Germany’s policy towards China has always been strongly driven by business interests. That has resulted in some impressive figures. More than 5,000 German companies operate in China, employing more than one million staff, while for German carmakers like BMW, Volkswagen and Mercedes Benz, the country is the most important market, with roughly every third of the cars they produce being sold there. Other industries, including electrical engineering and chemicals have major interests in the world’s second-largest economy; in 2022, Sino-German trade volumes reached a record 298 billion euros ($332 billion).
The long-held assumption of German leaders, notably former chancellor Angela Merkel, has been that intensifying mutual trade relations would at some point lead to political change in China, an idea known in German as ‘Wandel durch Handel’ (change through trade). This idea has been a trademark — some would say ‘fig leaf’ — of Germany’s China policy for years. Since the beginning of the 2000s, intensified business ties have been flanked by a number of high-level political exchanges, along with agreements on deepening research cooperation involving companies, technical universities, and national research institutions.
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.
But this mutually beneficial situation has come under strain in recent times. 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. The deterioration of U.S.-China relations, and pressure from Washington and other like-minded countries, have in turn added to a more urgent sense that Germany (and the EU) would need to define the guardrails of its relations to China more clearly. Other factors increasing the pressure on Germany’s leaders include growing concerns at home about technological and economic over-dependence on China, as well as problematic developments in the Chinese market including unfavorable data regulation, and an ongoing lack of reciprocity in China’s approach towards foreign business.
A major landmark in the changing mood was the German Federation of Industry’s (BDI) 2019 position paper in which it labeled China, for the first time, not only as a “partner” but also a “systemic competitor”.
Responding to these shifts, the current coalition government of Social Democrats (SPD), Liberals (FDP) and Greens, led by the SPD’s Olaf Scholz (now Germany’s chancellor), committed to devising Germany’s first ‘China Strategy’ after the country’s 2021 elections. One and a half years of extensive consultations with stakeholders and intense negotiations between ministries have since passed, before the German government finally approved its first “Strategy on China” earlier this month.
The 64-page paper presents the government’s views on China and the challenges it poses, as well as outlining 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 incomplete.
Starting from the premise that the German approach to China needs to change because China has changed, the analysis is frank to a degree that Beijing-friendly critics might consider undiplomatic. The paper states that China strives for “regional hegemony” and aims to “reshape the existing rules‑based international order”. It points to the country’s “serious human rights violations” in Xinjiang, Tibet and Hong Kong.
With regards to the key area of economic relations, it asserts that China aims to create “economic and technological dependencies with a view to using these to assert political objectives and interests”, and even states that China engages in “espionage in an attempt to gain access to German corporations’ trade and research secrets”. Security issues with China figure prominently: Beijing’s close relationship with Moscow is described as an “immediate security concern for Germany”, for example. The strategy concludes that “elements of rivalry and competition have increased in mutual relations”.
When it comes to transmitting these observations 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 its hope that this can happen based on fair conditions. On the other hand, there are concerns as to what extent further regulation can effectively mitigate the risks in doing business with China. The government’s paper opts for issuing only a vague call to companies to raise their risk awareness, and not to expect bailouts in the event of a geopolitical crisis.
A series of leaks during the paper’s drafting process showed that the government had previously considered more specific measures. These included mandatory transparency requirements and stress tests for large companies with high exposure to China. In the end, the government has only committed to further exploring the options at hand and holding “confidential discussions” with corporations. Likewise, no specifics were included on critical infrastructure (Germany so far hasn’t banned Chinese companies like Huawei from its telecom networks), on outbound investment screening or on regulating joint research, despite the paper stating that “China’s Military-Civil Fusion policy is placing limits on our cooperation”.
The paper is unlikely to put an end to political debate within Germany over China, largely because the divergences within the ruling coalition that made the finalization of the strategy so cumbersome persist. Whereas the Greens — and to a certain extent the Liberals — seem more pessimistic about seeking opportunities for cooperation with China, the SPD is more optimistic about the partnership agenda. These tensions were particularly visible in the row over Chinese state-owned enterprise COSCO’s investment in the major German port of Hamburg: While the Green-led Ministry of the Economy (along with six other ministries) warned over Chinese investment in critical infrastructures, the Scholz-led chancellery helped to eventually push through COSCO’s bid for a stake in the port.
How will the Sino-German story develop, now that the strategy has finally been published? The paper has yet to be debated in the German parliament, a process that might stir up fresh controversy. The Federal Government has meantime committed to report regularly on the strategy’s implementation.
The old belief that “whatever is good for German companies in China is good for Germany” has been undermined by concerns about “concentration risks” as well as increasing and often unfair competition.
German business continues to be largely focused on dependency issues. The old belief that “whatever is good for German companies in China is good for Germany” has been undermined by concerns about “concentration risks” as well as increasing and often unfair competition. The fate of the German automotive industry is a case in point: the country’s carmakers are struggling to keep pace with China’s transformation towards new energy vehicles, a sector where Chinese companies are poised to overtake their German competitors.
It will also be worth watching whether Germany will stick to its commitment to work closely with partners, especially within the EU. In that regard, the country does not have a very consistent record on matching its actions to its rhetoric. Berlin is also keenly aware that Europe’s space for maneuver is largely dependent on the U.S., and that Washington’s agenda might become considerably less accommodating towards European interests if a Republican takes the White House in 2024. Even if the present coalition does put more emphasis on coordination with Brussels on China on paper, there remains a lot of skepticism in Germany about whether it is sensible to put its national interests second to those of the EU. Germany may have finally published its China strategy; how it will work in practice is still shrouded in unknowns.
This article is a shortened version of an analysis published in a recent report of the European Think-tank Network on China, published on July 26, 2023.
Bernhard Bartsch is Director External Relations of MERICS. Before joining MERICS, Bernhard headed the Asia Program at Bertelsmann Stiftung, where he published numerous studies and established various strategy development and conference formats. From 1999 to 2013, Bernhard lived in Beijing, working as East Asia Correspondent for major German-language media.
Claudia Wessling leads communications and publications at MERICS. She is a seasoned journalist and Asia expert focusing on China and Indonesia. She has written on digitalization in China, Sino-German relations, Hong Kong and the Belt & Road. Prior to joining MERICS, Claudia was an editor at the foreign policy desk of news agency Agence France-Presse in Berlin.