“Reducing risks” instead of disengagement… Germany’s new approach towards China

German Chancellor Friedrich Merz began a visit to China yesterday, accompanied by a delegation of about 30 businessmen. This scene may seem familiar in the context of German-Chinese relations, as former Chancellor Angela Merkel used to accompany large economic delegations with her during her frequent visits to Beijing, and former Chancellor Olaf Scholz also followed the same approach during his short term.

However, Merz’s delay of about 10 months before making his first visit to China, which is Germany’s largest trading partner, did not go unnoticed, whether in Berlin or in Beijing. This delay is seen as an indication that Merz’s approach may differ from his predecessors, as the Chinese market is not only no longer prosperous for German exports, but large sectors of German industry now see China as a direct competitor and a threat to their vital interests. Therefore, many economic actors expect the Chancellor to clearly convey these concerns to the Chinese leadership.

Today, Meretz is scheduled to be received by Chinese Prime Minister Li Qiang, before he meets later with President Xi Jinping, for talks before a dinner.

Merz’s three-day visit includes the capital, Beijing, in addition to the city of Hangzhou, one of the most prominent centers of advanced technology in China, in an implicit acknowledgment of China’s current status as a superpower with global economic and technical weight. However, the atmosphere of the visit will be affected by the gloomy political climate inside Germany, as the government believes that Russian President Vladimir Putin will not be able to continue the war in Ukraine without Chinese support, and German intelligence reports are also increasing regarding electronic attacks and espionage acts suspected of being linked to China.

“Reduce risks”

Meretz is expected to raise these issues with the Chinese President, although he does not expect a radical change in positions. Instead, it will give priority to a policy of “reducing risks” resulting from Germany’s heavy dependence on China. This approach is evident in seeking to address the choke points that revealed the fragility of German supply chains, especially after China threatened to impose restrictions on exports of rare earth elements and electronic chips, which threatened to disrupt production lines and raised great concern among German importers.

In addition, the issue of trade imbalance emerges, as from the German point of view, the trade relationship is no longer balanced. Exports of German cars and goods to China have declined significantly, while imports from Chinese companies facing price pressures in their domestic market have increased, which has led to an inflation of the trade deficit to reach about 90 billion euros, equivalent to about 2% of Germany’s gross domestic product.

The weakness of domestic demand in China also prompted Chinese companies to increase their exports, including cars, which allowed them to seize market shares from their German competitors in other international markets.

Non-commercial competition

German industrial sectors are expressing their dissatisfaction with Chinese government support and the decline in the value of the yuan, considering that competition is no longer purely commercial, but rather supported by the capabilities of the Chinese state. Oliver Richberg, from the Mechanical Engineering Industry Association, which includes about 3,600 German and European companies, expressed this by saying, “German companies are not only competing with Chinese companies, but rather competing with the budget of an entire country.”

The Federation of German Industries confirms that competitive pressures include multiple sectors, from the automobile industry to the chemical and pharmaceutical industries, and this has led to what some Germans call the “Chinese shock,” in reference to the radical transformation witnessed by medium-sized family companies, which for decades had been operating in stable industrial fields before finding themselves forced to reformulate their business models.

In the state of Baden-Württemberg, which has a large industrial weight, some political candidates are warning of the danger of it becoming the “Detroit of Europe,” a metaphor that reflects concern for the future of the automobile industry.

New game

However, not all German companies adopt a unified position. There are major groups, such as the chemical industry giant BASF, which has doubled its investments in China, and other German companies are moving to resettle their operations within China, taking advantage of local supply chains and developing products through Chinese personnel, while reinvesting profits there. As for Volkswagen, it seeks to transform China into an export center for other global markets, in a move that raises internal controversy because of its potential impact on job opportunities within Germany.

Some analysts believe that the “in China for China” strategy aims to avoid customs duties, adapt to local regulations, and maximize market share, while others see it as a means of maintaining competitiveness by benefiting from Chinese innovation, research and development.

In this context, Miko Hutari of the research company Merex in Berlin said that German companies operating in China are playing a “completely new game,” as Chinese branches become increasingly independent of their main headquarters, and a question arises about the extent of the German government’s commitment to defending the interests of those branches.

split

The division is not limited to the industrial sector, but extends to the German government itself. The liberal current tends to keep trade barriers low, while climate officials focus on benefiting from Chinese green technology, while security officials call for a tougher stance, due to China’s support for Europe’s opponents. Sander Tordauer of the Center for European Reform notes that Germany’s China policy still lacks strategic clarity.

Despite the importance of Merz’s visit to China, Thorsten Benner of the Institute for Global Public Policy believes that the main focus of Germany’s policy towards China lies in the European framework. Berlin has begun to support tightening investment screening, as happened when the Chinese company MingYang was excluded from a wind energy project in favor of Siemens Gamesa after security objections. Merz also pledged to prevent Chinese companies from participating in the development of 6G networks in Germany.

Within the European Union, Germany supports the requirement to “purchase European content” in subsidy and procurement programs, although to a less severe degree than the French position, but some countries fear that excessive stringency will alienate partners, such as South Korea and Canada, that could contribute to reducing carbon emissions. Despite the differences between European governments, they mostly focus on details and not principles.

Negative results

German officials acknowledge that a more stringent policy towards China may have negative consequences for the German economy, given the country’s heavy dependence on exports, and the rare earth element crisis was a painful reminder of the extent to which Germany is under pressure.

However, some observers believe that Germany and Europe are reducing their economic weight on the global level, especially in light of the customs duties imposed by the United States and the legal controversy surrounding them, as losing the European market will cause China serious losses, according to what the head of the Beijing office of the Heinrich Böll Foundation, which is linked to the German Green Party, Arthur Tarnowski, said. About “The Economist”

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A complex relationship

Economic interests and geopolitical considerations are intertwined in a complex and potentially mutually influential relationship. While German exports linked to the Chinese market are declining, Beijing is demanding that the European Union raise the duties imposed on its electric cars. In light of this delicate equation, large sectors of German industry hope that German Chancellor Friedrich Merz will show a degree of firmness during his visit to Beijing, reflecting a clearer defense of Germany’s economic and strategic interests.

. German officials acknowledge that a tougher policy towards China may have negative consequences for the German economy.