Did Germany learn from Russia? The test is in China

Germany understood the trap of strategic vulnerability that it had laid for itself in relying so heavily on Russian gas only after Moscow invaded Ukraine and turned off the spigot. But whether that lesson has been fully absorbed may be tested elsewhere: China.

As Chancellor Olaf Scholz prepares for his first visit to Beijing on Thursday, a planeload of executives in tow, Germany’s intelligence chiefs and allies are warning him against pursuing business as usual with a China that is saber-rattling in the Taiwan Strait. Were tensions to escalate, Europe’s most powerful democracy could be exposed to economic coercion.

More than a million German jobs depend directly on China, and many more indirectly. Almost half of all European investments in China are from Germany and almost half of German manufacturing businesses rely on China for some part of their supply chain. And Germany’s dependence on China is more complex than that on Russia: In addition to China’s export market, German industry also relies on China for raw materials and technologies critical for the transition to a carbon-neutral economy. From solar modules to batteries for electric cars, China is crucial.

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“When people talk about China, they say, ‘Russia is the storm, China is climate change,’” said Thomas Haldenwang, the president of Germany’s domestic intelligence agency. “We cannot allow a situation where the Chinese state can influence political events in Germany, possibly through critical infrastructure.”

Yet Germany is edging in that direction — and at a moment when President Xi Jinping has just secured a third term with greater emphasis on China’s security interests and threats from the West, warning of “dangerous storms” on the horizon.

Even so, ahead of his trip, Scholz has been quietly engineering a compromise to allow Cosco, a Chinese state-owned shipping company, to buy a stake of up to 25% in a container-handling terminal in Hamburg port, Germany’s most important.

The investment, down from Cosco’s original proposal of 35%, was opposed by six of his ministries and both the domestic and foreign intelligence chiefs.

They worry that Cosco’s stake could be weaponised by Beijing, whose state-owned companies already hold sway over other critical infrastructure and technology, including a stake in the Wilhelmshaven port and the mobile network of the German railway company, and in 2016 bought what was then Germany’s largest robotics firm, Kuka.

As if to prove their point, German politicians say, Cosco threatened to take its business elsewhere if its bid was turned down. It is the Hamburg port’s biggest client, and already owns stakes in ports in the Netherlands, Belgium, Spain and Italy. It also owns two-thirds of the port of Piraeus in Greece and even some stakes in ports in the US.

“The blackmail is already in full swing,” said Norbert Röttgen, a conservative member of the German Parliament’s foreign affairs committee and outspoken China hawk. “It’s another building block of Chinese influence in Germany.”

In a terse statement this week, Cosco cautioned that the Hamburg deal was still uncertain. Scholz, a former mayor of Hamburg whose successor is one of the noisiest advocates for the Cosco bid, has so far been silent on the matter.

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The bid has become a test case of the chancellor’s fledgling China strategy — and Germany’s willingness to pay an economic price for more strategic independence.

For decades, Germany’s post-war identity was that of a peaceful exporting nation, thriving on cheap Russian gas imports and ever-growing sales to its largest trading partner, China. That model made Germany the largest and most influential economy in Europe. Even before the war in Ukraine, Germany’s China policy was ripe for evolving from the mercantilist soft touch of the Merkel era. In 2019, the Federation of German Industries, or BDI, published a policy paper warning that the country’s liberal, open model was increasingly in competition with China’s “state-dominated economy” and that Germany should protect itself more forcefully from Chinese companies.

The war in Ukraine has only added urgency. “The Russian attack on Ukraine has taught us that vis-à-vis autocratic states we have to be better prepared for extreme scenarios,” said Siegfried Russwurm, the president of the BDI, which represents more than 100,000 companies. “That is true for China, too.”

The widening imbalance between the economies has also sown alarm. In recent years, the Chinese government has pursued a series of industrial subsidy campaigns to wean itself from imports.

China now makes a very wide range of factory equipment that it used to buy from Germany. Covid lockdowns and a wave of nationalism have also hurt consumer spending on imports in China. At the same time, Germany has gone on buying ever more goods from there.

The result is that Germany’s long-time trade surplus with China vanished late last year and has been replaced by a steadily widening deficit. Many German companies now see China as a competitor at home instead of an opportunity abroad.

“People always talk about how China is a big market — no, China is a huge economy with a small accessible market,” said Jörg Wuttke, the president of the EU Chamber of Commerce in China. Overall, EU exports to China are only slightly larger than those to Switzerland.

All of that has added to the frustration with Scholz’s apparent tiptoeing around China, and not only from some German businesses. Scholz’s own foreign minister, Annalena Baerbock, of the Green Party, has struck a noticeably more hawkish tone on China, and especially on the Cosco bid. She told The Süddeutsche Zeitung this month. “With every investment in German critical infrastructure, we have to ask ourselves what that could mean at the moment when China would oppose us as a democracy and a community of values.”

Baerbock plans to lay out the country’s first China strategy early next year. It is expected to reflect concerns in Germany that China holds too much sway over the country’s most powerful companies. Volkswagen, Daimler and BMW all sell more cars in China than anywhere else. Last month, the chemical giant BASF opened the first of several dozen factories that it is building in the 10 billion euro initial stage of a vast complex in southern China.

Even as many smaller German businesses pare back their exposure to China, a narrowing group of corporate giants has continued to invest. Persuading these companies to diversify away from China has proved a struggle.

Some see a dangerous clash of national and corporate interest reminiscent of the debates over Russian gas pipelines. BASF was one of the companies that had to write off its investment into the Russian pipeline Nord Stream 2. Scholz’s reluctance to take a tougher line on China, observers say, is likely to be a reflection of uneasiness over the German economy. The chancellor is treading carefully to avoid creating a sense of confrontation with China when the country is headed for recession and Europe is already locked in a standoff with Russia.

Thorsten Benner, the director of the Global Public Policy Institute in Berlin, said, “Part of the hesitation is that Scholz doesn’t want to send shock waves into the system.” But he and others said Germany’s economic anxieties should not factor into decisions on strategic investments, such as Cosco’s bid in the Hamburg port, out of fear that Chinese business would go elsewhere. European states need to stand together, they say, and Germany cannot be afraid to be the first.