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Germany’s first strategy paper on China: Only rhetoric or a real shift in Germany’s approach?



Introduction

This article analyses if the assertive rhetoric of Germany’s first strategy paper on China is likely to translate into an actual change in Germany’s approach to China, which has previously been dominated by the goal of deepening economic relations.


On the 13th of July 2023, the German government published its “Strategy on China”, its first-ever strategy paper dedicated solely to Germany’s China policy. The strategy paper includes a call for ‘de-risking’ in light of growing economic dependence on China. Thus, Germany aims to reduce risks emanating from China while simultaneously maintaining economic ties.


However, it remains to be seen to what extent the strategy paper reflects a real change from Germany’s former business-friendly approach to China, apart from unusually assertive rhetoric. This article argues that due to conflicts within Germany’s current government and due to the hesitation of German companies to follow the government’s ‘de-risking’ strategy, such a shift is unlikely.


Germany’s positioning on China is pivotal for the EU’s broader approach to the People’s Republic since Germany is China’s largest trading partner within the EU (Huld, 2023). China also sees Germany as an important partner, for instance regarding the modernisation of its industry (Zenglein & Holzmann, 2019, p. 57).


Germany’s growing dependence on China


During the last decades, the relationship between Germany and China has been characterised by increasing trade ties. In 2022, Germany’s trade with China represented 10 percent of Germany’s total trade in goods (Statistisches Bundesamt, 2023, pp. 2-6; own calculation). By comparison, China was responsible for less than one percent of Germany’s trade in goods in 1990 (Baur & Flach, 2022, p. 6).


With deepening economic ties, however, concerns have started mounting in Germany regarding an increasing dependence on China. For several of Germany’s largest companies, the Chinese market has grown more and more important over the past years. For instance, German carmaker Volkswagen realised roughly 40 percent of its sales in China in 2021 (Chazan & Yang, 2022). In addition, an analysis by the Kiel Institute found that there are dependencies on Chinese inputs for German production (Sandkamp, 2023).


Germany’s “Strategy on China”


The increasing dependence on China and emanating concerns are not something unique to Germany. Throughout the Western world, critical voices on China have soared, with former U.S. President Donald Trump famously making use of the term ‘decoupling’ (Wolfe, 2020). ‘Decoupling’ can be understood as severing all ties in terms of trade and investment. This is not supported by the vast majority of German politicians as Germany’s economic intertwinement with China makes a ‘decoupling’ from China unrealistic. Instead, the term ‘de-risking’ is preferred in Germany’s political arena, a term first introduced by European Commission President Ursula von der Leyen (European Commission, 2023).


The German government has put down the ‘de-risking’ approach in its strategy paper on China. The paper stipulates that Germany still views cooperation as a cardinal factor in its relations with China, for instance in the area of climate protection (Federal Government, 2023, p. 20). However, it is also laid out that Germany wants to “become less dependent in critical sectors” (Federal Government, 2023, p. 25).

In order to reach the goal of more independence, the paper advocates a location policy. Hence, the paper supports a set of policy measures that are aimed at strengthening growth, research, and innovation in the EU and Germany (Federal Government, 2023, p. 35). Moreover, Germany plans to diversify its trade ties by fostering EU trade agreements with countries such as Australia, Chile, Indonesia, and Thailand (Federal Government, 2023, pp. 50-51).


“Strategy on China”: Is an actual shift occurring?


The articulation of Germany’s goal to tackle critical dependencies on China represents a rhetorical shift from former German China policy that was more optimistic regarding close economic ties with China. The paper states clearly that “China has changed” and acknowledges that as a result, Germany needs to change its approach to China (Federal Government, 2023, p. 9). This questioning of its relationship with China by a German government is unprecedented. It is, however, unclear to what extent the paper will epitomise a real shift in German policy towards China.


Regarding some parts, the paper remains ambiguous and lacks formulation of concrete instruments that the government wants to implement to bring about effective ‘de-risking’. This might also stem from disagreement within Germany’s government coalition. During the drafting process of the paper, certain contentious points have been watered down. In November 2022, a leaked version of the paper mentioned stress tests for companies to assess the risks emanating from their dependencies on China (Rinke, 2022). This measure was not included in the published paper. The government now only urges companies to take geopolitical risks into account and wants to aid them in diversifying (Federal Government, 2023, p. 38).


The main driver in preventing a tougher wording of the strategy paper was arguably Chancellor Olaf Scholz, a Social Democrat known for preferring a more business-centred approach to China. He delayed the publication of the paper until after the intergovernmental consultations between Germany and China in June 2023 (Rinke, 2023), supposedly to avoid setting a negative tone for the bilateral talks. Against the opposition of several ministries that are held by the Greens, Scholz also enabled a deal that allowed Chinese shipping company Cosco to buy a stake in a terminal of Germany’s largest port in Hamburg (Deutsche Welle, 2022).


China has criticised the paper, saying Germany’s ‘de-risking’ strategy is a form of protectionism and that it will be “counterproductive” to “politicise normal cooperation” (AP News, 2023). Nevertheless, China’s response to the paper was relatively restrained in comparison to what one might have anticipated. Fuhrmann (2023, p. 2) argues that part of the reason for China’s temperate reaction was Scholz’s moderating influence on the formulation of the strategy.


On the one hand, the chancellor might have cushioned a harder and more abrupt shift away from Germany’s focus on economic interests in its China policy. On the other hand, Scholz’s disagreements with some of his ministers deter a clear German course of strategy vis-à-vis China. Even after the publishing of the paper, a lack of consensus within the government will persist and continue to impede an effective China strategy by Germany.


A report published by the Institut der deutschen Wirtschaft (German Economic Institute) underlines the argument that Germany’s China strategy paper will not result in sudden ‘de-risking’. Although German investments in China have diminished in the first half of 2023 compared to the first half of 2022, the share that investments in China make up of Germany’s total investments abroad has reached a record high. Moreover, the decline in investments in absolute numbers was rather insignificant since investments remained nearly twice as high as in 2019. Hence, the report suggests that German companies keep investing in China notwithstanding the German government's call to reduce dependencies (Marsh, 2023).


How Germany’s China strategy develops in the next months and years will have a far-reaching impact. Oertel (2023) puts forward that Germany functions as a “test case” for other European countries. Other countries will adjust their China policy based on whether Germany’s aim ‘de-risk’ is successful or is met by severe retaliatory measures from China. Thus, Western countries in general will take a close look at the future development of the German-Chinese relationship.


Conclusion


With a view to acting on concerns of growing dependence, the German government has introduced its first strategy paper on China, which calls for ‘de-risking’. The existence of the paper itself represents a significant change in how Germany views its relationship with China. Nevertheless, the question is whether the tougher language will translate into an actual shift from Germany’s former China approach. Disagreements between the German chancellor and some of his ministries, as well as data underlining that companies are hesitant to follow the government’s appeal, suggest that it is unlikely that Germany will completely turn away from its business-oriented China policy. In whatever direction the German-Chinese relationship will move, other Western countries are going to take notes.


This article represents the views of contributors to STEAR's online digital publication, and not those of STEAR, which takes no institutional positions.


 

References

AP News. (2023, July 14). China criticizes German call for reducing dependency on Chinese products as ‘protectionism’. Associated Press. https://apnews.com/article/china-germany-russia-economy-taiwan-7eed455f16e53982ea8004a415cc123b


Baur, A., & Flach, L. (2022). German-Chinese Trade Relations: How Dependent is the German Economy on China? (EconPol Policy Report No. 38). Munich. CESifo Research Network.

Chazan, G., & Yang, Y. (2022, November 1). Germany struggles with its dependency on China. Financial Times. https://www.ft.com/content/be082c77-1f9c-409f-86e8-eeb2bd9d1418


Deutsche Welle. (2022, October 20). Scholz criticized over China's Cosco bid in Hamburg port. Deutsche Welle. https://www.dw.com/en/germany-scholz-hit-with-backlash-over-plan-for-chinese-investment-in-hamburg-port/a-63505648


European Commission. (2023, March 30). Speech by President von der Leyen on EU-China relations to the Mercator Institute for China Studies and the European Policy Centre. https://ec.europa.eu/commission/presscorner/detail/%20en/speech_23_2063


Federal Government. (2023). Strategy on China. Berlin.


Fuhrmann, J. (2023). Pekinger Reaktionen auf die deutsche China-Strategie (Länderbericht Auslandsbüro China). Beijing. Konrad-Adenauer-Stiftung.


Huld, A. (2023, April 4). EU-China Relations: Trade, Investment, and Recent Developments. China Briefing. https://www.china-briefing.com/news/eu-china-relations-trade-investment-and-recent-developments/


Marsh, S. (2023, September 20). Exclusive: German investment in China eases in first half after record high. Reuters. https://www.reuters.com/world/german-investment-china-eases-h1-after-record-high-2023-09-20/


Oertel, J. (2023, September 15). The end of Germany’s China illusion. European Council on Foreign Relations. https://ecfr.eu/article/the-end-of-germanys-china-illusion/


Rinke, A. (2022, November 21). Germany plans to tighten rules for firms highly dependent on China - document. Reuters. https://www.reuters.com/business/germany-plans-tighten-rules-firms-highly-dependent-china-document-2022-11-19/


Rinke, A. (2023, May 23). Germany's new China strategy delayed by policy differences - sources. Reuters. https://www.reuters.com/world/europe/germanys-new-china-strategy-delayed-by-policy-differences-sources-2023-05-23/


Sandkamp, A. (2023). German economy's dependence on China: Critical for individual products. IfW Kiel Institute for the World Economy. https://www.ifw-kiel.de/publications/news/german-economys-dependence-on-china-critical-for-individual-products/


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