A forced Chinese-German marriage?

The desire to win billion-dollar contracts for the buoyant export machine, the desire to escape to emerging markets from the problems of the eurozone, striving to balance Washington’s influence with relations with Beijing. And all this behind the façade of the fight for moral values – China’s democratization through economic rapprochement. This is how you can describe Germany’s policy towards Beijing over the last two decades. Sounds like the perfect transfer of Bismarck’s Realpolitik formulas to this day? Perhaps. However, contrary to the expectations of the Germans themselves, the fruit of this ideally crafted policy towards China is becoming increasingly dependent on the Chinese market, breeding a competitor that poses a serious threat to German industry and causing Germany’s lack of control in strategic matters, and as a result, weakening its sovereignty.

The spell of mutual infatuation

It began innocently in 1999. It could not be otherwise since it was the German specialist on shady agreements, Chancellor Gerhard Schröder, who engaged in tightening relations with China. It was he who initiated the almost annual pilgrimages of German heads of government to the PRC. During the 7 years of his office, he was there 6 times. It paid off. It was enough to support the policy of united China, to appeal for the lifting of the EU arms embargo (imposed after the Tiananmen Square massacre), and the yuan began to fuel the German economy.

In the blink of an eye, Chinese protectionism seemed to no longer apply to German companies. There was one condition – German companies were to enter into joint ventures with selected Chinese partners. And, of course, an unwritten element of the agreement was the resignation to appeal to Chinese authorities for democratization.

Interestingly, at the same time, a different path was chosen by the US president, George W. Bush, who was particularly disliked by Germany and did not hesitate to stigmatize China for persecuting religious minorities under the pretext of fighting terrorism. But the Americans could not count on the same privileges as the Germans. After all, it was the German travel agency TUI that was the first foreign investor to get approval to obtain a majority stake in a company established on the Chinese market… Eager to buy, Chinese tourists began to fly to Germany.

A relationship that is almost perfect

Human rights defenders had high hopes after Angela Merkel, a pastor’s daughter, who had experienced life in a totalitarian state, came to power. It cannot be said that the first female German chancellor did not make any effort , but whenever she wanted to go beyond the framework of the convention set by Schröder, she was unceremoniously disciplined by the Chinese side. This was the case in 2007 when Angela Merkel decided to invite the Dalai Lama. Several of important high-level German-Chinese meetings were immediately cancelled.

Angela Merkel understood these signals very well – after all, she had spent almost 40 years of her life in the communist system, and at the same time never had the nature of a knight-errant ruthlessly fighting for democratic ideals.

The billions flowing from China, which contributed to the well-being of her countrymen, probably also helped soothe remorse. Anyway, let’s look at the numbers. Over the past 20 years, exports from Germany to China have increased more than tenfold, from EUR 9.5 billion to EUR 96 billion. From the 15^th export market position, the PRC climbed to Germany’s 3rd position (behind France and the USA).

Moreover, China has been the world’s largest automotive market since 2009, with every fourth car purchased by the Chinese coming from German factories. Without this scale of success in China, the German automobile sector would not have dreamed of having a strong global position it currently has.

Berlin and Beijing were a perfect match. On the one hand, there was the industrializing China hungry for any resources, and on the other, Germany – an industrial power offering know-how and all the equipment necessary to build modern factories.

Moreover, when China was dynamically growing, the power of Western markets was rapidly eroding. First, the US plunged the world into a global financial crisis, and shortly thereafter, the eurozone was on the brink of disintegration. This influenced the calculations of German politicians. After all, something had to be used to fuel the German engine of economic development, the perpetually insatiable export machine. The choice was simple – China.

In 2010, Berlin initiated regular intergovernmental consultations with Beijing, which are still carried out today. The Chinese listened with the utmost attention. Their unwritten future goal was to dominate transport, green technologies, new materials and the medical industry, sectors in which Germany was one of the leaders.

Until 2016, even if the Germans noticed disturbing trends – such as the systematic advancement of Chinese producers to an ever-higher level of technological development – they were trying to wave away reality with a magic wand. Perhaps the Chinese can to displace Italians and the French from foreign markets, but we, Germans, due to our diligence, industriousness and engineering precision, will always dominate – such a stance could be read between the lines of German business analyses.

Although German companies have complained about the theft of intellectual property and industrial secrets from Chinese factories, they were comforted that it concerned third-class technologies – after all, the most valuable components are produced only in Germany. This was the mindset of German politicians, but not necessarily German economic leaders. German companies became so dependent on China that they began to build their research and development centres there. After all, it’s hard to innovate away from your most important factories and in isolation from your key consumers.

The end of romantic delight

The shock came in 2016 when the Chinese dragon showed what it could do and what its motivation was. For the first time, the Germans felt that the situation was getting out of hand. The jewel in the crown of German industry, one of the world’s leading manufacturers of industrial robots – the Kuka company – was taken over by the Chinese. In addition, it was not a hostile takeover. On the contrary, it was completed with the consent of the company’s management, but against the helpless government in Berlin. The Germans were not thrilled that their 'partnership’ with China was becoming more and more one-sided. Especially since Beijing was showing less and less readiness to open up new sectors of the economy to Germany.

Berlin quickly recalled the assumptions of the Beijing government’s strategy Made in China 2025 published in 2015, which explicitly announced the use of all available instruments in order to gain a dominant position in the most important industrial sectors by 2025, and therefore actually replacing Germany.

It did not take long for the next, increasingly unceremonious actions by China to take place. In 2017, Beijing approved cybersecurity laws that gave authorities access to data from companies active in China, which Germany interpreted as a potential sanctioning of industrial espionage. In turn, in 2018, the Chinese investor Geely, bypassing the provisions of German law with complex financial engineering schemes, acquired a 10% stake in Daimler and became the company’s largest shareholder. Soon the Chinese may exceed the 20% share threshold entitling them to veto key decisions in the company. Another Chinese company, BAIC, owns 5% of the group’s shares and wants to increase them.

A forced marriage?

The Germans understood the gravity of the situation, but it was too late for any sudden changes. After all, Volkswagen had already sold almost 4 million cars in the Chinese market in 2016, which accounted for 40% of its distribution. Over the next several years, Germany increased state control over investments in strategic sectors, but EU regulations tied their hands, rendering deeper reforms impossible. They were not satisfied with the results and sometimes had to resort to contrivance. This happened when there was a threat that the Chinese would acquire nearly 20% of shares from one of the co-owners (i.e. below the threshold authorizing the government to block investments) in the German operator of energy networks, 50Hertz. At that time, Berlin persuaded the company’s other shareholder to use the pre-emption right and to beat the Chinese offer, and then resell the shares to the state-owned bank KfW.

Faced with the ineffectiveness of the national law, Berlin was left to tighten the rules of the game through the EU. The Brussels bureaucratic machine works slowly yet surely. After 3 years of debates, an EU mechanism was established in 2019 to monitor acquisitions of EU companies by external investors. The most important advantage of the new solution will be the passing on the responsibility to the EU for blocking the acquisition of the company by an external investor. This is especially beneficial for Berlin, which is reluctant to come into confrontation with Beijing alone. Despite some progress, the Germans realized that the scope of protection of German companies was insufficient; therefore, in 2019 the Ministry of Economy proposed the creation of a fund enabling the bidding of offers of investors trying to acquire strategic German enterprises.

There will be no divorce?

The real test of assertiveness is still ahead of the Germans. Because what to do when the fantastic world of open and increasingly liberalizing global markets constantly craving German goods turns into the inferno of constantly increasing restrictions introduced by two competing powers? In addition, who to choose – China or the US – when the former provides 15% of turnover for the 30 largest German joint-stock companies, and the latter – 22%.

Even if the Germans would like to close their eyes to reality, it cannot be ignored. In fact, it has already reminded them of itself. The dilemma that has been giving Berlin a headache for almost two years has been the question of choosing a 5G provider – the new generation of the Internet, which is to be much faster, with greater bandwidth. And most of all, traffic in this type of network will take place almost in real-time, so it will prove to be an ideal solution, e.g. for self-driving cars, robots and the Internet of Things. The offer of the Chinese Huawei seems more attractive than the two European leaders – Eriksson and Nokia. German operators have been working closely with the Chinese company for years. Currently, about 45% of the 75,000 base stations in Germany for 4G/LTE come from Huawei, while the share of this company in installations for all of Europe is only about 33%. The exclusion of the Chinese company from the German 5G technology entails not only high costs but also potentially significant delays in its implementation. Germany cannot afford it if it wants to remain the industrial leader of the globe.

The Americans are threatening that Berlin’s choice of Chinese technology will have consequences. Washington fears that this will open the door to Huawei’s credibility across the EU, and then to domination by the corporation of the global market. The involvement of the Chinese in the construction of such critical infrastructure may bring security threats that are difficult to assess. This opinion is shared by the German intelligence and the Ministry of Foreign Affairs. The choice should therefore be simple.

Not in Germany. China has become a strategically important market, and Beijing is well aware of this asset. As soon as rumours started circulating in Germany about a possible limitation of Huawei’s participation in German 5G, the Chinese ambassador spoke, leaving little doubt. The exclusion of the Chinese company from the German 5G market will not be left without reaction. Proof that the gate to Huawei’s participation in the construction of 5G remains open, is the catalogue of security regulations for providers of next-generation Internet infrastructure published on August 18. Chancellor Merkel assured in it that she, as an ardent advocate of cooperation with China, would have the final say in recognizing certain companies as credible.

Besides, China does not have to issue a warning. When in July this year Hong Kong found itself under Beijing’s full control, in response to the allegations of Germany’s inaction in this matter (in relation to the US or Great Britain’s activity), the economy minister replied that Germany was not a moral teacher of the world. Where does this self-restraint come from? After all, only in the last few years, Berlin has been lecturing Donald Trump how not to run global politics, Boris Johnson, how nonsensical Brexit is, not to mention criticizing the actions of almost all Central European countries. Suddenly, Germany has no advice for Xi Jinping (or for Putin).

There would be nothing disturbing about these dilemmas in Germany if it was not for one fact. Germany is simply too economically powerful and too politically influential in the EU to remain silent on important issues and to be held hostage to its – often too narrow – economic interests. And in the future, they may even turn out to be crucial.

Without the EU, the US may not win the economic clash with China, and Berlin is the one that holds all the cards in Europe. It is already disturbing today that many German analysts have started to use the term interregnum to describe the present times. This may suggest that Germany is increasingly considering whether the rule of a new global leader is coming. But would it really be a better world than the one during Pax Americana? Only based on the evolution of German-Chinese relations, one can seriously doubt it.

Polish version is available here.