Germany’s new China strategy

On July 13, the German cabinet approved its Strategy on China after nearly two years of internal discussions. The new strategy simultaneously views China as a “partner, competitor, and systemic rival”, calling for de-risking German economic dependence on China, while also expanding cooperation with other countries in the Indo-Pacific region.

BY Ambassador Gurjit Singh

China presents a unique conundrum for Germany, particularly for the current coalition, whose three partners have varying views on China.[1] The SPD preferred a voluntary effort by German Industry[2], where each company could define its risk strategy rather than Germany as a whole. The Greens had their way on a more emphatic Strategy on China (SOC) which sees China as “simultaneously a partner, competitor and systemic rival.” On 13 July this year, the German cabinet approved the SOC after two years of discussions among the Green-led Ministry of Economic Affairs and the Federal Foreign Office and the SPD-led Chancellery. The strategy is projected as a whole-of-government approach in line with Europe’s economic strategy towards China, as well as wide-ranging discussions within the German system and their counterparts in China.

In 2022, Germany-China trade at $320 billion was a new record. German imports rose by 31% to $214 billion and exports by 3% to $120 billion. Germany has a core spot in the EU’s China strategy[3] as it accounts for 20% of EU exports to China. German FDI into China continues, unabated.

Strength and size are one factor. China generated 87GW of solar energy in 2022, exceeding Germany’s installed capacity. China produces 96% of the world’s Gallium and may impose restrictions on its export.[4] China has the largest navy. Germany sees itself as a rising power, is less hesitant to deal with military issues than in the past, wants to face up to the realities of China today and in the future.

But the systemic rivalry aspect of its engagement with China is now more dominant than the partner and competitor aspects. Germany anticipates that China will be assertive overseas and more repressive internally, calling for a systematic response.

Foreign Minister Baerbock[5] in a speech after the SOC announcement, highlighted three aspects:

First, the aim is not to decouple from China, but to derisk as much as possible, in tandem with the EU; the dependencies are now seen as errors. Economic security demands reducing concentration of economic risk. Companies that remain extremely dependent on the Chinese market will have to bear more of the financial risks themselves.

The responsibility of adherence to German values along their supply chains is placed upon corporate Germany. The SOC analyses unfair competition practices which German and European companies face in China and want to protect themselves collectively. Export controls seem necessary but Germany will not go as far as Japan and the U.S.’ unilateral efforts, preferring multilateral efforts.[6]

The SOC believes that an EU Anti-Coercion instrument if implemented jointly, can protect European companies against state-led action by China. FDI screening, and foreign subsidies rules will be a part of German-EU alignment. The military escalation around the Taiwan Straits is significant for German commerce. It requires an emphasis on resilience and of German companies diversifying away from China.

Secondly, this implies larger investments in global partnerships with the Indo-Pacific, Africa and in Latin America seeking trade agreements particularly with Mercosur. India and ASEAN could gain from greater German attention.

Thirdly, Germany accepts expanded cooperation with China on a reciprocal basis as it does not intend to obstruct Chinese development, while protecting its own. Baerbock holds China responsible for not adhering to its responsibilities for controlling carbon emissions; yet, Germany and China share aspirations to enhance cooperation on climate action. China is an indispensable partner to deal with the climate crisis and cannot be excluded though persuasion maybe long-winded.

The Federation of German Industries (BDI) was relieved about the soft tenor of the SOC, which is does not oppose but seeks clarity about its exact implementation. “De-risking, but no decoupling – this strategy is correct,” said BDI president Siegfried Russwurm. German companies like VW, BASF are beholden to the Chinese market. During Li Qiang’s June visit to Berlin, German industry, according to Li, assured him that it did not believe in “de-risking”![7][8]

The direction that the German government intends is evident; but how much will it lean on its industry, so dependent on China for profits and scale? In what time frame will derisking emerge – this is also an open issue. German Institute for Economic Research President Marcel Fratzscher said, “the worrying truth is that Germany is so dependent on China that a rapid reduction in dependencies and risks seems unrealistic”.[9] Clearly, it does not seem that ‘policy action on clearly identifiable security risks and developing data-driven approaches to identify broader macroeconomic risks’ is close at hand.[10]

Is the SOC similar to the IndoPacific Guidelines (IPG)? The IPG is a smaller initiative expanding German interest in the Indo-Pacific without attacking China. The SOC is a China-oriented paper, better analysed but with no clear implementation strategy. Both documents compete for fuzziness. The 2022 progress report on the IPG emphasises strengthening the rules-based international order; tackling climate change; reducing dependencies through diversification; preventing future socioeconomic crises and reaffirming an inclusive approach.[11]

Much of this is akin to the SOC. It remains for German industry to give it the granularity that will enable it to move ahead and adhere to its country’s new policies.

Gurjit Singh is a former Indian Ambassador to Germany. He is currently promoting the impact investment movement for implementing SDGs in Africa.

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References

[1] Amt, Auswärtiges. “Germany Adopts Its First Comprehensive Strategy on China.” German Federal Foreign Office, 2023. https://www.auswaertiges-amt.de/en/aussenpolitik/regionaleschwerpunkte/asien/strategy-on-china/2608618.

[2] “Companies Rather than Countries Must De-Risk Relations with China, Scholz Says.” Reuters, June 30, 2023. https://www.reuters.com/world/companies-rather-than-countries-must-de-risk-relations-with-china-scholz-2023-06-30/.

[3] Bond, Ian, François Godement, Hanns Maul, and Volker Stanzel . “Rebooting Europe’s China Strategy – Swp-Berlin.Org.” Stiftung Wissenschaft und Politik, 2023. https://www.swp-berlin.org/publications/products/sonstiges/2022_Rebooting_Europes_China_Strategy.pdf.

[4] “Announcement No. 23 [2023] of the Ministry of Commerce and the General Administration of Customs Announcement on the Implementation of Export Control on Items Related to Gallium and Germanium.” 中华人民共和国商务部, 2023. http://www.mofcom.gov.cn/article/zwgk/gkzcfb/202307/20230703419666.shtml.

[5] Amt, Auswärtiges. “Speech by Foreign Minister Baerbock at MERICS on the Future of Germany’s Policy on China.” German Federal Foreign Office, 2023. https://www.auswaertiges-amt.de/en/newsroom/news/policy-on-china/2608766.

[6] Allen, Gregory C., Emily Benson, and Margot Putnam. “Japan and the Netherlands Announce Plans for New Export Controls on Semiconductor Equipment.” CSIS, 2023. https://www.csis.org/analysis/japan-and-netherlands-announce-plans-new-export-controls-semiconductor-equipment.

[7] Pennekamp, Johannes, and Hendrik202 Ankenbrand. “The China Strategy Leaves the Economy Cold.” FAZ.NET, 2023. https://www.faz.net/aktuell/wirtschaft/plan-der-bundesregierung-die-china-strategie-laesst-die-wirtschaft-kalt-19031652.html.

[8] Regniet, Thomas. “Fachkräftemangel in Deutschland: Wenn Unternehmen Das Personal Ausgeht – Ein Überblick Zum Fachkräftemangel.” This is how German industry is reacting to the new China strategy, April 12, 2023. https://www.wiwo.de/politik/deutschland/fachkraeftemangel-in-deutschland-wenn-unternehmen-das-personal-ausgeht-ein-ueberblick-zum-fachkraeftemangel/28936056.html.

[9] Fromm, Thomas. “This Is How German Companies React to the China Strategy.” Süddeutsche.de, July 14, 2023. https://www.sueddeutsche.de/wirtschaft/china-strategie-deutschland-vw-bdi-basf-infineon-firmen-reaktion-1.6028839.

[10] Spillner, Ole, and Dr. Guntram Wolff. “China ‘de-Risking.’” DGAP, June 16, 2023. https://dgap.org/en/research/publications/china-de-risking.

[11] Amt, Auswärtiges. “Stronger Engagement in the Indo-Pacific Region.” German Federal Foreign Office, 2022. https://www.auswaertiges-amt.de/en/aussenpolitik/regionaleschwerpunkte/asien/indo-pacific-progress-report/2551714.

TAGGED UNDER: German coalitions, germany, germany-china, IndoPacific Guidelines, international order, international politics, SOC, Strategy on China