Germany is China’s most important economic partner in the EU and China is Germany’s most important economic partner in Asia. Germany therefore has relied on a negotiation- and discussion-based approach in its relations with China following the principle “change through trade” (Wandel durch Handel). While other western powers, such as the United States, already took a tougher stance vis-à-vis China on past occasions, Germany regarded it more as a partner than a competitor. However, things have changed in recent years.
Prominent reasons for this include China’s industrial policy strategies Made in China (MIC) 2025 and the Belt and Road initiative (BRI).
MIC 2025 with its ambition to turn China in a global technology leader has left Germany wondering whether its industries will remain competitive in the course of the 4th industrial revolution facing Chinese competitors that to some part play by different rules and might even have subsidized money ready at hand for buying up German high-tech firms.
BRI lacks transparency from a German and European perspective and arouses fears about the increasing influence in the EU and other countries along the belt and road. As past examples have shown, China has already influenced certain EU member states politically: for example, Greece blocked a EU statement at the United Nations criticizing China’s human rights record in 2017.
In light of these developments, Germany has begun to readjust its relations with China. The tipping point was the acquisition of the German robotics firm Kuka by Chinese manufacturer of household appliances Midea in 2016. At that time, increasing Chinese acquisitions of German high-tech firms already received a lot of public attention, especially regarding technology transfer and potential state influence. What was new in the case of Kuka, was the intervention of the German government (due to the key role of the robot maker in Industry 4.0 applications). In the end, it had no means to prevent the acquisition. But the case triggered immediate political action and even impacted more recent policy measures:
- The German government has revised the foreign trade law and ordinance, which regulates investment screening in Germany, twice since the Kuka case (2017 and 2018).
- Germany together with France and Italy urged the European Union to develop a common EU approach to investment screening at the end of 2016. This led to the “EU framework for screening foreign direct investment”.
- The German Minister of Economic Affairs and Energy proposed a “National Industry Strategy 2030” draft in February 2019, putting industrial policy, the stepchild of German economic policy, back on the table.
- The pledge for a European Industrial Policy followed suit, brought forward by Germany and France.
Moreover, besides the two strategies mentioned above, there is a third factor responsible for Germany’s more cautious stance on China: the never-ending story of reciprocity or rather the lack of it. It seems that Germany has lost its patience after years of discussions and negotiations with China that from a German perspective did not always produce satisfactory results. While Chinese companies have benefited significantly from the open markets and non-discriminatory investment regimes in Germany and other European member states, foreign companies are still discriminated against in China. More than 17 years after China’s WTO accession in 2001, there still is no level playing field in the economic relations between Germany and China.
This has become a serious issue by now, as Chinese companies have undergone a rapid catching-up process and have turned into serious international competitors. In some areas like artificial intelligence or the manufacturing of e-car batteries they are already in the lead – backed by their government and well-protected against foreign competition at home.
It would therefore be naïve if Germany had continued with business as usual in its relations with China. At this point, a continuing readjustment seems necessary. In doing so, however, it is important not to cross the fine line between a prudent and a protectionist approach. From my point of view, this could happen on three levels:
National level: Germany has already taken steps to revise its national law in regard to investment screening and to discuss the necessity of an industrial policy fit for the 21stcentury. It is now important to ensure the greatest possible transparency in the policy-making process to come. Thereby, the principle of non-discrimination must not be disregarded. Potential new regulations must be implemented independently of the country of origin. A formal or informal “lex sinica,” i.e. a distinct treatment of China and Chinese businesses, would be contrary to the principles of a free market economy. Yet a certain amount of self-protection is necessary to prevent selling off German interests on the basis of unfair competition.
EU level: Germany should support current ideas to re-examine existing instruments, such as competition law, subsidies or state aid, to see if they are still sufficient and stand up to current challenges. Also, new instruments should be considered and introduced if necessary. At the same time, Germany should also continue to encourage negotiation-based solutions. The envisaged bilateral investment agreement that the EU and China have been negotiating since 2014 lends itself to this purpose. The practical implementation of the agreements should play a central role here, thus avoiding the rise of a “paper tiger".
Multilateral level: Despite the challenges brought about by Trump, Brexit and stagnating WTO reforms, Germany and the EU should not give up on multilateralism. Alliances are necessary to revitalize the WTO and counter rising protectionism. China and Germany are therefore more dependent than ever on reliable partnerships. While regional agreements are good in general, they also are exclusive and might cause negative economic effect for third countries. Moreover, multilateral solutions give a voice to countries without large markets and economic power, too, and thus may counterbalance economic heavyweights, such as the United States. It should therefore be in both sides’ interests to actively promote the maintenance of a multilateral rules-based economic order.
To sum up, it would be beneficial for both Germany and China to promote reciprocal economic relations. Therefore, China also has a responsibility to iron out concerns about Chinese economic activities abroad. In this respect, on the one hand more openness and greater transparency from the Chinese side, e.g. in relation to state involvement, would be desirable. On the other hand, China should finally ensure that the pre-requisites from which Chinese businesses in Germany and in general in EU member states profit, i.e. equal market access, a transparent investment promotionand a non-discriminatory investment environment, also apply to German and other foreign businesses in China.
For Germany, China is and will remain a very important economic partner. However, it will also be a very serious competitor in the future. Germany therefore needs a realistic approach to cope with this “new normal” in its relations with China.