Germany’s new China strategy: Ambitious language, ambiguous course

You are reading the Germany chapter from the ETNC Report 2023 "From a China strategy to no strategy at all - Exploring the diversity of European approaches". Go back to the main page or download the report as a PDF here.

By Bernhard Bartsch and Claudia Wessling

In July 2023, Germany passed its first ever China strategy. It acknowledges that China has changed significantly under Xi Jinping and is now a major challenge to German interests. But Germany still struggles to find the right balance between business and politics – and between national and European approaches.

Germany’s China policy has always been strongly driven by business interests. China is a key market for Germany with more than 5,000 companies operating in the country, employing more than one million staff. Crucial sectors are automotive, machinery, electrical engineering and chemicals. All of these sectors are important pillars of Germany’s economic success. For German carmakers like BMW, Volkswagen and Mercedes Benz, China is the most important market, with roughly every third car being sold there.

Despite disruptions caused by the Covid pandemic and geopolitical tensions, trade relations continue to intensify. In 2022, the overall trade volume reached a record 298 billion Euros, with a fast-growing German deficit (German imports from China: 191 billion Euros; exports: 107 billion Euros).

Since the beginning of the 2000s, the deepening business ties were flanked by a growing intensity of high-level political exchanges resulting in the establishment of a wide array of cooperation and dialogue formats on different levels of politics, economy and society. The government consultations, initiated by Angela Merkel in 2011, created corridors for cooperation on, for instance, high-tech topics like autonomous driving or digital manufacturing. They also facilitated agreements on deepening research cooperation involving companies, technical universities, and national research institutions.

Human rights issues and civil and political differences were always important factors in German debates about and exchanges with China. At the same time, the assumption that intensifying mutual trade relations would at some point lead to political change in China (“Wandel durch Handel”) has been a trademark – some would say “fig leaf” – of Germany’s China policy.

Over the course of the Xi Jinping era, German companies have come to realize that navigating economic opportunity and political risk has become more difficult, resulting most prominently in a 2019 landmark position paper by the German Federation of Industry (BDI) in which China, for the first time, was labelled not only as a “partner” but also a “systemic competitor”.

The deterioration of US-China relations and pressure from Washington and other like-minded countries also resulted in an increased sense of urgency that Germany (and the EU) need to define the guardrails of their relations to China more clearly. Other factors were concerns over technological and economic dependence on China, problematic developments in the Chinese market, such as unfavorable data regulation and the lack of reciprocity, and China’s growing global influence. Responding to these shifts, the coalition government of Social Democrats (SPD), Liberals (FDP) and Greens, led by SPD politician Olaf Scholz, committed to devising Germany’s first China Strategy after the 2021 elections.

In recent years, China policy has moved from the fringes to the center of German political debates. Previously, it was mostly individual politicians who formulated prominent positions towards China, stirred debates on the sidelines or simply drew their parties along. For instance, in 2019, the question of Huawei’s involvement in building 5G infrastructure led to mid-sized uprising in the Christian Democratic Union (CDU) against Angela Merkel’s China-friendly line, when her inner-party rival Norbert Roettgen challenged her course and forced the government to accept more restrictive legislation. Within the Green Party, two prominent party elders, former party chairmen Reinhard Buetikofer and Juergen Trittin, for years locked horns on the right approach to China, though it wasn’t a key issue in Green party politics.

This has changed. The parliamentary groups of three of the four major political parties now have released their own China position papers: the Social Democrats (SPD, 2020¹⁶⁰), the Christian Democrats (CDU, 2023¹⁶¹) and the Liberals (FDP, 2023¹⁶²). The Greens, despite being the driving force behind the national strategy, have not published a distinct strategy paper on the country, but mentioned China an extensive 16 times in their 2021 election manifesto.

All these papers share a similar analysis of China’s course and the challenges that China poses, but differ slightly in how they emphasize options for the path forward – the Greens being more pessimistic when it comes to seeking opportunities for cooperation, while the SPD seems more optimistic about the partnership agenda. Chancellor Olaf Scholz seems to be leaning toward the cautious rationality of his predecessor, Angela Merkel, and has been criticized¹⁶³ for his ambiguous course.

In July 2023, after one and a half years of extensive consultations with stakeholders and intense negotiations between ministries, Germany approved its first “Strategy on China¹⁶⁴”. The 64-page paper is meant to fulfil two goals: 1) to present the government’s views on China and the challenges it poses, and 2) to outline the means and instruments needed to enable the government to pursue a coherent approach that asserts German and European values and interests. On the first goal, the strategy delivers clear language, while on the second ambition, it remains ambiguous and preliminary.

Starting from the premise that the German approach to China needs to change because China has changed, the analysis in the strategy is frank to a degree that Beijing-friendly critics consider undiplomatic. The strategy:

• states that China is striving for “regional hegemony”, aiming to “reshape the existing rules-based international order” and “calling principles of international law into question”;
• points to “serious human rights violations”, e.g., in Xinjiang, Tibet and Hong Kong; analyses that China’s economic strategy aims at creating “economic and technological dependencies with a view to using these to assert political objectives and interests”;

• assesses that China engages in “economic and academic espionage in an attempt to gain access to German corporations’ trade and research secrets”;

• asserts that Chinese authorities engage in “illegitimate interference” and “acts of transnational repression”;

• upgrades security issues, e.g., by calling Beijing’s close relationship with Moscow an “immediate security concern for Germany”; and

• concludes that “elements of rivalry and competition in our relations” have increased.

But despite the clear orientation that the paper provides, when it comes to transmitting these realizations into concrete policies and actions, the strategy is – understandably – more elusive. On the one hand, the government is careful not to shut any doors: “Systemic rivalry with China does not mean that we cannot cooperate”, the paper postulates, adding the hope that this could happen on the basis of fair conditions. On the other hand, there are real concerns to what extent regulation can effectively mitigate risks. The government therefore only issues a vague call to companies to raise their risk awareness and not expect bailouts in the event of a geopolitical crisis.

More specific instruments that were discussed during the drafting process (and became public through a series of leaks), included mandatory transparency requirements and stress tests for large companies with high exposure to China. In the end, the government only committed to further exploring the issues and options at hand and holding “confidential discussions” with corporates. Likewise, no specifics were included on critical infrastructure (Germany so far hasn’t banned Chinese companies from its telecom networks), on outbound investment screening or on regulating joint research, despite the fact that “China’s Military-Civil Fusion policy is placing limits on our cooperation”.

All of this builds squarely on the EU Commission’s mantra of “no decoupling, but de-risking”. The strategy makes a strong commitment to enhancing a coherent European policy on China (which has not always been seen as a key feature of Germany’s China policy). Besides close coordination, Germany specifically promises:

• not to negotiate with China on matters for which the EU is responsible. (In the context of the Comprehensive Agreement on Investment (CAI), officials from the German chancellery are understood to have discussed the topic frequently with Chinese counterparts.)
• to “explore” where EU partners or institutions could be included in bilateral talks with China, such as government consultations. (The German government made a similar commitment in its coalition agreement, but so far hasn’t acted on it.)
• to make greater use of bilateral exchanges with China to raise EU-wide economic interests.

While the “Strategy on China” provides clear orientation on how to understand China and the challenges it poses to Germany, the paper cannot be expected to put an end to intense political debates about concrete decisions.

The degree to which China policy has moved to the center of politics is shown by the political struggles that accompanied the finalization of the strategy. While the Green-led foreign office, the penholder for the drafting process, wished to approve the strategy in early 2023 well before the government consultations with the Chinese, the chancellery dragged the process out over months until after the consultations and just before the parliamentary summer break.

Tensions between different political priorities were also visible in the case of the Hamburg harbor investment of Chinese state-owned enterprise COSCO: While the Greens-led Ministry of the Economy (along with six other ministries) warned of Chinese investment in critical infrastructures, the chancellery helped push through COSCO’s bid for a (albeit smaller than envisioned) stake in the port. The deal was finalized in June 2023, one day before the 7th Sino-German government consultations in Berlin, which resulted in the launch of a new “climate and transformation partnership”, one of the few areas in which both the Greens and the chancellery – and the business community – still see potential for cooperation with China.

It is improbable that any of these decisions would have been taken differently if the “Strategy on China” had already been in place before the government consultations instead of three weeks after. At the same time, the effects of the strategy must not only be explored at the national level. While guidelines for foreign policy are devised by the federal government, Germany’s 16 federal states (“Länder”) have their own subnational foreign policies, for example through city partnerships or regional economic contacts.

In recent years, there has been an increasing awareness at the subnational level that an all-too-naive approach to cooperation with China does not benefit the regions. Efforts to develop China expertise locally have been stepped up, as have exchanges among regions and with state or federal authorities. According to the wordings in the national China strategy, Berlin intends to support regular, expert-level meetings. However, a precarious budget situation and the traditionally difficult coordination among and with federal entities could hamper efforts to come up with a more coordinated approach to China.

1. Putting the new Strategy on China to work

While various areas for action are spelled out, real progress will depend on political leadership. Momentum will largely depend on the political sense of urgency on these issues. The Federal Government has committed to report regularly about the implementation of the strategy. Meetings at the level of State Secretaries are intended to monitor progress and “maintain appropriate strategic situational awareness”.

Ministries are meant to coordinate their activities, and stakeholders (including the parliament and federal states) are promised a role in the evaluations of the strategy. But besides the government’s own progress reports, the dynamic state of relations with China will create many opportunities in the coming for the media and other stakeholders could reference the Strategy on China to ask critical questions.

2. The future of German businesses relations with China

German China policy continues to be largely shaped by the interests and needs of German industry – and a narrative of deep economic dependence. Signals about the development of their business therefore get close and nervous attention, in particular in a phase where China’s economy appears to be facing a multitude of structural problems and Sino-US tensions increasingly force companies to “choose sides”. The old belief that “Whatever is good for German companies in China is good for Germany” is undermined by concerns about “concentration risks” and increasing, often unfair competition.

Current political and public debates frequently center around the fate of the German automotive industry, which is struggling to keep pace in the transformation towards new energy vehicles – a sector that today is largely driven by the Chinese market and in which Chinese companies are poised to overtake their German competitors.

3. Working with partners

While Germany officially commits to working closely with partners, especially within the EU, the country does not have a very consistent record on walking the talk. In Brussels, the European Commission is pushing hard to create momentum for joint member state action that can only be successful if Europe’s largest economic power is willing to take over a leadership role. Time may be running out for consolidating a European course vis-à-vis China and on other global issues, as elections in the US are looming.

Berlin is keenly aware that Europe’s space for maneuver is largely dependent on the US, and that Washington’s agenda might become considerably less forthcoming to European interests if a Republican takes the White House in 2024. Therefore, hardwiring transatlantic and G7 initiatives as much as possible and aligning better with partners in the EU and beyond will be key for securing space for a proactive European agenda. But even if the present coalition does put more emphasis on coordination with Brussels on China on paper, there is a lot of skepticism in Germany as to whether it is sensible and worthwhile to put national interests second to those of the EU. The German government will need to find constructive ways to best pursue national interests through and with the EU.

Like all European states, with the exception of the Vatican City, Germany does not maintain official diplomatic relations with Taiwan. As part of its One China policy, the Federal Republic recognizes the People’s Republic as the only sovereign state in China. In the recent past, public and policy support for the island has grown due to China’s de facto ending of “one country two systems” in Hong Kong and its increasingly martial tones, pushing for “reunification” with Taiwan.

The Strategy on China commits to expanding relations with Taiwan, supporting “issue-specific involvement on the part of democratic Taiwan in international organisations” and states that “military escalation would also affect German and European interests”. German business is particularly concerned that an escalation around Taiwan could disrupt important supply chains in the region and severely disrupt activities in China. In March 2023, Germany’s Science Minster, Bettina Stark-Watzinger, officially travelled to Taiwan, the first visit by a German cabinet member in 26 years. In July, German Justice Minister, Marco Buschmann, welcomed his Taiwanese counterpart, Tsai Ching-hsiang, in Berlin.

Endnotes

160 | Position paper of SPD, June 30, 2020: https://www.spdfraktion.de/system/files/documents/positionspapier_china.pdf

161 | Position paper of CDU/CSU, April 24, 2023: https://www.cducsu.de/themen/china-strategie-cducsu-will-beziehungen-neu-ordnen

162 | Position paper of FDP, Febuary 8, 2023: https://www.fdpbt.de/beschluss/positionspapier-fdp-fraktion-zur-china-strategie

163 | One example for media coverage after publication of the strategy: Berliner Zeitung: Keine Strategie: Die Welt schüttelt den Kopf über Olaf Scholz, July 16, 2023 https://www.berliner-zeitung.de/ wirtschaft-verantwortung/olaf-scholz-und-die-china-strategie-die-welt-schuettelt-den-kopf-ueber- den-bundeskanzler-li.369894

164 | German Foreign Office: Germany adopts its first comprehensive Strategy on China, July 13, 2023 https://www.auswaertiges-amt.de/en/aussenpolitik/regionaleschwerpunkte/asien/strategy-on-china/2608618

You were reading the Germany chapter from the ETNC Report 2023 "From a China strategy to no strategy at all - Exploring the diversity of European approaches". Go back to the main page or download the report as a PDF here.