Germany out to reduce reliance on China

Gurjit Singh

Former Ambassador to Germany

AMID the churning in the global order, a keenly watched relationship is between Germany and its largest trading partner, China. The new German coalition in power since December 2021 has a larger internal consensus on challenging China. This includes democratic values, particularly focusing on how China treats the Uighur minorities, how it responds on Taiwan and Hong Kong and its aggressive intent in the East and South China Seas.

China’s solid partnership with Russia despite the latter’s aggression in Ukraine has riled the Europeans and made it more difficult for Germany to continue a business-as-usual relationship with China.

At the World Economic Forum in May, German Chancellor Olaf Scholz expressed concern over China’s rising power and said that China, being a global actor, could not be isolated. “But neither can we look the other way when human rights are violated the way they are now,” he said.

Vice-Chancellor and Economy Minister Robert Habeck advocated larger diversification and reduction of dependency on China and giving democratic values higher weightage. Foreign Minister Annalena Baerbock is the main critic of China, seeking a transparent investigation and protection of human rights, which she is committed to protect globally.

The leaking of the Xinjiang police files which showed the scale of brutality and how China represses the Uighur minority community caused several sections in Germany to rethink their approach to China. Thus, Germany is not only re-engaging Russia differently, but now is also rethinking its China relationship, though both of them have a heavy economic cost for Germany.

For over 25 years, China and Germany have had a successful economic partnership. Though they have a comprehensive strategic partnership, there has been scant German influence on the Chinese way of doing things.

The failure of the energy security matrix with Russia has alerted Berlin to the fact that the economics-led partnership model with China may also cause it heartburn due to China’s unwillingness to change.

The China strategy is being reformulated in Germany’s Foreign Office. Since ministers of the same ilk are in the transport and industry ministries, there is a greater coordination among them to use the Russia example to seek reducing dependency on China.

Germany is keen to keep up its economic engagement with China. It is apprehensive about its predatory methods, which prevent a level playing field. Merkel tried to achieve this by granting China a comprehensive agreement on investment (CAI) with the EU.

However, China’s lack of democracy and the rising tensions with Taiwan, Hong Kong and the East China Sea have now put the CAI into cold storage as the European Parliament is not budging on it. Germany is also relooking at providing guarantees to large German companies seeking new investments in China. A review of Chinese investments in Germany, particularly in the port of Hamburg and by Huawei, is underway.

The federation of German industries recognises dependence on China for strategically important mineral resources; it must act quickly to reduce these by investing in new partnerships. The federation also seeks business relations with countries which are not autocratic. A greater alignment between the new economic engagement and the political preferences of the EU are a part of the new China policy that Germany is crafting.

The German-China economic partnership is immense. German exports are about 600 million euros daily. Chinese exports to Europe are 1.3 billion euros daily. According to the president of the EU Chamber of Commerce in China, German FDI in China is nearly 100 billion euros. Chinese investment in Germany has been rising. German industry now knows that the German political system, which intended to challenge China even at the cost of business, is now strengthened by a transatlantic engagement which is firmly challenging Russia. The consequences of this are clear. The systemic rivalry has now become a real strategic challenge for Germany.

Germany was quieter at the G7 and NATO summits in June on the tougher position adopted towards China. The G7 joint communique referred to China 14 times. The German-led G7 brought purposeful coordinated action to promote diversification, resilience and reduction of strategic dependencies. Similarly, at the NATO summit, both France and Germany overcame their concerns of putting Russia and China together as a similar threat. The deepening strategic partnership between Moscow and Beijing was equally a matter of concern. NATO did not close the possibility of a ‘constructive engagement’ with China, leaving room for Germany to talk to China. The direction which NATO has now set is clear.

It is evident that the approach to China across Europe shows a closer transatlantic coordination and China’s attitude to Ukraine and Lithuania has cautioned Europe generally and Germany in particular. The Indo-Pacific policy of Germany and the EU now has a better chance of success. The German government and business may have more emphasis on developing relations with the Indo-Pacific countries. The multi-polar economic model is searching for new nodes.

There is a growing interest in India, Japan and ASEAN countries. German companies can look for resilient supply chains, manufacturing hubs and service centres which will not be dependent on China. The cost-effectiveness with the new PLI (Production-Linked Incentive) schemes could lead to an enhancement of German companies investing in larger manufacturing hubs in India and exporting to Europe, Africa and ASEAN using the India-ASEAN FTA (Free Trade Agreement) and the possible India-EU trade agreement.

Similarly, in impact investment and fulfilling the Sustainable Development Goals, Germany is ready to work with India. A JDI (Joint Declaration of Intent) on this was signed during the visit of Prime Minister Modi to Berlin in May.

Germany is heavily committed to the climate agenda and has promised India additional financing of 10 billion euros. More funding for green manufacturing, infrastructure and related projects in India could be forthcoming. These include green transmission lines, battery-operated inland waterways transportation, cleaning of rivers and the like. The biggest surge could come if substantial funds are invested by the German industry in high-speed railways in India.

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