MERICS Forum: The next German government's China policy

Germany's China strategy, passed by the outgoing government in July 2023, acknowledges that China has become a major challenge. But the country has been struggling to find the right balance between business and politics – and between national and European approaches. Ahead of the Federal Election in February, we asked leading experts to share their assessment on the following question in the first issue of MERICS Forum: “What should the next German government prioritize and/or implement (differently) in China policy?” 

“As China changes, the way that we deal with China must change, too.” This was Olaf Scholz's message in 2022 marking a departure from former Chancellor Angela Merkel's China policy, which consistently failed to adjust to changes in Xi’s China. However, Scholz’s adjustments to China policy have not kept pace with the real existing challenges China presents.

To the SPD-Green-FDP coalition’s credit, the first ever German “China Strategy” sets out quite an ambitious China policy. However, it was always clear that the “China Strategy” was little more than a PDF. The real China strategy is (as the French philosopher Ernest Renan once said about the nation) a plébiscite de tous le jours – the daily plebiscite of decisions on China policy. Under this coalition government, this vote was at times realistic (allowing a German frigate to sail through the Taiwan Strait), at other times disastrously short-sighted (as with the German campaign against EV countervailing duties). The next coalition must consistently be realistic and ambitious. Five principles should guide the chancellor and the coalition partners:

First, a clear rejection of the siren calls for getting closer to Beijing as a response to Donald Trump's unpredictability.

Second, Germany must work with partners to reduce its dependencies on China far more comprehensively and decisively.

Third, it is in Germany's core interest in terms of peace policy to take a clear stand against China's support for the Kremlin's war machine and to make Beijing pay a high price for this. In the case of critical technologies, Germany must ensure to stop enabling China's military modernization. To ensure as effective a deterrence as possible, Beijing needs to have no doubts whatsoever about the severity of Germany's and Europe's response to aggression against Taiwan or other Indo-Pacific states.

Fourth, Germany must abandon outdated beliefs and take far more decisive action against the impending “China Shock 2.0,” which fundamentally threatens the core of Germany’s industrial base. “Within the WTO where we can. Beyond the WTO where we must” must be the guiding principle.

Fifth, Germany must invest more in ensuring that Europe is as united as possible in its dealings with Beijing.

All this does not come for free. Germany must be prepared to bear the costs. The bill for inaction will be far higher later on. We experienced this in a painful way with Russia.

The next German government will continue to face major challenges in its China policy. A unified and internally coordinated approach toward Beijing is a key requirement for successful policymaking and implementation. Initiatives such as the federal government’s China Strategy and the concept of de-risking have set important guidelines.

China will be one more reason why the new government will have to invest much more than before in a comprehensive security policy. In view of the geopolitical upheavals in Europe and East Asia, any attempt to first establish a broad consensus in Germany and Europe is likely to prove too difficult and too protracted. Donald Trump’s second term as US president is already increasing pressure on Germany and the EU to put their money where their mouth is, even if this entails considerable political and material costs. The new government will have to show strong leadership.

To this end, the new government must urgently and decisively create capacities in security policy that will allow for containing China's interference in German politics, its economy, and society – and even more so to restrain China's support for Russia’s war in Ukraine. Here too, those who criticize China for supplying dual-use goods and drones to Putin's Russia should first close the loopholes in the European sanctions’ regime, which are also widely used by German companies.

Over the last years, German governments have invested strategically into shoring up expertise on China. The new government should now draw on this expertise in all its diversity. It needs to be prudent not to break off existing forms of exchange and cooperation prematurely or for ideological reasons. A profound understanding of Chinese politics and business remains extremely important.

Clear, unified and credible positions from a German government that truly sees itself as European and acts accordingly will be taken very seriously in China. Only then will China and Germany be able to find common ground and act as partners in order to solve urgent global matters, such as the climate crisis. 

The following areas are key:

1) Actually implement Europeanization

The Europeanization of Germany's China policy should be at the top of the agenda. This includes avoiding German solo efforts in “visit diplomacy” and when it comes to important projects in the European interest (e.g. countervailing duties).

In future, high-level visits to China and accompanying business delegations should be coordinated at EU level whenever possible and include several member states and ideally EU representatives. In general, long-term European and German interests should take priority in dealings with China, not the short-term interests of individual sectors or companies.

2) Send clear and concerted messages to China

Important core issues vis-à-vis China could be addressed even more strongly in future. This requires clear and, if possible, coordinated messages at EU level (see 1).

One example of this could be the issue of de-risking, which has been repeatedly criticized by China. The EU and Germany should make it clear that China actively practices this itself (e.g. dual circulation) and could even propose working together on de-risking global supply chains in order to avoid cluster risks and the associated costs.

A second example is setting European red lines and the consequences of breaching them. As long as there is a war in Europe, for example, which China supports at least indirectly through its close relations with Russia, there will be no normalization – however this may look like – of EU relations with China.

3) Not only strive for China expertise, but also finance it

The China Strategy has raised awareness of the lack of China expertise in Germany at all levels and calls for its development and expansion – albeit with the proviso that this should be as budget-neutral as possible. However, a long-term and not just project-related development and expansion of China expertise also requires additional funding. The new German government should therefore prioritize the question of how to achieve this. In particular, it should consider public administrations (federal, state and local), the availability of translation and interpreting services (e.g., for ministries and the Bundestag) as well as science and research.

The next federal government can build on the good China Strategy of the previous coalition, but must act much more consistently and strategically, as the former government willfully allowed much to slide.

From an economic perspective, the following to-dos are key: 

• To finally breathe life into de-risking – the main economic theme of the China Strategy, we first need a thorough analysis of truly critical dependencies on China. The new German government should create an internal task force that consistently identifies such critical import dependencies and also incorporates expertise from the business community – as other countries like the United Kingdom have long done. We must also ensure that companies have sufficient incentives to adequately reduce their critical dependencies. If there is evidence of market failure here, smart and minimally invasive state intervention will be needed.
• The European Commission's investigation into China’s state support for e-cars has once again proven that China is massively subsidizing its economy on many levels. In addition, the yuan appears seriously undervalued against the euro when measured by the massive increase in producer price divergence between Germany and China since 2021. This is another significant but artificial competitive advantage. The in part unfair competition from China is another serious threat factor in the current difficult situation for German industry, as an IW survey from 2024 clearly shows. The new German government must act together with the European Commission to provide a level playing field for threatened German and European jobs if there is evidence of illegal subsidies. Imposing countervailing duties in such cases has nothing to do with protectionism.
• As a matter of principle, the next German government should work consistently to ensure that the EU member states do not allow themselves to be repeatedly divided by China and instrumentalized for its purposes. This means it will sometimes be necessary to set aside own national interests.

Recent experiences with Germany's Russia and China policies raise fundamental doubts as to whether German foreign policy is capable of strategy at all. By this I mean the ability to define longer-term goals and to pursue them coherently and consistently across the entire federal government with all appropriate and necessary means and instruments.  

From this perspective, the greatest challenge Germany faces is the war in Ukraine and – linked to this – the establishment of a European security order that can permanently guarantee Germany's security, prosperity and democratic independence vis-à-vis the Russian aggressor.  

Dealings with the People's Republic of China should be geared toward this dual priority: Establishing strategic capabilities in foreign and defense policy in the context of the European security order. This is because China is playing an important role in the Ukraine war through its massive material and diplomatic support for Putin's war on Ukraine. China is thus indirectly threatening European security and putting a strain on relations between China and Europe as a whole.  

Focusing our China relations on economic exchange and cooperation on global issues such as climate protection is incompatible with this. The basis for the entire relationship should therefore be reorganized and based on the perspective of how China’s actions may threaten European security. The concept of de-risking is too general and too weak to adequately capture the security threat China poses to Germany and Europe. It is therefore not surprising that the implementation of de-risking has so far achieved very little when compared with the scale of the challenge.

From this perspective, we can draw two conclusions for dealing with partners. First, in line with the dual priority outlined above, German foreign policy must bring together a coalition that is credible to both Beijing and Moscow as well as Washington, because it must be taken seriously. Of course, this applies above all to other European countries, but also to partners in Asia-Pacific (Japan, South Korea, ASEAN, Australia).

The EU of 27 is only suitable for this to a limited extent due to its sluggishness and “Trojan horses” such as Hungary. Berlin must therefore forge “coalitions of the committed” within and beyond the EU and use these to move the EU forward. The decisive factor here should be the ability and political willingness of the partners to support cooperation within the coalition by providing resources. (Germany should set a good example here). 

Without cooperation in such a coalition, all potentially interested states are ultimately at the mercy of Beijing and Moscow, as well as the US. Such a multilateral coalition would also give Germany the opportunity to pursue its own foreign and security policy priorities and goals in its relations with the US and China.

The principles of liberal democracy should be included as the normative basis for the objectives: The future of the European security order is also about the future prospects of the democratic order at home. Whether the US remains committed to this fundamental basis under President Trump is uncertain. American democracy could still assert itself and renew itself after 2029. We should keep this in mind in relations with Washington.

In principle, however, the orientation between Washington and Beijing over the next four years should be decided on a case-by-case basis as to which of the two can best realize the common interests of the multilateral coalition. Of course, this also requires strategic capability – not only for Germany, but also for such a coalition.

The next German government should continue to follow the China strategy set by the previous coalition government. “Derisking, not decoupling” remains the right approach. However, there are many unanswered questions regarding implementation.

The most important basic prerequisite for a successful German China policy is for the German government to be consistently perceived in Brussels as a reliable driver of European policy approaches.

Only a coherent EU policy can provide the necessary economic and political weight for successful systemic competition with China and to assert its own interests vis-à-vis China. National interests must always be measured against the overall interests of the EU, and the German government must also send clear pro-European political signals and, for example, involve European partners in bilateral activities with China.

The next German government must also focus more clearly on the offensive. Defensive instruments to protect against distortions in competition and risks to national security are necessary. Ultimately, however, Europe’s competitiveness as a business location will be decisive in systemic competition with China. Reducing critical dependencies, for example, requires massive investment in Europe and the expansion of international partnerships in order to diversify supply chains beyond China and gain access to new markets.

The Mercosur free trade agreement recently concluded with South American countries is a ray of hope, but hardly a blueprint for agreements with important growth markets such as India or Indonesia. We need more flexible and pragmatic approaches to trade policy.

In terms of China policy, much will also depend on how the transatlantic relationship develops. The US is Germany's and Europe's most important partner, particularly in sensitive areas such as high-tech and defense, and it is in our interest for this to remain so. At the same time, the risk that German companies may come under fire due to trade tensions between the US and China is increasing. For this reason, the next German government must work to protect European interests – which do not always overlap with those of the US – and at the same time stabilize the transatlantic partnership.
 

This MERICS Forum is part of the “Dealing with a Resurgent China” (DWARC) project, which has received funding from the European Union’s Horizon Europe research and innovation programme under grant agreement number 101061700. 

Views and opinions expressed are however those of the author(s) only and do not necessarily reflect those of the European Union. Neither the European Union nor the granting authority can be held responsible for them.