Germany’s New China Strategy and its Implications for EU-China Relations

On 13 July 2023 Germany released its first-ever China Strategy, of which its inception has been driven by the new geopolitical equilibrium between Berlin and Beijing. China, Germany’s largest trading partner, has become a more assertive actor at the global stage and “as a result of this, we need to change our approach” Foreign Minister Annalena Baerbock declared at the presentation of the long-awaited paper.

The conception of the milestone strategy was already decided in the coalition agreement but its finalisation was delayed by disagreements within the German traffic light government. In this sense, the final document can be interpreted as a compromise between Scholz’s neo-mercantilism and the Green’s original draft. While the Green party is prominent for its adverse tone on Beijing, especially regarding human rights, the Chancellor has frequently warned about the consequences of decoupling from the Chinese economy and suggested a more cautious approach. Nonetheless, Scholz also recognizes the importance of a smart diversification after Berlin’s decades-long dependence on Russian gas supplies demonstrated its vulnerabilities.

In the same way, the “Federal Government Strategy on China” rejects the US notion of decoupling, focusing on the von der Leyen Commission’s stance on de-risking. The new German position is heavily based on the EU’s 2019 Strategic Outlook on China and emphasises the alignment of the German national interests with those of Europe. A clear example is the descriptor of China simultaneously as a partner, competitor and systemic rival which mirrors the notable EU tryptic and multifaceted approach. The following analysis intends to assess the German strategy along these three dimensions and shed light on the reactions of the actors involved and the potential impact on Sino-EU relations. 

Partner, Competitor and Systemic rival

China as an economic competitor. In the strategy Germany commits to strengthen its economy and the synergies within the European internal market to safeguard competitiveness. In doing so, it is fundamental to improve the domestic industrial capacity for innovation and investment. However, the document highlights how economic and trade relations with Beijing are characterised by several asymmetries from the Chinese side that generate disadvantages for German companies – particularly for small and medium-sized enterprises – and their operations in the country. Regulatory discrimination, restricted market opportunities and unfair practices (such as public subsidies and forced technology transfer) undermine the mutually beneficial nature of competition and the stability of the German-Sino economic interdependence. This issue must be addressed at the European level, with the definition of a new China-EU trade agreement that replaces the stalled EU-China Comprehensive Agreement on Investment (CAI). 

As regards the systemic rivalry, Germany explicitly refers to the Chinese differing interpretation of the international rules-based order and how Beijing attempts to reshape it. China is leveraging its political and economic weight (thanks, for example, to the Belt and Road Initiative) to build a global network centred around its interests and values, which do not necessarily match with Germany’s. Germany criticises China in particular for 1) ignoring UNCLOS by not complying with the 2016 arbitration award, 2) its militarisation and the Military-Civil Fusion that places limitations on cooperation initiatives and 3) human rights abuses, notably in Xinjiang, Tibet and Hong Kong in violation of the UN Charter. The German Federal Government is set to protect the current international order and confront China for not upholding it. Other security concerns are represented by Xi Jinping’s no-limits friendship with Russia, especially after the 2022 invasion of Ukraine, and the heightening tensions in the Taiwan Strait. The rising tensions between Beijing and Taipei have made the existing semiconductor supply chain undeniably vulnerable, threatening German technological engagement in the area. Here, Germany reiterates the Western call for a peaceful and mutually agreed solution.

The main focus of the document is on de-risking measures. Economic dependency on China – especially in the fields of medical technology, rare earths and preliminary products for the energy transition – is becoming an increasingly relevant security risk for Germany. The strategy exhorted the domestic firms linked to critical sectors to reduce their export dependence on the Chinese market and diversify their supply chains. The ultimate goal is to spread the geopolitical risks more widely and, in general, increase the resilience capacity of the German economy. Foreign minister Annalena Baerbock said at the presentation of the New China policy that companies overly dependent on China would “have to bear more of the financial risk themselves” in the future. Berlin is no longer willing to bail them out if they get into trouble. This approach is the continuation of a process initiated in 2021, when Germany’s Economic Ministry refused to provide carmaker Volkswagen with guarantees to cover new investments in China (because of concerns over human rights violations in the Xinjiang region). Conversely, the German Federal Government pledges to assist the private sector in implementing more sustainable sources of supply.

Despite the German criticism and warnings, China remains a fundamental market for German businesses and, most importantly, a strategic partner. Its national carmakers (VW, BMW and Mercedes-Benz), the chemical giants BASF and the industrial powerhouse Siemens are still increasing their investments in China. Deepening the integration in the Chinese innovation ecosystem could help them retain their global competitiveness. The German Federal Government is seeking to cooperate with Beijing in other areas, given its central role at the global stage. Germany has to engage China to create meaningful results in international regulations and global challenges. While China is the biggest emitter of CO2 worldwide, its industry is also the main producer of renewable energies. For this reason, it will not be possible to overcome the climate crisis without collaborating. Not working together on this front would make climate regulation less ambitious and less feasible. Germany has also an interest in developing a scientific cooperation with Beijing in other fields such as Artificial Intelligence, quantum technologies and autonomous driving and supports bilateral research between universities also through academic exchanges.  In addition, both sides are actively engaging in intergovernmental fora to better coordinate the various aspects of their relations.

Reactions and consequences of the new EU China Strategy

The strategy received praise from German industry. For example, The “Federation of German Wholesale, Foreign Trade and Services” (BGA) said that the reorientation on China was long overdue and appreciates the rethinking of the current supply chains system. The “Federation of German Industries” (BDI) supports the strategy as well and its balanced approach of not decoupling with China. However, the “German Economic Institute” (IW) raised some concern on the lack of details given on the de-risking process and the sectors involved.

China, on the contrary, was critical of the paper. The Chinese Embassy in Berlin defined the strategy as ideological and called for more pragmatic and rational relations. It stated that, put in this way, the de-risking policy would be counterproductive and artificially intensifying risks. Equally, the Chinese Foreign Ministry denounced how “drawing a line according to values and ideologies and advocating so-called competition of systems” undermine the China-Germany cooperative partnership. It also described the de-risking concept as a form of protectionism. 

With this document, Germany aligns itself more closely with the EU principles and advocates a coherent policy at the European level. It is probable that the Federal Government paper could represent a stepping stone for a potential updated EU strategy on China. Just as Germany needs to get more specific, clarifying the meaning and implementation of de-risking, Europe will need to develop a more extensive plan, making the EU’s priorities and specific interests in its relations with Beijing clear. The explanation and a more detailed outline of the envisaged sectors involved in the ‘de-risking’ process is essential in order to overcome the ambiguity of the concept. So as to increase transparency, German and European businesses need to know about the relative measures in support of the costly diversification process. The main challenge would then be the coordination and convergence of the EU’s 27 national interests in their relations with China.  Ultimately, all EU Member States will need to agree on a common stance. As not all of them are as critical as Germany towards China, this exercise will prove to be a tedious balancing act.

In conclusion, the definition of a new China-EU trade agreement will be fundamental to ensure a better level playing field for German and European companies in China. The ‘Federal Government Strategy on China’ declared that “for various reasons, ratification by the Council of the European Union of the Comprehensive Agreement on Investment between the EU and China that was negotiated in 2020 is not possible at the present time”. Because of its intensive economic relations with China and its political influence in Brussels, Germany has a ‘special responsibility’ in asserting European economic interests and should therefore make greater efforts in the implementation of a new trade agreement.

Authors: Adrian Glaz, EIAS Junior Researcher and Alessandro Laurucci, EIAS Junior Researcher

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