Trade tightrope: Germany risks US wrath as it hugs China tightly
As messages for Germany’s new Chancellor poured in last month, seasoned diplomats were not surprised to find China among the first to offer its congratulations.
Just minutes after Olaf Scholz succeeded Angela Merkel, Chinese president Xi Jinping was hailing the “great importance” of his country’s bilateral relationship with Berlin.
During his time as mayor of Hamburg, a port city that markets itself as China’s “gateway to Europe”, Germany’s new Chancellor Olaf Scholz courted investment from the hundreds of Chinese firms that have set up shop there.Credit:AP
The statement – issued faster than similar greetings to other western leaders – urged Scholz to continue the so-called “win-win” approach favoured by his predecessor.
This style of diplomacy has reaped huge dividends for German businesses such as Volkswagen, BMW and chemicals giant BASF, allowing China to become their country’s biggest trading partner with €213 billion worth of annual imports and exports.
But critics say it amounts to little more than “Germany first” – turning a blind eye to Beijing’s grave human rights abuses, as well as concerning events in Hong Kong and Taiwan.
It is also becoming harder to sustain as president Xi becomes more assertive on the global stage and the US pushes for a tougher, more united response from the West.
Yet while Scholz has vowed to “strike out on a new path” at home, he seems determined to walk the same tightrope as Merkel when it comes to foreign policy and trade.
Even before his narrow election victory, the Socialist Democratic Party (SDP) politician privately reassured Xi there would be no major changes to relations with the communist regime in Beijing, according to a report in German media.
And following a virtual summit with the Chinese leader before Christmas, Scholz called for deeper economic ties and the revival of the controversial European Union-China investment deal “as soon as possible”.
Investment deal under pressure
The investment deal would have ostensibly put Continental companies on an equal footing in China and cemented the country’s status as a trusted trading partner.
But it was put on ice over claims China is committing genocide against Uyghur muslims in Xinjiang, with an indignant Beijing hitting back against EU sanctions by targeting politicians, think tanks and diplomatic bodies in Brussels with sanctions of its own.
Beijing has called the genocide claims “absurd” after they were made by nations including the US.
Experts say Scholz’s embrace of the accord risks a new row with his partners in government – the Greens and the right-leaning Free Democratic Party (FDP) – and could leave Berlin increasingly isolated from the rest of Europe.
Germany’s close ties with China have been lucrative for businesses such as Volkswagen, BMW and chemicals giant BASF.Credit:AP
“Merkel’s approach to China was very capitalist, pragmatic and business-first – really a ‘Germany first’ policy within the EU context,” says Didi Tatlow, a senior fellow at the German Council for Foreign Relations.
“Scholz may be forced to take up a different position, not just because of pressure in his coalition but, above all, because of pressure from the US.
“But that will be difficult. Germany and China are now very closely intertwined and the chickens are coming home to roost.”
Even if Scholz’s posture towards China may puzzle his foreign allies, it makes perfect sense to longtime observers of German politics.
Bald, slight and sometimes dubbed “Scholz-o-matic” because of his robotic, lawyerly demeanour, the 63-year-old rose through the ranks of the SDP by becoming its most recognisable safe pair of hands.
He twice served in Merkel coalitions – first as a labour minister in the late 2000s and then as finance minister in her last government – and also had a seven-year term as mayor of Hamburg from 2011.
In the election, Scholz was able to deftly sidestep attacks from his opponents by positioning himself as Merkel’s most natural successor.
Scholz’s pro-China past
Another thread also runs through his recent career.
During his time as mayor of Hamburg, a port city that markets itself as China’s “gateway to Europe”, Scholz courted investment from the hundreds of Chinese firms that have set up shop there.
Chinese shipping giant Cosco is currently trying to buy a 35 per cent stake in the port, where one in every three containers passing through are generally bound for China.
Scholz also built personal ties with Xi while running the city, meeting the Chinese president during a G7 gathering in 2017.
As national finance minister, he later invited the Chinese vice-premier Liu He to a forum known as the Hamburg Summit in 2018 and visited China himself in 2019 – a trip that saw him criticised at home for not bringing up human rights.
“He is under great pressure and China has a lot of tools at its disposal to punish Germany.”
His call with Xi as chancellor last month signals a continuation of this approach – and even appeared to contradict his coalition agreement with the Greens and the FDP.
Among other things, their deal specifically says the EU-China investment deal should be put on hold and vows to “clearly address China’s human rights violations”.
Scholz’s recent overtures could create tensions with Annalena Baerbock, the co-leader of the Greens who was given the role of foreign minister and has taken a much more hawkish posture towards Beijing.
Meanwhile, Joe Biden, the US President, is pushing allies for a more coordinated posture towards China, whether that be a tougher line on intellectual property theft, curbs on investment in sensitive industries, opposing bellicose threats to Taiwan or confronting Beijing’s campaign against Lithuania, which has spoken out against it.
For German car makers, Lithuania presents a particular headache, as many are reliant on parts made in the country which China now wants them to ditch.
Many also have a big presence on the Chinese mainland and oppose any change in relations, with Volkswagen boss Herbert Diess recently warning it would be “very damaging”.
They are at risk of swimming against the tide as patience wears thin among western governments. But Scholz faces potentially painful choices regardless.
“Undoubtedly, if the Germans changed their policy, and became a lot more hard hitting on human rights and things like that, the Chinese would target German firms to put on the pressure,” says Charles Parton, a former British diplomat in China and senior associate fellow at the Royal United Services Institute.
“That’s what Scholz is afraid of.”
But Parton argues that failing to stand up for western values carries far greater costs than any temporary loss of business.
“You can’t necessarily point to a particular action, but over time the lack of rigour in defending our own interests, security and values becomes quite debilitating,” he explains. “It is a threat to our way of life.”
For Tatlow, Scholz is facing the trickiest balancing act of his career.
“He is under great pressure and China has a lot of tools at its disposal to punish Germany,” she adds.
“It is going to take real backbone, real leadership. But it remains to be seen whether Scholz is even interested in that.”
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