Merkel's Chinese puzzle

b_179_129_16777215_00_images_DEU121121AA001.jpegBERLIN — French President Emmanuel Macron took a hard turn toward "Europeanizing" his nation's policy toward China on Tuesday by inviting German Chancellor Angela Merkel to attend a state visit by Chinese Premier Xi Jinping in Paris.

Such a move is high on Merkel's agenda in her last term in office: During her tenure over the past decade, Germany became the continent's economic powerhouse thanks to close economic ties with China.

Even so, Merkel is worried: Hungary, Greece, and on Saturday, Italy, have all signed on to China's trillion-dollar investment plan "One Belt, One Road," stoking concerns of further European dependency on a rule-bending regime.

“It's a dilemma because Germany is an open economy in favor of open markets, but at the same time it relies on the fact that everyone is playing by the same set of rules," said Cora Jungbluth, a senior analyst on China with Germany's Bertelsmann Foundation. "If this is not the case, Germany has to walk a fine line with its long-term interests."

Starring down a recession in the early 2000s, Germany became a European pioneer when it chose to invest heavily in Chinese markets, where German motor vehicles, machinery and chemicals were seen as vital for building the emerging nation's infrastructure.

Today, some 5,200 German companies operate in China, and about 900,000 jobs in Germany depend on exports to China, according to Germany's Chambers of Industry and Commerce. In 2018, for the third year in a row, China was named Germany's most important trade partner, with commerce between the two nations totaling about $226 billion, according to government figures.

But as China has transformed from an emerging market with cheap labor into an economic juggernaut with skilled workers and massive tech companies like Huawei and Tencent, "the fairly cozy and stable economic relationship between China and Germany is being disrupted," said Max Zenglein, head of economics at the Mercator Institute for China Studies (MERICS) in Berlin.

Chinese firms have taken advantage of Germany's open markets by attempting to buy up Germany's prized small and medium-sized enterprises, which comprise 99 percent of all German firms, according to government figures.

At the same time, expectations that China would gradually open its markets to allow fair competition to foreign firms have fallen flat. China continues to impose steep taxes on foreign companies in order to grow domestic firms.

"This is the biggest source of frustration," said Angela Stanzel, a senior policy fellow in the Asia Program with Institut Montaigne, a Paris thinktank. "There's a lot of fear in Germany about losing our edge and selling off our high-tech."

Such frustrations have recently come to a head. Since 2017, the German government has tightened rules on foreign corporate takeovers and sought to cap the percentage of a company non-European firms can purchase.

At the same time, German industrial lobbies have demanded that Brussels and Berlin finally come to terms with the fact that Chinese markets will not bend to international trade norms without pressure — a "remarkable" development, considering German industry's dependence on Chinese markets, said Stanzel.

“The People's Republic is establishing its own political, economic and social model,” said Dieter Kempf, the President of the Federation of German Industries, in a January policy paper. "No one should simply ignore the challenges China poses to the EU and Germany.”

Even so, Germany's new hawkish tone toward China isn't satisfying the administration of President Donald Trump. Germany has refused to ban Huawei from bidding to build its 5G digital networks, despite fears that doing so would allow Beijing unbridled access to confidential information.

The United States' Ambassador to Germany Richard Grenell warned Germany earlier this month that the United States would withhold crucial intelligence sharing with Berlin if Huawei took part in the 5G project. It only adds to the many tensions surrounding trade and geopolitics that have colored the transatlantic relationship since President Trump took office, said Stanzel.

"The irony is that the German relationship toward China has never been as close to the US position as it is today," she said. "With the US, Germany, being the strongest economy in Europe, could have achieved a lot in leveraging China."

Dependent on China but wary of its motives, Germany is seeking to forge a future relationship with the world's second-largest economy that reflects its own ethos. Apart from close cooperation with France and other reliable EU partners, representatives of the German government have traveled to Vietnam and other emerging economies in the region to broker new trade deals that diversify away from China.

"With China and Chinese companies, they're somehow playing by their own rules. It's difficult for Germany to support that," said Jungbluth. "So Germany is looking for a third way between being too naïve with regards to China and being too protectionist to the point that it could damage the economic relationship.”

Photo: German Chancellor Angela Merkel.

Story/photo published date: 01/04/2019

A version of this story was published in the Washington Times.
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