August 2, 2022 | Breaking Defense

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

If the US and Europe are going to be on the same page when challenging China’s geopolitical goals, they must ensure that their industrial bases are, too.
August 2, 2022 | Breaking Defense

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

If the US and Europe are going to be on the same page when challenging China’s geopolitical goals, they must ensure that their industrial bases are, too.

On June 27, Airbus announced that it would establish an innovation center in Suzhou, China to cooperate with local players on advanced technologies ranging from hydrogen energy infrastructure to aerospace intelligence. Four days later, China’s three leading State-owned airlines committed to purchasing almost 300 Airbus jets, the largest order by Chinese carriers since 2020.

These recent developments reflect a broader trend of Airbus engagement with China, Chinese government science and technology development, and Beijing’s military-civil fusion system. Such entanglement underscores the uphill battle that Washington faces in coordinating with allies, including those in the EU, to compete with Beijing. Airbus’s footprint in China also makes clear that for the US and Europe to compete effectively, they will have to recognize that today’s international contest is a contest for and by industry — and respond accordingly, together.

Over recent years, the US and Europe have made remarkable progress in coordinating to resist China’s global offensive. Take, for example, NATO’s new strategic concept and the Trade and Technology Council established under the Biden administration. But that progress risks being rendered hollow by Beijing’s indirect influence over key industrial champions, as China uses its enormous domestic market and production base both to acquire technology, including dual-use-relevant technology, and to develop coercive leverage in the critical sectors and supply chains undergirding the globalized system.

Washington, Europe, and NATO are wising up to this reality. But, as the Airbus case proves, none can respond effectively without coordination — among themselves and with their industrial bases. US Entity Listing and identification of Chinese military companies might prevent Boeing, Lockheed, and Raytheon from doing business with AVIC, Huawei, and China Mobile. But those measures do not stop Airbus. They might even encourage it: Airbus’s incentive to dive headfirst into the Chinese market increases as US companies retreat, no matter the long-term costs of doing so.

If the US and Europe are going to be on the same page when challenging China’s geopolitical goals, they must ensure that their industrial bases are, too. It’s a big challenge, but there are a number of ways to approach this issue.

Airbus And China: A Case Study

According to Airbus leadership, the company delivered 142 aircraft to China in 2021, accounting for 23 percent 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. Those run the gamut from production and assembly facilities to a satellite technology joint venture with the Chinese Academy of Sciences that provides imagery for the Chinese government.

Airbus and Chinese government research institutes have jointly launched at least 10 research and development projects and six laboratories covering fields ranging from advanced materials to digital solutions, image recognition to 3D printing, 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 to sign partnerships with Chinese military-tied companies like Huawei and China Mobile.

The bulk of the Airbus footprint in China is operated in partnership with AVIC, a state-owned aerospace conglomerate that the Department of Defense has identified as a Communist Chinese military company and that the Commerce Department has placed on the Entity List, restricting the export of critical technology to the company. The Airbus-AVIC partnership includes at least three joint ventures engaged in aircraft engineering, manufacturing, and assembly; extensive supply relationships; and technological sharing. Airbus and AVIC subsidiary XAC cooperate on plane 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 holds a 5% share of AviChina, AVIC’s Hong Kong-listed arm. Put otherwise, Airbus is one of the major shareholders in a Chinese State-owned defense conglomerate. US companies are restricted from doing business with this entity, but Airbus, a global champion and market leader in its own right, boasts a substantive — and growing — tie-up with this core, backbone military player that directly operationalizes Chinese President Xi Jinping’s international industrial ambitions.

Per the Airbus China CEO, “Airbus is a member of the Chinese aviation industry family. We will always be committed to the development of China’s power to achieve a win-win situation.”

The consequences: Critical, military-relevant technology is at risk of being transferred to the Chinese government with ease. So is capital. Moreover, key elements of the US and allied defense industrial base rely, increasingly, on China.

This dynamic is very good for China. It is very bad for US security — as well as US workers and the US industrial base. It is equally bad for Europe’s.

Beijing’s bid for global control involves subverting the West broadly, not just Washington. Part and parcel of that ambition is a project to cannibalize market share in key industrial sectors, including aerospace. Beijing is not acquiring expertise from and influence over Airbus simply so that it can out-compete the United States military. It is also doing so to support its domestic champions — think COMAC and AVIC — so that they can dominate the protected Chinese market and eventually gobble up global markets.

A United Political-Industrial Front

In today’s international contest, industry — including civilian industry — is security. This reality is reflected in the push to bring more commercial sources of technology into the US defense industrial base just as it is in Beijing’s military-civil fusion strategy.  If the US, Europe, and their larger network of allies and partners are going to resist China’s global offensive, they must learn to coordinate in commercial domains, and form an industrial united front, not just a diplomatic, informational, or military one.

Defensively, this means enhanced alignment on technology export controls, foreign investment screening, and outbound investment monitoring. The EU and UK should take the initiative to impose restrictive measures on Chinese military and military-civil fusion companies. US processes for identifying those — like, for example, the indicators itemized in section 1260H of the 2019 National Defense Authorization Act — and accompanying information should be shared with and applied by allies and partners.

There is a more proactive angle, too. Allied regulators and private sectors need to coordinate to condition capital markets to reward positive behavior — behavior that supports the longer-term interests of US and European industrial bases rather than pawning them to China in exchange for short-term profits. Today, markets reward Airbus for inking a new sales or supply deal with China. They fail to price in the future costs of doing so; costs that begin with industrial dependence and technology transfer and end with a stronger COMAC and weaker Airbus. Greater corporate transparency around long-term risks for shareholders — as could be compelled, for example, by regulatory requirements to disclose supply chain dependencies —could help reverse this dynamic. So could allied regulations prohibiting investment in Chinese military companies, which could help to nudge short-term interests into alignment with long-term ones.

The US and Europe also need to invest, in a coordinated fashion, in upstream production to ensure that industrial champions — including but not limited to the civil aviation sector — do not have to depend on Chinese inputs. Upstream inputs of interest include known and urgent dependencies, like critical minerals. They also include aluminum, iron, and steel; wing flaps and machine tools; and the industrial infrastructure undergirding all of these.

This sounds like a lot to do, but there are reasons for optimism. The US and Europe managed to get on the same page when it came to Huawei and 5G. Yes, it was done with a lot of kicking and screaming. Still, it happened. And given China’s support for Russia in wake of Moscow’s invasion of Ukraine, the European nations are eyeing Beijing more skeptically 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 contest for the next 50 years will be an industrial one; now they need to drag their industrial bases into consensus.

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

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China