Iceland: China’s Trojan Horse in Europe?

President-elect Donald Trump is still two months away from taking office, but his initial foreign policy and national security appointments suggest a no-nonsense approach to China. While Trump’s derangement syndrome infects many in elite circles in Washington and Western Europe and exaggerates criticisms of his first-term conduct, he did succeed in fundamentally changing the conversation about China. Whereas Bill Clinton, George W. Bush, and Barack Obama saw China as a partner, even if also a “near peer” competitor, Trump recognized China as an enemy and existential threat to the United States.

During his first term, Trump issued more than a dozen executive orders to counter Chinese influence and to pressure Beijing, though he might have done much more. Still, the Section 301 investigations into Chinese economic malfeasance, release of information on Chinese “economic aggression” and subsequent tariffs changed the conversation forever about China. While President Barack Obama sought cooperation with China, Trump’s 2017 National Security Strategy depicted China as strategic competitor, a realization upon which the National Defense Strategy doubled down. National security concern about how China uses Huawei to gather intelligence on its customers led to legislation limiting U.S. cooperation with countries that allow their penetration by the Chinese telecom giant.

The Iceland Dilemma

If Trump’s focus on China is more real than rhetorical, Iceland, a country whose total population if equivalent to Wichita, Kansas, could soon find itself in the crosshairs.

While Bjarni Benediktsson, a conservative, led Iceland for ten months in 2017 and since April 2024, Iceland’s other prime ministers since 2009 have all hailed from left-of-center parties: Jóhanna Sigurðardóttir, the world’s first openly lesbian head of government, arose from the Social Democratic Alliance. The next two prime ministers, Sigmundur Davíð Gunnlaugsson and Sigurður Ingi Jóhannsson, were progressives. Katrín Jakobsdóttir, prime minister between 2017 and 2024, was chair of the Left-Green Alliance.

Iceland’s China problem began with the 2008 Icelandic financial crisis when the country’s three largest private banks all defaulted sparking what, proportional to Iceland’s size, was the world’s largest banking collapse. A joke at the time asked, “What’s the capital of Iceland?” The answer was not Reykjavik, but rather “25 cents.” The International Monetary Fund helped Iceland to stabilize its currency but Sigurðardóttir also sought Chinese assistance after Western countries objected to Russia helping to bailout one of NATO’s founding members. In June 2010, Beijing and Reykjavik agreed to a three-year $500 million currency swap deal to enable Iceland to pay for Chinese imports in the kronur, Iceland’s currency. The two countries subsequently renewed the swap. While Icelandic negotiators said China’s interest and investment in Iceland was to tap Icelandic expertise in geothermal and hydroelectric generation, China’s record in the Atlantic and Arctic suggests Beijing had ulterior motives.

China and Iceland: Warming Ties

While the crisis passed, the Iceland-China relationship continued to solidify with successive Icelandic leaders looking at China as a cash cow. On April 15, 2013, Iceland and China signed a Free Trade Agreement, the first such agreement between China and a European country. The agreement affirmed the rights of Iceland and China to invest directly in the other. For Iceland, this was theoretical; its major exports to China are frozen fish, tin foil, and processed crabmeat. Icelanders pin their hopes on geothermal cooperation, a market they say could translate into more than $11 billion. In 2006, Sinopec, China’s leading energy firm, and an Icelandic company Enex-China partnered to produce geothermal energy for Xianyang, a city of around five million people in central China. The results were mixed: While the Arctic Green, the renamed partnership, says it is “the global leader in geothermal heating and cooling,” those on the company’s network received water only around 55 ̊F. A 2018 Asian Development Bank $250 million loan helped bolster the project. Foreigners who enter the Chinese market and believe it to be a gold rush often end in ruin. Arctic Green’s insistence that China, the world’s greatest polluter, is committed to carbon neutrality is naïve.

Not all Icelanders been as positive about China’s new role in their economy. In one prominent controversy, Icelandic knitting co-operatives objected to a scheme in which China imported Icelandic wool, knitted it into sweaters for re-import into Iceland, and sold to tourists.

While China was happy to find cheerleaders in Iceland to exaggerate the benefits of expanded ties, China’s own interests were more cynical. China likely sought the ability to build factories in Iceland and both monitor NATO movements and access the Arctic’s strategic minerals represents a major strategic gain. Between 2012 and 2017, Chinese investment in Iceland amounted to almost six percent of Iceland’s gross domestic product, though that percentage fell because of both the COVID pandemic and the China National Offshore Oil Corporation (CNOOC)’s decision to cease exploration off Iceland’s coast.

China’s expansion into Iceland was multifaceted. The Confucius Institutes are a major pillar of Chinese soft power. The Institutes say they provide language lessons and sponsor cultural events, but they promote an exclusively pro-Chinese Communist Party line and often serve as bases to both spy on Chinese abroad and to disrupt events that counter Chinese positions on Tibet, Taiwan, or Tiananmen. As China began to see Iceland as its de facto base in the North Atlantic, it opened the Northern Light Confucius Institute at the University of Iceland. Many in the West did not catch onto Confucius Institutes’ true agenda until years later. Perhaps, then, Iceland could be excused for opening Northern Light in 2008, but that does not excuse doubling down on the institution with a new five-year contract in 2017.

China has sought to establish a strategic position in Iceland in other ways. In 2011, Huang Nubo, a Chinese businessman, sought to buy 100 square miles of land in Iceland in a deal backed by the China Development Bank. While Huang talked up a golf course as the project’s focal point, his plans also included a private airfield.

China proceeded to open a number of supposedly scientific institutions that, much as in Svalbard, enable Chinese intelligence and security deployment to the island under the guise of scientific research. In October 2018, for example, the Polar Research Institute of China and the Icelandic Center for Research opened a joint China Iceland Arctic Research Observatory in Karholl, a small town in northern Iceland. Huang’s Icelandic spokesperson and representative Halldór Jóhannsson was a major cheerleader for the facility. Within weeks of opening, the observatory expanded its focus to include satellite remote sensing. President Joe Biden’s 2022 National Strategy for the Arctic Region alleged that China uses its scientific engagements in the Arctic to “conduct dual-use research with intelligence or military applications.”

A number of Chinese officials have proceeded to visit Iceland, including Chinese Premier Wen Jiabao in 2012, and Vice Foreign Minister Zhang Ming three years later. The two countries now revised a proposal for twice-weekly direct flights after the pandemic shelved initial discussions.

For too long, the United States has viewed China as a pan-regional power, one that challenges U.S. primacy in the Pacific and Indian Ocean basin, but it ignores the Atlantic and the Arctic. Beijing and the People’s Liberation Army have ambition to establish an Atlantic presence. This is why China’s inroads into the Azores a decade ago should have sent off alarms in Washington. To Biden’s credit, he did act immediately upon indications that China sought a base in Equatorial Guinea, a country split between mainland Africa and an offshore archipelago.

Donald Trump Needs to Watch This Space

For strategists in Beijing, however, Iceland represents the perfect Trojan horse, allowing China access to the Arctic, Atlantic, Europe, and NATO. Perhaps Trump can be excused for Iceland evading his radar during his first term, but there can no longer be any question about China’s ambitions on the island nor Iceland’s permissiveness to Chinese money and strategic inroads. It is time to play hardball with Iceland until it recognizes that Chinese cash will not offset the cost of its endangering North Atlantic and Arctic security.

About the Author: Dr. Michael Rubin

Michael Rubin is a senior fellow at the American Enterprise Institute and director of policy analysis at the Middle East Forum. All views expressed in this piece are the author’s own.