Germany adapts China policy in light of Beijing’s behaviour

Germany’s China policy is undergoing a significant shift, according to Thomas Bagger, Director-General for Foreign Affairs. The emphasis has moved from partnership and cooperation to competition and rivalry, in response to China’s changing behaviour towards the international community. This shift includes a focus on de-risking and reducing dependence on Beijing, particularly in the wake of the COVID pandemic. Germany’s strategic shift is encapsulated in its first-ever Strategy on China, unveiled last year, which aims to reduce economic dependence on China.

“The scales have evidently tipped. What was once a relationship of collaboration and alliance has now morphed into a landscape of competition, even escalating to rivalry,” expressed the diplomat. This change in tone reflects the evolving dynamics of international relations.

China’s evolving conduct on the global stage has necessitated a re-evaluation of Germany’s China strategy, as per a senior German diplomat. Thomas Bagger, the Director-General for Foreign Affairs, conveyed this shift at a Hudson Institute event. He emphasized that Germany’s three-pronged view of China – as a collaborator, competitor, and systemic adversary – has now veered towards adversarial. “The pivot from collaboration and cooperation to increased competition and rivalry is unmistakable,” Bagger affirmed.

Germany is recalibrating its strategy towards China, aiming to mitigate risks and lessen its reliance on Beijing, a shift accentuated by the COVID pandemic. This involves decreasing dependency on China for essential medical supplies and tech raw materials. However, a complete disengagement from China could significantly impact the German economy. Germany is candid with Beijing about this strategic shift, attributing it to China’s altered approach towards Germany, its neighbours, and the global community. This change in China’s behaviour has necessitated a re-evaluation of Germany’s China policy.

In the previous year, Germany introduced its inaugural strategy on China, signifying a strategic pivot towards lessening its economic reliance on China. This strategy lays out a blueprint for fostering equitable collaboration with China, in a manner that aligns with Germany’s values and interests.

While the United States views China as a geopolitical challenge, Germany has charted its own course in dealing with China. Germany, not being a mere follower of the U.S., may concur with American perspectives on several matters, such as the South China Sea issue and the need for China to respect international law, but not on all fronts.

China’s backing of Russia’s military actions in Ukraine is detrimental to the core interests of Germany and Europe, and could tarnish Beijing’s reputation. Should China persist in undermining Europe’s security interests, it will incur increasing costs. Continued support for Russia’s war against Ukraine will also have repercussions for Germany’s bilateral and Europe-China relations.

Since 2015, China held the title of Germany’s primary trading partner. However, a shift occurred in the first quarter of this year when the United States took over the top spot. The total trade between Germany and the U.S.— encompassing both exports and imports —amounted to 63 billion euros ($68 billion) from January to March, slightly surpassing the nearly 60 billion euros in trade with China. Notably, in 2023, China maintained its position as Germany’s leading trading partner for the eighth consecutive year, with trade volumes reaching   253 billion euros ($270 billion), marginally ahead of the U.S.

On June 12, the European Union (EU) declared a significant increase in tariffs on imported Chinese Electric Vehicles (EVs), set to take effect in July. This decision came after an extensive eight-month investigation, with the EU accusing Beijing of unfair subsidization. This move mirrors Washington’s recent decision to double its tariffs on Chinese EVs from 25 percent to a staggering 100 percent. However, this tariff hike by the EU has been met with resistance from Germany. Major German automakers such as BMW, Mercedes-Benz, and Volkswagen expressed   concerns about   potential   retaliatory   tariffs  from   China.

These companies have substantial automobile production facilities in China, which benefit from local tax incentives and Beijing’s subsidy policies. They fear that the tariff increase could negatively impact their operations.

The business landscape in China for European companies has been increasingly challenging, as revealed by the “European Business in China Business Confidence Survey 2024” conducted by the European Union Chamber of Commerce in China. A significant 68% of companies reported a tougher business environment in the world’s second-largest economy compared to the previous year.

Instead of the anticipated robust recovery, European companies are grappling with uncertainties. The report attributes this to China’s structural issues, including slowing demand, overcapacity, and a downturn in the property sector. Additionally, market access and regulatory barriers continue to pose challenges for these companies.

Interestingly, the survey highlights that the strategies employed by these companies to adapt to China’s business environment could inadvertently exacerbate China’s economic difficulties. This creates a negative feedback loop, where the measures taken to navigate the challenging business environment further contribute to the economic issues. This complex interplay between European businesses and the Chinese economy underscores the intricate dynamics of international business in today’s globalized world.