Merkel pur­sues eco­nomic ties with China from safe dis­tance

The Washington Times Weekly - - Geopolitic­s - BY AUSTIN DAVIS

BER­LIN | Don­ald Trump’s Amer­ica is not the only Western econ­omy hav­ing trou­ble fig­ur­ing out how to han­dle the threat and prom­ise of China.

Ger­man Chan­cel­lor An­gela Merkel spent time in Paris with French Pres­i­dent Em­manuel Macron and Euro­pean Com­mis­sion Pres­i­dent Jean-Claude Juncker for a glit­ter­ing sum­mit with Chi­nese Pres­i­dent Xi Jinping.

China is mov­ing to the top of Ms. Merkel’s agenda for her last term in of­fice. Dur­ing her ten­ure over the past decade, Ger­many be­came Europe’s eco­nomic pow­er­house, thanks in large part to its close eco­nomic ties with China. But like the U.S., Ger­many is in­creas­ingly un­easy about China’s ad­her­ence to in­ter­na­tional trad­ing rules and deeply un­nerved by Bei­jing’s in­roads into the Euro­pean mar­ket.

Hun­gary, Greece and Italy have agreed to sign on to Mr. Xi’s sig­na­ture $1 tril­lion “One Belt, One Road” in­ter­na­tional in­vest­ment pro­gram, stok­ing con­cerns of fur­ther Euro­pean de­pen­dence while Bei­jing ex­tends its for­eign pol­icy and in­flu­ence. Many see China’s in­roads as a di­rect chal­lenge to Ger­many’s tra­di­tional role as Europe’s dom­i­nant econ­omy and its de­ci­sive voice of EU mone­tary and fis­cal pol­icy.

China is Ger­many’s third-largest ex­port mar­ket, be­hind the U.S. and France, and sec­ond-largest source of im­ports, be­hind the Nether­lands, based on 2017 fig­ures. Ger­many is the world’s third-largest ex­port­ing na­tion, be­hind China and the U.S., and runs the world’s largest cur­rent ac­count bal­ance sur­plus.

“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.”

Star­ing down a re­ces­sion in the early 2000s, Ger­many be­came a Euro­pean pioneer when it chose to in­vest heav­ily in Chi­nese mar­kets, where Ger­man cars, 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 the As­so­ci­a­tion of Ger­man 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 a low-wage, low-cost de­vel­op­ing mar­ket into an eco­nomic jug­ger­naut with skilled work­ers and mas­sive tech com­pa­nies such as 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, in Ber­lin.

Chi­nese com­pa­nies have taken ad­van­tage of Ger­many’s open mar­kets by at­tempt­ing to buy the coun­try’s prized small and medium-sized en­ter­prises, which con­sti­tute 99 per­cent of all Ger­man firms, ac­cord­ing to gov­ern­ment fig­ures.

The sit­u­a­tion has become so wor­ry­ing that the Merkel gov­ern­ment is weigh­ing the ex­tra­or­di­nary step of cre­at­ing a gov­ern­ment fund to out­bid Chi­nese in­vestors seek­ing to buy Ger­man com­pa­nies. Chi­nese in­ter­ests snapped up the cut­ting-edge Ger­man ro­bot­ics firm Kuka in 2016 and last year made a bid for the power grid oper­a­tor 50Hertz.

The pro­posed state-owned fund would make strate­gic in­vest­ments to foil un­wanted — pri­mar­ily Chi­nese — suit­ors, the Reuters news agency re­ported.

“In the past, Ger­many was too re­luc­tant to de­fine its na­tional in­ter­ests. This is chang­ing now,” one gov­ern­ment of­fi­cial told the wire ser­vice re­cently.

Bar­ri­ers to en­try

Ex­pec­ta­tions that China would grad­u­ally open its mar­kets to Ger­man ri­vals have fallen flat. China con­tin­ues to im­pose steep taxes on for­eign com­pa­nies in or­der to pro­tect 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 think tank.

“There’s a lot of fear in Ger­many about los­ing our edge and sell­ing off our high-tech.”

Such frus­tra­tions have 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 that non-Euro­peans can pur­chase.

At the same time, Ger­man in­dus­trial lob­bies have de­manded that Brus­sels and Ber­lin 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, Ms. Stanzel said.

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

Even so, Ger­many’s hawk­ish tone to­ward China isn’t sat­is­fy­ing the Trump ad­min­is­tra­tion. Ger­many has re­fused U.S. de­mands to ban Huawei from bid­ding to build its 5G dig­i­tal net­works de­spite fears that it would give Bei­jing un­bri­dled ac­cess to con­fi­den­tial in­for­ma­tion.

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