Germany’s long-awaited “China Strategy” has finally arrived, and while it’s not as strong as China hawks wanted, it will still likely harm trade ties between the two countries.
Hardliners from the Greens like foreign minister Annalena Baerbock and minister for economic affairs and climate action Robert Habeck had wanted measures ranging from strong export and import controls and China-risk stress tests for German companies. Those provisions did not make the final document. From Politico EU:
Notably, the strategy no longer includes earlier proposals to introduce a “reporting obligation” and “stress tests” for companies that are particularly exposed to China. Instead, the final document says that the government will seek to “raise awareness” and “intensify exchanges” but “expects” that companies manage risk by themselves.
Whether the majority of German companies — which invested a new record sum of €11.5 billion in China last year — will really do so on their own is questionable, though.
The strategy is clear, though, that an EU investment agreement with China — which had been pushed forward by former Chancellor Angela Merkel but has been put on ice for the past two years — “cannot take place at present for various reasons.”
…The strategy is toughest on human rights, lambasting Beijing over the “grave” violations of the rights of Uyghurs in Xinjiang as well as the situation in Tibet and Hong Kong, highlighting “the situation of ethnic and religious communities, and the significantly worsened situation of human rights defenders.”
The document said that Germany wants to coordinate its China policy with the EU and supports the application of EU sanctions against Beijing “in the event of serious human rights violations.”
The new policy also calls for preventing the export of sensitive technology and know-how to China. Beijing, expectedly, is not a fan of the strategy. From the Global Times:
In response to the published German strategy, the Chinese Embassy to Germany said in a statement on Thursday that China hopes Germany can view China’s development in a rational, comprehensive and objective manner.
The difficulties and challenges Germany is currently facing are not caused by China. Viewing China as a “competitor and systemic rival” does not accord with reality, nor does it benefit either sides’ interests, said the embassy.
The embassy said viewing China and making China policy based on ideological bias will only lead to misunderstanding and misjudgment, and impair cooperation and mutual trust.
Baerbock, speaking on the sidelines of the NATO summit in Vilnius, said the strategy sends the signal “that we are not naive.” That’s debatable.
The lesson Berlin has decided to draw from the whole Ukraine fiasco and its severing of energy ties with Russia is that Germany erred by being overly reliant on Moscow for fossil fuels. They are determined to not make the same “mistake” with their largest trading partner, China.
Should they have learned another lesson that should give them pause?
We are entering a world of permanent government energy subsidies for European companies. pic.twitter.com/anfV7D9Mp4
— Philip Pilkington (@philippilk) May 6, 2023
At his meeting with Baerbock in May, Chinese foreign minister Qin Gang acknowledged that China would be hurt by a “new Cold War” but noted Europe would suffer more. He mentioned a recent report from the Austrian Institute of Economic Research and the Foundation for Family Businesses, which estimates that Germany’s GDP would drop two percent if it “de-risks” from China.
A recent New York Times piece continued to push the narrative that by trading with China, Germany falls into a trap of “reliance” like it did by getting Russian energy. But the article also hits on how important China is to the German economy including:
- “Germany depends on China to provide essential technology products, including mobile phones and LEDs, as well as raw materials, including lithium and rare earth elements.”
- “China has been Germany’s biggest trading partner for seven years in a row.”
- “German automakers, including BMW and Mercedes-Benz, sell roughly a third of all vehicles they produce in China — exceeding sales in all of Western Europe.”
- “A study by the Kiel Institute showed that decoupling from China would be very costly for all of Europe, but especially Germany, given the strength of its economic ties. Calculations by the institute, based on gross domestic product from 2019, showed that Germany could lose income worth more than €131 billion. And it could be even more if China retaliated.”
And there’s more:
The strategy takes a tougher line toward China than the one embraced by governments led by Chancellor Angela Merkel, who viewed China as a huge growth market for German goods.
That push created a tight relationship with China, more than a million German jobs that depend directly on China, and many more indirectly. Nearly half of all European investments in China are from Germany, and almost half of German manufacturing businesses rely on China for some part of their supply chain.
It might seem like an odd time to “de-risk” considering the headwinds currently facing the German economy. It no longer has access to cheap Russian fossil fuels, and it is an importer of critical minerals used in manufacturing such as electric cars. The country’s exports to Asia are shrinking, and its auto manufacturing is in decline. The only component of Berlin’s economic model still left is wage suppression, and its doubling down on those efforts.Real wages fell at record speed in Germany last year.
The country is already in a recession, inflation remains high (6.4 percent in June) and is largely driven by energy prices, which continues to make German industry less competitive. German exports unexpectedly declined in May. Business morale is plummeting. Insolvencies filed in Germany in June rose by 13.9 percent year-on-year.
A record high of 71 percent of the German public are not satisfied with the work of the federal government, according to a recent Deutschlandtrend survey. The anti-EU, anti-immigrant Alternative for Germany is surging in the polls, largely due to public dissatisfaction with the government’s policy towards Ukraine and Russia and the economic costs of those decisions. The rise of AfD has German spooks sounding the democracy-threat alarm. Thomas Haldenwang, the chief of the Federal Office for the Protection of the Constitution, said at a news conference recently that far-right views and positions pose the biggest threat to German democracy – or at least whatever is left of it.
Despite all of that, the China hawks, led by Baerbock, push on nonetheless.
The overly confident and outspoken Atlanticist has been one of the biggest proponents of a tougher German stance against China. She favors a “feminist” interventionist foreign policy that aligns neatly with the US’ enemy list, and has done her best to damage ties with Beijing.
— Lord Bebo (@MyLordBebo) April 14, 2023
Berlin says it wants to coordinate its China policy with the EU. Well, the EU wants to coordinate its policy with Washington.
EU foreign ministers met back in May and backed a more hardline position on China; now they just need to figure out how to put it into practice, foreign policy chief Josep Borrell said. The ministers agreed that coordination with the United States will “remain essential” as they work to, as President Ursula von der Leyen put it recently, “de-risk” from China.
Chinese foreign minister Qin Gang happened to be in Berlin at that time, which led to the second war-of-words appearance in a month of him and his German counterpart Baerbock who continues to do her best to damage ties between Berlin and its largest trading partner.
While Qin stressed China’s neutrality in the Ukraine war and its efforts to formulate a peace plan, Baerbock insisted neutrality is not an option. “Neutrality means taking the side of the aggressor,” she told Qin according to Deutsche Welle. She also labeled China a “systemic rival.”
The great irony in all this is that the Germans are putting so much effort into confronting China while its “ally” the US is working to poach German industry, Berlin still hasn’t gotten to the bottom of who blew up the Nord Stream pipelines, and they’re now going to suffer even more as the US-China rivalry heats up. From Reuters:
A German official said on Wednesday the country has been working to secure long-term supplies of critical and strategic raw materials as it assesses the possible effects of Chinese export controls on some metals used in semiconductors.
China announced on Monday it would control exports of some metals widely used in the sector, the latest salvo in an escalating stand-off between Beijing and the United States.
In 2022, China supplied 27 tonnes of gallium to Germany, accounting for 55% of total imports. Regarding germanium, China supplied 3 tonnes, or 75%, according to data supplied by the Federal Institute for Geosciences and Natural Resources (BGR).
A German industry representative said earlier on Wednesday that China’s decision may be in response to U.S. trade restrictions, but its impact will also be felt in Europe.
The EU increasingly looks doomed to repeat its Russia “de-risking” strategy with China, and it can be expected to be similarly disastrous for the bloc. From the South China Morning Post:
Chinese foreign minister Qin Gang has warned that the real “risk” Europe faces comes from “a certain country” that is waging a “new cold war”, imposing unilateral sanctions and exporting its own financial problems to others.
Qin did not mention the US by name, but accused the country in question of fomenting ideological confrontation and engaging in camp confrontation, when asked about the EU’s “de-risking” strategy…
Qin said he appreciated the stance of Berlin and Brussels, but raised Beijing’s concerns that the strategy could become a “de-sinicisation” of the continent that would cut opportunities, cooperation, stability and development.
Indeed, that is what is slowly happening. Meanwhile, President of the European Commission Ursula Von der Leyen has been touting the bloc’s Net-Zero Industry Act (NZIA), which aims for the EU to process 40 percent of the strategic raw materials it uses by 2030. The NZIA would allow projects to bypass many environmental and social impact reviews. But the proposals do not earmark any new money, and the policies do nothing to change Europe’s disadvantages, which include a lack of subsidies compared to the US and China and much higher energy costs thanks to their “de-risking” away from Russian energy.
The problem for the EU is that much like the de-risking from Russian energy, its roadmap to de-risk from China will take years and is filled with question marks, but if Europe continues to damage ties at the current rate, it runs the risk of further wrecking its economies. Agathe Demarais, global forecasting director at the Economist Intelligence Unit, outlines some of the risks for the EU should relations continue to deteriorate:
The EU would lose its biggest trading partner for goods. The consequences of this would be dire for European export-oriented firms, as China is their third largest export market. Losing access to a market of 1.4 billion consumers is simply not an option for many European businesses.
Goods shortages would become commonplace in Europe, as EU imports from China are twice the size of those from the US (the EU’s second-largest source of imports). The competitiveness of European firms is too low to replace all imports from China, notably for basic manufactured staples. As such, decoupling from China would weigh on growth and fuel consumer inflation.
Besides, a European decoupling from China would probably provoke Chinese retaliation. Beijing has an ace up its sleeve with rare earths. China controls the vast majority of known rare-earths deposits. It could curb the access of European firms to these crucial raw materials. Without them, the development of electrical vehicles, military gear, and semiconductors would stall in Europe.
NATO officials, too, ramped up their criticisms of Beijing this week. From Al Jazeera:
In a strongly worded statement issued halfway through their two-day summit in the Lithuanian capital of Vilnius, NATO leaders said the People’s Republic of China (PRC) challenged the alliance’s interests, security and values with its “stated ambitions and coercive policies”.
“The PRC employs a broad range of political, economic, and military tools to increase its global footprint and project power, while remaining opaque about its strategy, intentions and military build-up,” the group’s leaders said in their communique, which covered 90 different points.
“The PRC’s malicious hybrid and cyber operations and its confrontational rhetoric and disinformation target Allies and harm Alliance security.”
The Chinese mission to the European Union condemned the comments, accusing NATO of distorting China’s position and deliberately trying to discredit the country.
Similar to the Russia escapade, the line of thinking in Brussels seems to be to do what the Americans say and figure it out on the fly. And it can be expected to work out similarly to the efforts to isolate Russia:
See, biggest imports are semi-finished goods like active pharmaceutical ingredients.
So if you buy drugs from India so as to “friendshore”, you’ve in fact just added a middle man between you and China. Just like the Russian oil the EU buys from India 😏https://t.co/8pBl3mRzUA
— Arnaud Bertrand (@RnaudBertrand) May 8, 2023