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Germany’s Planned China Strategy Is the Wrong Approach

Kiel Focus

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To date, the German government’s attempts to devise a China strategy have been misconceived. There is much to suggest that a foreign trade strategy geared toward autocracies in general is preferable. There is also a need for a European perspective. A sensible strategic approach must satisfy five conditions.

How should we engage with China? That question is currently being widely debated. Just a decade ago, the EU and China concluded the EU–China 2020 Strategic Agenda for Cooperation, which aimed at promoting a wide-ranging strategic partnership involving broad-based bilateral cooperation across a variety of areas. Although frequently modified, long-term cooperation was the foundation of bilateral relations between the partners. The relationship has undergone fundamental change in recent years, however. The focus and tone of the most recent version of the EU’s China strategy, dating from 2019, shifted toward perceiving China more as a competitor than a partner. In addition to the EU itself, individual EU members—including Germany, France, and Italy—are now developing their own China strategies. All of these strategies are no longer based solely on the concept of joint cooperation, but increasingly on an assumption of systemic rivalry.

China’s rapid rise over the past 20 years to become the world’s second-largest economy and a key geopolitical actor alongside the US has shifted the global balance of power and led to a new rivalry between the two countries. China is an adept geoeconomic actor. It has been able to use its many investment projects in developing countries, but also in some EU countries through the Belt and Road Initiative, to establish strong market positions and steadily expand its global economic and political influence. For the EU, this engagement inside and outside Europe has implications in terms of current and future spheres of influence. Not least because China—taking imports and exports together—is the EU’s most important trading partner.

The problem with a strategy focused on a single country

The EU and Germany are both now aiming to formulate a strategy on China that is driven by foreign and security policy concerns and befits the country’s status as a systemic rival and powerful competitor. At the same time, they are avoiding creating economic policy tools that explicitly constitute a “Lex China.” The ongoing prohibition on discrimination in the multilateral economic order only allows temporary measures directed at an individual country in exceptional situations. That is reflected in the EU’s planned anti-coercion instrument and in the reviewing of foreign direct investment for compatibility with security interests under the EU investment screening mechanism. China is not mentioned in either instrument, although both are implicitly directed at it. Non-country-specific economic policy measures are thus already available.

Does Germany need a foreign policy strategy focused on a single country? The increasing linkage between foreign policy and trade policy—the weaponization or geopoliticization of trade—makes answering this question difficult. For a variety of reasons, the answer could be “no.” First, because Germany would be doing exactly what China (and other autocratically governed countries) is often accused of doing, i.e., applying significant state requirements and protectionist interventions to private-sector decisions and activities. This is done on the assumption that businesses are at best underestimating the risks of having close economic ties to China and, at worst, are blind to such risks—so the government believes it needs to step in. Furthermore, questions could quickly arise about strategies aimed at other countries, such as the US. That apart, it is not apparent why Germany should have a strategy of its own if the EU is already working on one and has a much stronger hand in its dealings with China. Go-it-alone efforts in the form of national strategies are likely to sow confusion or even meet with outright rejection from other EU member states.

Five conditions for a strategic approach

What is the case in favor of such a strategy? A clear strategy that includes goals and instruments and a detailed assessment of mutual dependencies could provide businesses with relevant guidance, causing them to give greater weight to the business and economic risks involved. Consequently, this would encourage the sort of behavior the German government is seeking to foster. Moreover, this sort of strategy could send an important foreign policy and trade policy signal to China. In order to ensure that a proper strategy is put in place, rather than just a catalog of short-term measures that are in conflict with business interests, five conditions must be met, which are lacking in the current German and EU draft policies.

Strategic foresight rather than ad-hoc measures

First, the strategy would have to specify clear goals and take a long-term view in terms of both diagnosis and conclusions. If the goal of the strategy is to safeguard national security against China’s feared dominance and to reduce “strategic dependencies,” then careful analysis of “mutual” dependencies is required. The fact that China was Germany’s most important trading partner in 2021, worth EUR 246.5 billion, illustrates the close relationship between the two countries.

Equally important is China’s role as an investment location for German companies. However, this says nothing about strategic dependencies, i.e., about the importance of these goods and services and whether they could be provided by other trading partners and if so, which ones. In its most recent annual report, the German Council of Economic Experts rated China number one among the countries on which Germany is especially dependent in terms of imports of strategically important goods, which constitute 280 out of 5,400 product categories traded. According to the report, 45.1 percent of total imports of products with significant import dependencies come from China. There are clearly major dependencies on China, notably with respect to particular resources and semi-finished products required for the ecological and digital transformation of the economy, for example.

This raises the question as to how quickly alternative suppliers can be found if changes occur in the procurement environment and how production technologies can be adapted to compensate for such changes. As was the case with Russian gas, this involves estimating elasticities of substitution, which could form the basis of a strategy. Ad-hoc measures that appear politically motivated, such as using foreign trade regulations to prohibit Chinese acquisitions of German companies or imposing arbitrary caps on investment guarantees for German investment in China, as recently proposed by the Federal Foreign Office in its draft strategy, are a poor fit in this regard. Rather, a strategy must attempt to define the economic policy challenges facing Germany over the coming decade and identify the resulting consequences for relations with China, currently its biggest trading partner, in accordance with German and EU interests. These include demographic shifts toward an aging society in which demand is increasingly focused more on services than goods, the advancing digitalization of all aspects of life, and decarbonization of production to stem global warming.

China’s technological and business expertise makes Chinese companies not just competitors but also partners; companies in the EU can offer them their skills and also learn from them. Therefore, rather than imposing bans, it would be better to make it a condition that German businesses share in the technological advances made by Chinese investors.

EU perspective must be taken into consideration

Second, in formulating its strategy the German government should be aware of its role as a leading member of the EU. This must be reflected in the strategy, which should not be designed solely around German interests. Germany is one of China’s key trading partners, but in the aggregate the EU is a much more significant actor vis-à-vis China. Ultimately, only completion of the EU single market and embedding of the German strategy in an EU strategy will make it possible to engage with China on equal terms. After all, Europeans are not the only ones seeking to develop a strategy for dealing with China. The main market for Chinese companies lies on the other side of the Atlantic, in the US, which began devising a playbook for its relations with China some time ago—a playbook that focuses exclusively on American interests. Only by acting together under the banner of the EU can the European economies hold their own in this three-way competition.

Understanding China’s development strategy

Third, the strategy should also analyze and describe the probable changes and challenges that China faces and the impact they could have on the country’s future foreign trade strategy. It should take into account China’s Vision 2035 development plan, which has already been initiated together with the 14th Five-Year Plan and is aimed at boosting the country’s economic, scientific, and technological strength, enhancing overall national power, and achieving significant breakthroughs in key technologies. By 2035, the plan envisions the country joining the ranks of the world’s most innovative nations while significantly enhancing existing comparative advantages and developing new ones in its participation in international economic cooperation and global competition. Investment in China by foreign companies, including German businesses, plays an important role in these development plans.

It is important in this context that a German or EU strategy should always bear in mind that in a China led by President Xi, primacy is placed on the party having control of the entire economy. The past has also shown, however, that in crisis situations (for example, during the currency reforms of August 2015 in the wake of the crisis) experts were allowed to implement reform measures that prevented the country from sliding into an even more serious crisis. It also involves not losing sight of China’s dependency as a major international creditor and supplier on the two most important world markets: the US and the EU. Overall, it is important to establish what expertise currently exists in the EU on China’s foreign and foreign trade policies and to identify any significant deficiencies and blind spots.

Take account of China’s international activities

Fourth, a strategy should not be limited to China itself, but also take into account what goods and services Chinese capital and Chinese manpower generate outside the country. Traditionally, reference is made to the 60 million overseas Chinese engaged in trade. But China’s influence now extends much farther, as shown by the Belt and Road Initiative and the extensive Chinese involvement in Africa. Here again, both sides of China’s projects and activities—the positive and the negative—need to be examined. The Chinese are working on many urgently needed infrastructure projects, for example, from which German companies operating in these countries can benefit. At the macroeconomic level, China’s use of risk capital helps strengthen the economies of many developing countries, thereby boosting their demand for German goods.

At the same time, any strategy should recognize China’s geoeconomic predominance by examining the negative economic and security consequences and the implications for our own policies. It cannot be ruled out, for instance, that in the event of a conflict China might exploit its position as principal investor or primary financier by arbitrarily preventing Germany from accessing raw materials and infrastructures in developing countries, despite Germany’s willingness and ability to pay.

Establish a framework rather than fixed rules

Fifth, a strategy should be indicative and not imperative. It must leave responsibility for decisions regarding the China-specific use of resources with businesses and consumers. The greater the extent to which ethical considerations around the three facets of sustainability (human rights, the environment, and good governance) determine the tenor of the strategy, the greater the risk that these considerations will become goals in and of themselves, resulting in a disregard for private sector goals, preferences, and responsibility, overemphasizing alternatives to the Chinese sales and procurement market, and thus become imperatives. A strategy that takes an indicative approach would define clear red lines in security and economic policy and push for reciprocity with regard to values, norms, and rules. The response to investment by Chinese companies in German businesses should therefore not be bans but standards and conditions. Beyond that, it is important to acknowledge China’s contributions toward curbing world hunger and providing opportunities for social and educational advancement by millions of Chinese and also by people in the countries partnering with China.

In view of the five conditions for a China strategy set out above, it is apparent that the proposals presented thus far by the German government contain major omissions and cannot be considered a proper strategy. In particular, there is no consideration of long-term needs and problems or of the goals Germany is seeking to pursue.

Dealing with authoritarian regimes in general

Similarly, the question arises as to whether a more broad-based strategy is needed, which provides a basis for dealing with other countries and not just China. The issues that Germany encounters with China are due in particular to an autocratic system prone to erratic behavior—an attribute that is currently characteristic of more than half of the systems of government worldwide. This approach would put managing relations with all autocracies at the heart of the strategy, rather than focusing solely on a single—albeit major—autocratic system. Calls for diversification likewise support a strategy aimed at dealing with all difficult trading partners—as the search for new sources of natural gas has demonstrated. Addressing environmental, social, and human rights matters is also not a problem specific to China. Trading partners that supply the raw materials used to make batteries offer a timely example. Furthermore, a strategy for dealing with autocracies in general would not antagonize Germany’s European partners, who are currently working on a joint China strategy at the EU level.

Historically, Germany has based its foreign policy on multilateralism and greatly benefited from that choice throughout the postwar era. This approach would be significantly undercut by a “strategy” geared toward a single country and should therefore not be adopted lightly. Of course, one should not ignore the fact that the multilateral order is facing its most severe crisis to date as a consequence of geoeconomic power strategies, creating a need for adjustments to both foreign policy and trade policy. Autocracies are particularly capable of erratic changes in direction without regard to laws, voters, markets, or global rules, thereby exposing other countries to shocks. They are also able to act more ruthlessly than democratically governed countries with respect to human rights and social and environmental standards.

Address weaknesses and boost competitiveness

This fact argues against a country-specific foreign trade strategy and in favor of a wider strategy for managing relations with autocracies. Such a strategy would define how to deal with these countries and issues and at the same time work to build greater solidarity among countries that share democratic values. As part of this effort, we must also explicitly address our own weaknesses—in terms of technological progress, for example, as well as with respect to the performance of our democracies. Only in this way will it be possible to meet the challenge of systemic competition by making gains in areas where autocracies are weak, such as in the international currency and financial markets and in the manufacture of advanced IT products and environmental technologies.

Clearly positioning Germany as an attractive location for investment and innovation, in conjunction with other democratic countries, especially in competition with autocratically governed countries, should be a major goal of a forward-looking trade strategy. That would obviate the need for a response that is narrowly focused on a single country.

(A slightly edited German version of this article was published in Frankfurter Allgemeine Zeitung on  January 6th 2023.)


Coverfoto: © Presse- und Informationsamt der Bundesregierung

The Kiel Focus series presents papers on current economic policy topics. Their authors are solely responsible for their content and their views or any policy recommendations they may make do not necessarily represent the views or recommendations of the Institute.