Resetting Relations in Light of Global Shifts: Germany and China

A decade ago, Angela Merkel had been chancellor, and the two countries relations had seemed to offer limitless opportunities for trade and financial gain. Red carpets, military salutes, trade agreements, signing ceremonies, and pomp and circumstance all occurred during the dialogues.

But after a three-year hiatus during the pandemic, Germany’s chancellor, Olaf Scholz, and China’s premier, Li Qiang, reopened the consultations on the previous Tuesday in a very different world—one with new estimates of political vulnerabilities and economic dependencies.

As a result of the conflict between Russia and Ukraine, Beijing’s growing courtship of Moscow, and China’s simmering tensions with the United States, Germany’s most important ally, the two nations entered the talks almost as estranged partners.

The director of the Global Public Policy Institute in Berlin, Thorsten Benner, said that those consultations “seemed out of step with the times.” Typically, you conducted government-to-government consultations with your democratic allies. The difficulty was striking a balance between the current level of realism and the traditional Merkel approach to China consultations.

The premier of China, Mr. Li, who was accompanied by a sizable train of ministers, was in Berlin for the first time for those consultations as well as for Mr. Scholz. Even as they worked to develop areas of shared interest, there was little doubt that their missions would conflict.

Germany used the meeting as a chance to stake out a new position, one in which China remained one of its most important economic partners but also a “systemic rival.” Berlin worked to protect its sensitive technologies and promoted business diversification away from Beijing.

For China, it was a chance to persuade its top trading partner in Europe to continue doing business as usual and to stoke tensions between Berlin and Washington.

Germany was still figuring out how to strike the right balance between needing to keep its economic ties with China and being under increasing pressure from Washington to side with Washington against Beijing.

Privately, a German official had referred to it as the “three-body problem” in Berlin. German officials no longer had the luxury of treating their economic and political interests separately because they were keenly aware that Washington was their security guarantee.

It no longer treated the bilateral and distinct relationships it once did, such as those between Germans and Chinese, Germans and Americans, and Americans and Chinese. Additionally, security issues interfered with Germany’s economic goals in ways that weren’t previously a concern.

Germany was forced to reevaluate economic ties it had previously taken for granted as a result of Russia’s invasion of Ukraine, including its reliance on cheap gas from Russia, which had once supplied 50% of its needs. Germany was able to switch to alternative sources of supply, narrowly avoiding a serious energy crisis and avoiding a recession.

It would have been much more painful if something like a Chinese attack on Taiwan had sparked a military conflict between the United States and China. German officials believed that because they had made such a strong case for Asian countries to stand with Europe against Russia’s invasion of Ukraine as a breach of territorial sovereignty, they would be forced to participate.

Even worse economic repercussions resulted from this. More than a million German jobs were, directly and indirectly, dependent on China. Germany accounted for almost half of all European investments in China, and nearly half of the German manufacturing companies had some sort of supply-chain connection to China.

Also for China, that was a difficult time.

Economic recovery following the pandemic was slower than anticipated. As President Xi Jinping pushed to strengthen national security last year, some Western companies were also hesitant to make new investments in China. This included a broadening of counterespionage laws that increased police scrutiny of Western companies in China.

Germany was crucial to China’s relations because it was both the country’s largest trading partner in Europe and a source of European investment in China.

According to Hu Chunchun, an associate professor at Shanghai International Studies University, “China naturally worried about the fact that Germany had been talking about de-risking or becoming less dependent on the Chinese market.”

German officials were expected to give China a preview of their long-awaited China strategy paper during the talks in Berlin. This document had been delayed due to months of internal debate within the German government about how aggressive it should be. Previously, July was the anticipated release date for the paper.

An early draught that had been leaked had taken a much tougher stance on the necessity of diversifying economic interests away from China, especially in sectors like critical infrastructure and raw materials for technologies essential to a carbon-neutral economy, like solar panels and electric vehicle batteries.

The pressure from Mr. Scholz, who was wary of too much shock to an economy that had dipped into recession, was expected to have somewhat softened that tone.

German government representatives made it clear that they did not intend to alter their stance on the “One China” policy, which acknowledged Beijing’s intention to unite with Taiwan while maintaining “friendly, but unofficial” ties with the Taiwanese.

They also emphasized the point that Mr. Scholz had repeatedly made: namely, that Germany did not intend to “decouple” from China as once urged by American officials. Instead, it emphasized the idea of “de-risking.”

Analysts claimed that defining what de-risking meant was the issue.

Did it mean eliminating risk or reducing it? How quickly could you have done it? That term had a lot of flexibility, according to Mr. Benner. Scholz trod carefully. He practiced ‘de-risking lite.’ Although he placed a lot of emphasis on diversification, he did not want to deter investors.

Chinese officials had expressed their worries to German officials in April regarding news reports that Berlin was considering restricting the sale of chemicals used in semiconductors to Beijing. In its campaign to deny Beijing access to vital technologies like semiconductors, the U.S. sought support from European and other allies, an effort that infuriated China.

According to Mikko Huotari, executive director of the Mercator Institute for China Studies, the aim of the Chinese delegation last week was to keep the Europeans as far away from the Americans as possible. Germany was very important in that.

Paul Haenle, a former director for China on the National Security Council in both the Bush and Obama administrations, said Beijing was still counting on the fact that many European businesses relied so heavily on Chinese consumers that they could not afford to cut ties with China.

“The Chinese leadership calculated that Europe was still very much at play,” he said.

China had cards to play, particularly with Germany: The largest and most influential German companies, including the chemical manufacturer BASF and automakers like Volkswagen, defied the trend of many other, more cautious German businesses and increased their investments in China.

Late in the previous year, China relaxed its severe pandemic regulations and reopened its market, laying on the red carpet for foreign investors to pour cash into the country. Oliver Blume, the CEO of Volkswagen, had been one of the first international business figures to travel to China. The largest sales market for the automaker was this nation.

According to Philippe Le Corre, a senior fellow for the Asia Society Policy Institute’s Centre for China Analysis, “China felt that Germany would always be able to compromise or at least strike a deal with China because of this dependency from a handful of big German companies.”

Germany’s biggest challenge might not have been dealing with Beijing, but rather its corporations, and making it clear that moving forward, they had to do so at their own risk in terms of their economic dependence on China.

The analyst Mr. Huotari said: “There was a way.” It made the path for Germany to transform its relationship with China possible, but risky. We had to wait and see if it would be painful.