Germany and China: No ‘Zeitenwende’ in sight

Last week Xi Jinping, president of the People’s Republic of China (PRC), presided over the party’s 20th National Congress which abolished the previous rule on term limits and effectively made him dictator for life. This week he has an international visitor: Olaf Scholz, the German Chancellor, is in town accompanied by a delegation of industrialists. There may have been a ‘reset’ in Germany’s relations with Russia, but as far as the PRC is concerned it is, literally, business as usual. 

The German economic model is based on the export of manufactured goods, and the PRC is Germany’s largest market, having overtaken the United States (US) six years ago. Last year Germany’s exports to the PRC were worth €245 billion (£211 billion). Unsurprisingly, therefore, German Chancellors have always seen maintaining strong relations with the PRC as a high priority. Both of Scholz’s predecessors, Gerhard Schroeder and Angela Merkel, used to visit the PRC regularly, accompanied by a large delegation of senior German businessmen who used the opportunity to further their existing contacts and expected the Chancellor to help pave the way for new ones. 

Until recently, the closeness of Germany’s relationship with the PRC did not pose any particular problem. All liberal-democratic countries traded with it and the fact that Germany was more successful than others in doing so was a source of pride rather than embarrassment. The PRC was a dictatorship and memories of Tiananmen Square remained. But it was not seen as a direct threat to the open international order. Just as during the Cold War Germany had adopted the concept of ‘Wandel durch Annäherung’ (Change through Engagement) as the doctrinal underpinning of its relationship with the Soviet Union and the Warsaw Pact, so too was the slogan ‘Wandel durch Handel’ (Change through Trade) used to describe the relationship with the PRC. It was based on the belief, or at any rate the hope, that ever closer commercial ties would lead to the gradual integration of the PRC into the global political system as well as some internal liberalisation.

But it has not. In recent years the PRC has become more authoritarian and repressive at home; it has abandoned its ‘one country two systems’ approach to Hong Kong and clamped down hard on human rights there, and engaged in ruthless persecution, sometimes characterised as genocide, of its Uyghur minority in the northwestern province of Xinjiang. More significantly, it has dramatically increased and enhanced its military capabilities and shown a willingness, both in practice and in principle, to use them.

Specifically, it has turned the South China Sea into a fortified Chinese lake by annexing a number of small islands and reefs and constructing military facilities on them. It has established military bases and facilities outside its own territory and it has reasserted its readiness to use military force to invade Taiwan if it cannot achieve territorial unification by political means.

All this has brought about a radical reassessment in Washington of the US’ relationship with the PRC. Avril Haines, America’s Director of National Intelligence, has described the PRC as the primary national security threat to the US. Despite its current preoccupation with Russia’s war against Ukraine, the current US administration remains committed to its Indo-Pacific commitments and policy of containment vis-a-vis the PRC, which it sees as a rival and an opponent rather than a partner. Joe Biden, the US President, has even, whether by design or by accident, spoken publicly of a willingness to directly support Taiwan militarily should it come under Chinese attack.

Germany too has had to rethink its approach to the PRC. The optimism, some would say naivety, of the Merkel years has gone and there is no more talk of seeking political engagement. At the time of its formation in 2021 the current ruling coalition identified the PRC as a ‘systemic rival’ and pledged to support Taiwan’s involvement in international institutions. German ministers, particularly those from the Green Party who head the Ministry of Economic Affairs and Foreign Office, now acknowledge that concern for human rights must play a role in Germany’s policy towards the PRC and that Germany must not become so dependent on trade and investment with the PRC as to be vulnerable to pressure. ‘We cannot allow ourselves to be blackmailed’, Robert Habeck, the German Economics Minister, recently remarked. Habeck has also withdrawn investment guarantees for German companies operating in Xinjiang.

Germany is a participant in the Asian Infrastructure Investment Bank, but has stayed out of the PRC’s Belt and Road Initiative. It has also sought in recent years to improve its relationships with other countries in the Indo-Pacific region as a counterweight to its involvement with the PRC. In 2021 a German destroyer, the Bayern, visited a number of countries in the region, the first time that any German ship had done so. The Chinese, clearly annoyed at this gesture, refused it permission to dock in Shanghai.

Germany is not alone in having to weigh up the benefits of trade and investment with the PRC against the risks of dependency. But the scale of Germany’s economic reliance on exports means that the dilemmas which it faces are particularly acute.

But weaning themselves off trade with the PRC will not be easy for many German companies; and it is not clear whether, or to what extent, the German government will put pressure on them to do so. When, somewhat belatedly, it acknowledged the political need to eliminate its gas and oil imports from Russia, it was able to identify alternative sources of supply and ensure that the transition was not too painful for German consumers. But reducing trade with the PRC will not be cost free.

The automobile sector in particular has invested heavily in production facilities in the PRC and some manufacturers are critically dependent on them. 40% of Volkswagen’s car sales go to the Chinese market and Herbert Diess, the company’s chief executive officer, has said that the future of the company will ‘be decided by the Chinese market’. Volkswagen’s biggest factory in the PRC is in Urumqi, the capital of Xinjiang, not far from one of the biggest ‘re-education centres’ – as the concentration camps for Uyighur Muslims are euphemistically termed in Chinese propaganda – in the province. The company has denied that it employs Uyghur slave labour in its operations in the PRC, but has consistently rejected suggestions that it should disinvest from Xinjiang. German ministers, although they have criticised Chinese human rights abuses, have not encouraged German companies to take any concrete action in response to them. The withdrawal of investment guarantees may act as something of a disincentive to new projects there, but is unlikely to affect existing ones.

BMW has too invested heavily in the PRC and is showing no signs of cutting back on its commitments there. It has recently announced that it is transferring its production of electric Minis from Cowley to the PRC where it has a joint venture with Great Wall Motors. This is a huge blow to His Majesty’s government’s hope of establishing the United Kingdom as a production centre for battery operated vehicles, and it calls into question the future of the Cowley plant itself. When production of petrol and diesel Minis there ends in 2030, BMW may well decide to sell the site off, as they did with Longbridge.

The Chinese government has made its willingness to use Germany’s economic dependence on exports to the PRC as political leverage clear. In 2019 Wu Ken, the Chinese ambassador in Berlin, warned that if Huawei is denied access to the German telecommunications market, then there would be implications for the German automobile industry. More recently, Peter Tschentscher, the Mayor of Hamburg, warned that unless Cosco was able to invest there the port of Hamburg would suffer a competitive disadvantage vis-a-vis Rotterdam. This generated an internal argument within the German government. All the Ministers from the Free Democrat and Green parties opposed the proposal, but the Chancellor and his Social Democrat colleagues argued in favour of it. Eventually, the deal was authorised, albeit with a share of only 24.9% rather than the 35%, which the Chinese originally wanted. 

Germany is not alone in having to weigh up the benefits of trade and investment with the PRC against the risks of dependency. But the scale of Germany’s economic reliance on exports means that the dilemmas which it faces are particularly acute. The nightmare scenario for any German government would be a crisis, such as a Chinese attack on Taiwan, which led to calls for an economic boycott. Public opinion in the country was, and still is, remarkably robust in supporting measures against Russia because of its barbaric assault against Ukraine. Whether, if it came to it, sanctions against the PRC would be greeted with similar equanimity is less clear.

Sir Paul Lever was Her Majesty’s Ambassador to Germany (1997-2003) and Chair of the Joint Intelligence Committee (1994-1996). His most recent book is Berlin Rules: Europe and the German Way (I.B. Tauris, 2017).