more question: Putin has now been in office for almost 18 years. What’s the outlook as far as successors are concerned?
That’s Putin’s problem. He can’t go because the political system depends on him – he personally guarantees its functioning and stability. Everything that is currently being said or written about Putin’s succession is mere speculation. The Kremlin is a black box and in recent years its workings have become even more opaque than they already were. Nobody knows who Putin’s successor will be, or when Putin will resign – probably not even Putin himself. The next general election will be held in 2024, when Putin will be 72 years old. That’s an age at which you can do it all over again. And Putin still has six years left in office; a lot can change in six years.