Angela Merkel and Xi Jinping at the G20 Summit in 2017. Image available at Wikimedia Commons under CC license.

07:48 am | May 12, 2020

Knowledge Gaps / Rebalancing EU-China Relations

Redefining Germany's Relationship with China

The coronavirus crisis has demonstrated the necessity of global cooperation and functioning multilateralism. But as Europe seeks to redefine its approach to China, will the special relationship between China and Germany be an advantage or a liability?

By Janka Oertel

In recent months, the coronavirus crisis has underscored how dependent Europe is in certain sectors when it comes to supply chains. Personal protective equipment and face masks are the oil of the Covid-19 era, a precious commodity. No country seems to have sufficient supply, and securing continued access has become dependent not only upon willingness to outbid the competition, but also on good relations with the producers – especially with China. If there is one European leader who clearly has a "direct line" to Beijing, it is Germany’s chancellor Angela Merkel. A phone call with Xi in early April, which ensured the speedy supply of masks and other supplies, was an impressive testament to that. Other European heads of state would like to have similar sway with Beijing.

The idea of a "special relationship" between Germany and China is something that has been discussed prominently for nearly a decade, centering on the idea of a growing interdependence in economic terms. But in a climate of increasingly tense relations between China and the West, there is another special relationship that must be balanced carefully– that between Germany and Europe.

Economic Interdependence

Trade with China has grown steadily under the chancellorship of Angela Merkel. From 2005 to 2018, exports from Germany to China more than quadrupled from 26 to 110 billion dollars. China’s share of Germany’s total exports more than doubled, from less than 3 percent in 2005 to just over 7 percent in 2018. But against the nearly 60 percent of exports accounted for by trade with EU countries, trade with China does not seem existential.

If, however, we zoom in closer from this macro-picture to look at specific sectors of the German economy, the picture with regard to China becomes more complex. One particular special relationship, for example, is that between China and German automakers. The German car industry is heavily invested in the Chinese market. Volkswagen Group, one of the world’s largest producers of automobiles, founded its first joint venture in China in 1984, joining hands with the state-owned SAIC Motor Corporation.

Volkswagen now sells more than four million cars every year to Chinese consumers, and these cars are manufactured predominantly in factories all across China. When you consider Volkswagen Group sold roughly 10 million cars worldwide in 2018, the Chinese market accounts for about 40 percent of the group’s overall sales. And now that the economies in Europe are ailing from the coronavirus-induced economic crisis, Volkswagen is proudly announcing that the demand for its cars in China is almost back to where it was the same time around last year.

The special relationship between China and the German car industry is mirrored in other industries. Even for companies like the German chemical giant BASF, which still derived 67 percent of its sales in 2019 from Europe and North America, compared to "just" 24 percent from the Asia-Pacific, there is a particularly strong emphasis on China as a growth market, a recent 10 billion Euro investment in a wholly-owned plant in Guangdong province being a case in point.

Zooming in on key sectors of the German economy – automobiles, mechanical engineering, chemicals, which are still responsible for hundreds of thousands of jobs in Germany and Europe more broadly supported by revenues from the lucrative Chinese market, suggests that for the backbone of the German industry dependence on the Chinese market not only exists, but is almost existential.

BASF officially launches its smart Verbund project in Zhanjiang, Guangdong province, in November 2019. Image from BASF.

For Germany, China accounts for 15 percent of overall exports outside the EU, the highest percentage among all member states. For most of the other member states of the EU, the situation looks quite different. In terms of overall exports of goods to China in 2019, Germany’s volume, amounting to 96 billion euro, was nearly five times larger than that of the EU’s second-biggest exporter, France, which exported 20 billion euro in goods.

At the same time, for the vast majority of the EU member states, Germany remains the largest market for their goods. With regard to prosperity across Europe, therefore, dependency on German growth and demand is strong. This means that any move upsetting Germany-China relations could ripple through the European economy, which has already taken a huge blow due to the pandemic.

This economic clout gives Germany great responsibility. But it also requires a higher degree of leadership that goes beyond the economic dimension. In a post-Brexit Europe, Germany and France are the only member states left with actual leverage when it comes to relations with China. At a time when Covid-19 has the capacity to reshuffle the global balance of power, and the global narrative of effective governance, it is also on Germany to take a decisive stance – for Europe, for a rules-based international order, even if this could have short term consequences for the economic relationship with China.

Evolution of the Special Relations in the Merkel Era

When Angela Merkel took over as the German chancellor in 2005, trade with China was growing at a steady pace. It had been just four years since China’s accession to the World Trade Organization (WTO), and there was a great deal of enthusiasm in the West for integrating China into the world economy and the enormous profits that might come from an emerging Chinese market.

It was also in 2005 that Robert Zoellick, the United States’ then deputy secretary of state, who delivered his “responsible stakeholder” speech in which he voiced optimism about China’s future role in the world, saying the US needed to “urge China to become a responsible stakeholder in that system.”

Any move upsetting Germany-China relations could ripple through the European economy, which has already taken a huge blow due to the pandemic.

In that optimistic time, double-digit growth in China was convincing enough an argument for the German industry to invest even more heavily in the Chinese market. Companies were well aware that business in China came with a price tag – obligatory joint-ventures in which they were restricted to ownership of less than 50 percent, and voluntary or involuntary tech transfers. Cooperation with the Communist Party run state, and acquiescence to its demands, became a well-established practice.

When the 2008 financial crisis struck, pulling the European economy down with it, China’s continued growth and stimulus spending proved an important lifeline for the world economy. Beijing’s subsequent investments in Europe, and particularly in Southern European countries saddled with debt and struggling to adhere to German-led austerity measures, contributed to European economic recovery. In the post-2008 environment, relations between Germany and China grew even closer. Chancellor Merkel established a positive working relationship with her counterpart Wen Jiabao. On the diplomatic level, this resulted in the first Germany-China government consultations, with the cabinets of both countries meeting in Berlin in 2011, an extraordinary set-up in light of the systemic differencesThe cooperative spirits were high, the glass half-full.

Angela Merkel (right) and Chinese Premier Wen Jiabao meet with representatives from Germany industry in 2012. Image available at Wikimedia Commons under CC license.

The shift in the Sino-German relationship over the decade following the global financial crisis was gradual. But the change at the top of the Communist Party leadership in late 2012 was a significant turning point – though perhaps observers in Europe did not see it this way at the time.

Xi Jinping received a warm welcome in Berlin for his first official state visit in March 2014. China by this point behaved already much more powerful and confident on the global stage, and Xi had moved domestically to tighten his grip on power within the Party. These changes in Chinese politics translated into more authoritarian control throughout Chinese society, including at Chinese enterprises. Strong, centralized management became the new norm. In every aspect of society, politics and the economy – from the internet to the market – Xi discouraged tendencies toward greater liberalization. Meanwhile, Xi described a grander Chinese vision for the world in the form of the “Belt and Road Initiative,” as a new global investment, infrastructure, and development strategy. Enhancing Chinese prosperity and influence throughout the world.

Xi Jinping also introduced bold new plans for China’s domestic economy. “Made in China 2025,” China’s industrial strategy for gaining world leadership in various key sectors – including automobiles, aerospace, machinery production, robotics, material science, and pharmaceuticals and medical devices – declared the intention of catapulting China into the top level of high-end manufacturing. The areas targeted by “Made in China 2025,” which was modelled in part on Germany’s own “Industry 4.0” plan, were precisely areas in which German industry had so far remained a leading player.

The shift in the Sino-German relationship over the decade following the global financial crisis was gradual. But the change at the top of the Communist Party leadership in late 2012 was a significant turning point.

By the end of 2015, both the “Belt and Road Initiative” and “Made in China 2025” should have served as clear warnings for German policymakers and businesses alike that relations with Beijing were about to grow tenser. Predominantly, however, the belief persisted that China was on a transitional (albeit bumpy) path to a more open economy – and all that would be needed was a bit more patience. In the German business community there was still little appetite for diversifying away from the Chinese market. In terms of cost-benefit analysis, it seemed a ludicrous idea not to double down on business with China, even if German businesses faced problems of restricted market-access, intellectual property theft and a challenging legal environment, there was still ‘no second China’.

Trans-Atlantic Trade Winds

The status quo changed dramatically as a more aggressive approach to China emerged in the United States, Germany’s other top non-European business partner. The election of Donald Trump had a huge effect on transatlantic relations and ripple effects for the relationship with China. As Trump assumed office, he moved swiftly and vigorously against China, which he had made out as a key adversary during his presidential campaign.

New frontlines had been marked, and policies would be adapted accordingly. The assessment regarding China was in fact not new. China was not living up to the commitments it had signed on to when joining the WTO in 2001. It was not moving towards greater openness, and its assertive posture was increasingly viewed as a challenge to the security interests of the United States and its key allies. President Trump was not alone in his assessment. There was and is widespread bipartisan support for a tougher approach towards China, which finds supporters at all levels of the bureaucracy, from the Commerce Department to the Office of the US Trade Representative.

By 2017, stressing the market-distorting effects of China’s state capitalism was no longer a particularly controversial assessment, even in Germany. But the unilateral way and the speed with which the Trump administration moved to deal with and antagonize China left Europeans vexed, and as the EU itself came under criticism from Trump, transatlantic action to address the challenges posed by China seemed unlikely.

But Germany had its own growing frustrations with China. The situation in the country was not at all improving for German companies. By late 2017, the European Chamber of Commerce described the mood as a severe case of “promise fatigue.” In January 2019, after almost a year of deliberations, the Federation of German Industries (BDI), an association of big German global players as well as small and medium size enterprises that had typically been one of the strongest proponents for deeper engagement with China, published a position paper making a number of concrete demands to the German government to improve conditions for German businesses in their interactions with China.

A policy paper from the Federation of German Industries (BDI) in January 2019 outlines concerns in the economic relationship with China.

To German companies, China was no longer just a cooperation partner or economic competitor, but also a “systemic rival” – a phrase which was later taken up in an EU strategy paper in March 2019 and a triad which has since become standard vocabulary to describe the relationship. The push by BDI enabled a turn in the German discussion, and in turn helped to ignite a debate all over Europe.

The first half of 2019 was defined by various iterations of a similar conversation about how Europe should respond to Beijing’s economic practices as well as its large-scale human rights violations. The discussions ranged from investment protection to reforming competition policy, to ensuring the security of 5G networks, and industrial policy. China quickly became a huge part of the public debate about Europe’s economic future. The speed at which these discussions unfolded has often been underrated. China has moved from a topic for the distinguished foreign policy connoisseur to the top of the agenda across all areas in Germany, from the Ministry of the Interior to the Ministry of Education and Research. Everyone was playing a game of catch up, trying to get up to speed on where the conversation had moved. The wide array of dialogue formats on bilateral and European level with China, were put under review, and an inter-ministerial coordination mechanism was established.

At the same time, even before the Covid-19 crisis turned the global economy on its head, the German leadership was concerned about the fallout of the US-China trade war and its impact on the German economy. With the economic outlook darkening, there was visible disunity among various actors within the German government on what tone to strike with Beijing: confront, hedge or embrace? Following a certain bureaucratic logic, the Foreign Office and the Intelligence Services were urging greater caution, the Ministry of the Economy, or the Ministry of the Environment clearly had a greater interest in a less confrontational approach to not rock the boat on business relations and ensure Beijing’s cooperation on an ambitious climate agenda. With climate change dominating the public debate in Germany, progress on this topic was a political imperative for the next elections.

During her twelfth state visit to China in her time as German chancellor in September 2019, Angela Merkel thus chose to not focus on the systemic rivalry aspect of the relationship, but to stress instead the cooperation and partnership dimension. Accompanied by a large delegation of German business leaders, she travelled to Beijing to signal Germany’s continued openness. For German automakers in particular, the dangling sword of potential US sanctions on their products were making the growth market in China seem ever more important.

Chancellor Angela Merkel visits the city of Wuhan in September 2019. Photo by Bundesregierung/Kugler.

In a speech in the city of Wuhan – just months before it would become the center of the coronavirus epidemic– Merkel spoke about an innovation partnership and the future of science and technology cooperation with China. Merkel’s speech could be perceived as oddly out of step with the debates that had continued throughout the year about the difficulties presented by China, and its increasingly assertive authoritarianism. Especially as while she toured China, protests raged in Hong Kong, underlining the infringement on civil liberties in the territory.

So in 2019, while the overall tone of the China debate was changing, France endeavored to show a more united European front, the Commission debated extensive trade defensive measures. Italy was signing a Memorandum of Understanding on the Belt and Road initiative, and Greece joined China’s 16+1 format (turning it into the 17+1). Europe was out of sync on China.

In 2020 this was supposed to change. Germany is taking over the helm at the EU for its turn in the rotating Council Presidency in July. China was supposed to be one of the key topics to be discussed during this six-month period – moving ahead with a comprehensive agreement on investment, nudging China to take a more progressive stance on climate change and emissions reduction and maybe even finding common ground on development financing in third countries.

To give the right setting to this ambitious agenda and to make this less about the bilateral relationship and more about joint European action, a special summit was designed: the “Leaders Meeting”.

This meeting is scheduled to take place in September 2020 in the Eastern German city of Leipzig, known for its special role in the peaceful protest against the GDR leadership in the late 1980’s. Intended to signal the bridging of Europe from East to West, with a message of unity, the event will bring together the 27 European heads of state and government along with Xi Jinping and the EU leadership. The plan has ignited fierce discussions across Europe, prompting concern that this could turn into a shallow photo op for Xi as Europe’s divisions are once again put on display.

Embracing Responsibility

But due to the coronavirus crisis, it remains questionable whether any kind of meaningful progress on the ambitious China agenda is possible at all – and whether a physical in meeting in Leipzig will be possible. All of the plans for 2020 have been upended. Agendas have to be rewritten, priorities revised. Just as in the financial crisis of 2008, Southern Europe is most affected. And Germany, while with a severe number of cases itself, has the financial means and medical capacities to absorb the worst of the catastrophic effects of the global downturn that is following the health emergency.

For Europe, the times are bleak, and Germany needs to act. This will to a large degree also depend on the economic and political relationship with Beijing. Berlin needs to take the co-dependencies into account and play its hand wisely to ensure that its own policy interests in a rules-based multilateral order and continued European prosperity and sovereignty will be served, beyond immediate and somewhat selfish economic gains.

For Europe, the times are bleak, and Germany needs to act. This will to a large degree also depend on the economic and political relationship with Beijing.

For trade this means that Berlin needs to pursue a clear ‘Europe first’ agenda: trade with China will not replace the importance of the European internal market. Strengthening its capacity is vital to German interest. This also means that lessons from 2008 have to be learned and Chinese investment that may come into Europe after the health emergency has to be rated much more critically and greater emphasis laid on what constitutes strategic infrastructure and industries to diversify risk and limit dependency. This will come at a price for Germany, but will need to be seen as an investment in Europe and an investment in resilience.

Especially in the realm of technology this means that Germany must understand its responsibility when making far-reaching decisions, for example, on the choice of vendors for 5G infrastructure. The global economic downturn will reinforce the temptation to push forward with the 5G roll-out to jump start the economy with the cheapest available option. Germany needs to be mindful of the strings attached and the effect that this could have on other countries’ choices and the survival of European tech companies in this sector. A German decision in this area is much more consequential than in any of the other EU member states.

In the realm of diplomacy, the coronavirus crisis aptly demonstrates the necessity of global cooperation, but also the importance of functioning multilateralism and trustworthy international institutions governing global public goods, such as global health and climate change. Germany regards multilateralism as the cornerstone of its foreign policy, it is a principle with almost religious meaning for German policymakers. Whether China is really part of the solution and not part of the problem to achieving effective multilateral solutions, needs to be reassessed.

But in the end the mutual dependencies between China and Germany could also be turned into an advantage in this crisis. As the Chinese economy slowly reopens and production normalizes, German companies are among the first to benefit. Berlin has to strategically embrace the responsibility that this entails and make use of it for Europe as a whole. For Berlin European solidarity will be key in tackling not only the effects of the coronavirus, but also of the long-term challenge posed by China’s new role in the world. In the end, no relationship is more special for Germany than that with Europe.