Germany’s new China strategy: a step forward, no breakthrough

Germany’s new China strategy: a step forward, no breakthrough

More than one-and-a-half years of drafting and negotiation have come to an end. Last week, the German government has adopted its first China strategy (German version here). The reactions are mixed. Some observers believe that the strategy will have little effect. Others argue that it is far more than a paper tiger. They identify substantial progress. China has issued some notes of protest but remains relatively silent.

What shall we make of the strategy? Here’s my take:

For decades, Germany’s China policy mainly focused on economic engagement coupled with rhetorical insistence on human rights. The new strategy breaks with this tradition. For example, Germany speaks out against the ratification of the Comprehensive Agreement on Investments (CAI) that was negotiated until December 2020. Strikingly, Germany under Chancellor Angela Merkel was the driving force behind the final negotiations. Not mercantilism but Germany’s concern for dependencies and its resulting risks takes center stage. The strategy further identifies normative divergences as a source of systemic rivalry with China. China, the government argues, puts the interests of the one-party system above principles of the rules-based order. Germany insists on the UN Charter and the Agenda 2030 instead of what the strategy identifies as rivaling Chinese alternatives such as the “Global Security Initiative”. The cooperation between Russia and China at a time of the war of aggression against Ukraine is rightly characterized has having direct security relevance for Germany. At the same time, cooperation with China remains necessary. Economically, Germany and China are deeply intertwined. Decoupling would come with enormous cost. To achieve global public goods, cooperation with China is also necessary.

Reacting to misapprehensions

Changes of Germany’s China policy were long overdue. Four long-held certainties that shaped Germany’s China policy have turned out to be false.

First, China’s economic development is the result of gradual but steady economic liberalization since the early-1980s. International trade contributed to this trend. Growing prosperity and welfare created a middle class that we thought would ultimately demand political liberalization. In recent years, however, authoritarian control has tightened again. Not China changed but rather the likelihood of China changing the rest of the world increased.

Second, it was widely believed that an authoritarian system provided for less freedom and was thus doomed to be less creative and innovative. Accordingly, China’s economy was thought to remain behind that of Germany producing lower quality products and be complementary to high-end products made in Germany. Unexpectedly, China became an innovation powerhouse. German and Chinese companies compete over the same market segments. While market distortion due to direct and indirect state support for Chinese companies exists for decades it has unfolded more damaging effects for German companies recently.

Third, Germany’s policy of engagement strived to gradually integrate China into the existing international order. The more China profits from existing institutions, we thought, the likelier China will play by the rules. In recent years, however, China has become more proactive. The country has initiated new institutions and cooperation formats like the Asian Infrastructure Investment Bank or the Belt and Road Initiative.

Fourth, Russia’s war of aggression has eroded the belief that interdependencies prevent crises and wars – at least in Europe. In a short time, Germany has decoupled from Russian fossil fuels. Security concerns are back on the agenda and comprise more than military considerations. Instead, technological and economic dependencies take center stage. China provides limited support to Russia. A conflict in the Taiwan Strait could have grave consequences for Europe and Germany. Most importantly, what used to be “unthinkable” in Europe is now being considered as politicians acknowledge that they always assumed a war of aggression in Europe was impossible.

De-risking

Germany’s China strategy reflects these changes and misconceptions and provides a solid, well-founded and substantial analysis of the risks. It may fall short of a risk matrix that could inspire the emerging European approach to increase economic security. However, the German strategy does mention different types of risks.

For example, risks to national security are discussed in relation to critical infrastructures and the role of Chinese vendors in their rollout. Another risk stems from import dependencies in critical sectors. In high technology and pharma, Germany struggles with high import dependencies of raw materials and primary products from China. The concern is that China could leverage these dependencies by means of export controls of threats to impose such controls. These concerns are not unfounded. From August, China will control the export of two critical minerals, namely Gallium and Germanium. These controls could only be the beginning and one of the less harmful export controls. A different type of risk emerges for Germany’s competitiveness from the market distortions and state support for Chinese companies. A final example of risks concerns for our values. Recent reports of Chinese police stations across the globe, including in Germany, are an example. Export of surveillance technology is another case in point.

All these are divergent and complex risks. To mitigate them, the strategy rightly stresses the need for Germany and Europe to increase our own resilience and strengthen our competitiveness. The strategy acknowledges that meeting the challenge requires efforts from all parts of society. Notably, the strategy calls on companies to consider geopolitical risks and is explicit in that firms need to bear more financial risks. The government will hold confidential exchanges with companies that are particularly exposed to China to reduce cluster risks. Concretely, export and investment guarantees will be caped and bound to conditions. Such conditions include the avoidance of dependencies, technology transfer, dual-use utilization and technology that can be used for surveillance and repression. A tightening of the screening of inbound Chinese investments into Germany seems imminent. In particular, Germany is concerned of China’s civil-military fusion policy that strives to explicitly develop civilian technology that supports military applications (dual-use). The strategy further mentions market economic incentives for diversification – without getting more specific.

Europeanizing Germany’s China policy

All this cannot be done by Germany alone. The China strategy, therefore, puts Europe at the center of its considerations and strives to Europeanize Germany’s China policy. Indeed, Germany’s focus on de-risking reflects what European Commission President Ursula von der Leyen had put at the heart of her widely reported China speech in March. The speech was later followed by an Economic Security Strategy. Many of the policy instruments suggested by Brussels also appear in the China strategy.

Similarly, Germany has adopted the EU’s description of China as a “partner”, “competitor” and “systemic rival”. The German government puts particular emphasis on competition and systemic rivalry – just like the European Commission. The strategy further promises it will raise EU-wide economic concerns with Beijing in its bilateral dialogue formats. Germany will stand in solidarity with EU countries that suffer from economic coercion like Lithuania does.

Despite its focus on risk mitigation, the strategy also identifies areas where cooperation with China is crucial. This includes the mitigation of climate change, global health coordination and non-proliferation among others. Sister city agreements and partnerships between provinces are welcomed as they can facilitate civil society exchanges.

No breakthrough

Despite all these positive elements, the strategy falls short of some of its potential. Unlike the European Union’s “Strategic Outlook” of 2019, Germany’s China strategy does not contain any actionable points that the government strives to achieve in the short-term. The government also does not name specific priorities. This raises questions about its implementation. Driving forces behind a change of course will try to leverage the strategy in the coming months and years to induce further policy change.

The German government remains not fully aligned on its future China policy. Indicative is a draft of the China strategy that was leaked in November 2022. The previous draft had, by and large, suggested a tougher stance. It reflected the initial position of the Federal Foreign Office. While the final version adopts somewhat weaker language, the Foreign Office can be hardly seen as damaged as the general tone of both documents is similar. One example is Feminist Foreign Policy. While an explicit reference to the Foreign Office’s priority was deleted, the final version of the strategy is clearly shaped by the concept.

On human rights, Germany’s China strategy is crystal clear and names all major human rights violations including in Xinjiang and Hong Kong. The government states that it acknowledges divergences in histories but underlines that this does not undermine the universality of human rights. Economic development and human rights are not contradictory. Despite such strong language, the document falls short of linking human rights concerns to concrete measures that bear significant economic consequences. The only concrete means mentioned are the due diligence law, export controls for technologies that could be used for human rights violations and the protection of Chinese citizens in Germany as well as unspecified actions against unofficial Chinese police stations in Germany.

Following Brussels, but not steering Europe

Strikingly, the China strategy adopts multiple references to the EU. It also refers to a multitude of concepts and buzzwords introduced to the European discussion by Brussels. To illustrate, here are some of the EU concepts, formats and legislative work positively referenced in the strategy:

  • Anti-coercion instrument

  • EU Communication “Criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest”

  • EU Cyber Diplomacy Toolbox

  • EU Directive on Corporate Sustainability Due Diligence

  • EU Hybrid Toolbox

  • EU Indo-Pacific Strategy

  • EU sanctions regime for cyberattacks

  • EU Strategic Compass

  • Europe’s WTO case against China’s anti-suit injunction

  • European AI Act

  • European Chips Act

  • General Data Protection Regulation

  • Global Gateway

  • High-level Climate Dialogue

  • Inbound Foreign Direct Investment screening

  • International procurement instrument

  • Regulation on Foreign Subsidies distorting the Internal Market

  • Several European trade agreements

  • Trade and Technology Council

Some concepts are embraced by Berlin, others are mentioned more cautiously. Most prominently, the German China strategy remains cryptic with regard to the screening of outbound investments into China. The US is likely to introduce such a screening mechanism to avoid that US investors financially support projects that could undermine US national security and abet critical technology transfer. The European Commission has also cautiously referred to outbound investment screening in its latest Economic Security Strategy. The German government, in turn, only promises it will constructively contribute to the European assessment. This likely reflects that not all members of the German government share the opinion of Robert Habeck, Minister of Economics, who explicitly stated his support for such a screening instrument.

Germany’s hesitation to embrace outbound investment screening needs to be considered in context. Critics of such an instrument often argue that similar effects could be achieved with a broadening of existing export controls. The China strategy, however, hardly lends much support to such a broadening. It states that export controls are to protect national security and human rights. This is the existing EU consensus. Granted, the strategy voices concern of China’s civil-military fusion that could be used to broaden the definition of dual-use items that fall under the export control regime. Germany further promises close collaboration with EU and G7 partners and explicitly includes knowledge transfer in its definition of export controls. However, not least the reference to the export controls imposed in 1989 following the Tiananmen Massacre insinuates a narrow application of export controls. The hesitation to embrace outbound investment screening coupled with a rather restricted language on export controls indicates rather little policy change in this field.

Berlin further states it strives to contribute to a coherent European China policy with its strategy. But this is precisely where the German strategy is failing. The promised support for the European External Action Service’s search for EU consensus remains vague. While Berlin is largely following Brussels it does not suggest any new policy inventions or instruments. It also falls short of any concrete proposals to find compromises in Europe or drive European China policy forward in any meaningful way. The largest member state is rather a follower than an engine that steers the realignment of Europe’s China policy. This may be unavoidable for a coalition government that is not fully aligned on its China policy, but it remains noteworthy.

The strategy’s gravest weakness is that it provides no ground for additional financial resources to get it implemented. To meet the challenges the strategy identifies, Germany will need to invest. On the day of its release, German government officials were quick to reassure observers in private conversations that plenty of what the government proposes is not China specific and could be founded by other means. Diversification of supply chains or a strengthening of European and German competitiveness is indeed not explicitly China policy. It is also not exceptional that a strategy does not come with an explicit budget. But the inclusion of the reference to cost might reflect a general policy that needs to be reversed if the strategy is to be implemented successfully.

Discussing specific issues

Although the strategy is not always detailed, it is worth examining a couple of its goals and policy fields in more detail. The following selection rather reflects my own research interests focusing on de-risking and technology issues than providing a representative overview of all subjects. Clearly, however, technological de-risking is a priority of government reflected in the strategy.

De-risking, not de-coupling

Just like the European Union, Germany strives to de-risk but not decouple from China. It is explicit, however, that digital sovereignty is a particular concern with regard to countries that do not share our fundamental values. This clearly indicates that Germany seeks more strategic autonomy from China than from the United States. Importantly, Germany is also explicit that it does not want to impede China’s economic development. In other words, Germany is not in favor of a containment strategy. Instead, it strives to increase its resilience as it identifies the risk that China is utilizing economic might and dependencies for political purposes.

The strategy may fall short of a list of critical dependencies. However, this is more complex than one might assume and a strategy document like this can hardly provide for it. Germany expresses support for a constant EU monitoring of critical dependencies. (Yet another example of Berlin following Brussels.) It requires the analysis of complex technological ecosystems – a term that the German China strategy mentions at least once. The strategy exemplarily mentions health equipment, medicine, rare earths and primary products for the energy and the digital transformation as well as risks for semiconductor supply due in case of a Taiwan crises as cases of strategic dependencies.

Furthermore, the strategy names important tensions between the need to simultaneously reduce geopolitical risks while preserving an open political, economic and societal system that is as free from state interference as possible. What may sound logical is more difficult to implement. For example, the European Chips Act is an attempt to strengthen grown, innovation and resilience in Germany and Europe as embraced by the strategy. The European Chips Act is a program of massive subsidies. The German government states that it strives to reduce risks with manageable costs for the society and the companies. Moreover, whether subsidies will turn out to be efficient enough to persist in free market competition remains to be seen. In the case of the European Chips Act this is questionable.

In terms of trade, the German government supports trade agreements with ASEAN, Australia, Chile, India, Indonesia, Kenia, Mercosur, Mexico, New Zealand, Thailand and the United States. The strategy further calls on additional trade facilitating agreements in digital technology. While trade is in EU competence, Germany is willing to second personnel to the European Commission (DG TRADE) in order to handle the enormous workload. The strategy further opts for deepening existing partnerships. For example, it favors a dynamic and ambitious Trade and Technology Council (TTC) with the US. What this implies remains open. The TTC is a useful forum for transatlantic coordination. However, it does not involve EU member states but is an exchange format between the US government and the European Commission. A truly ambitious TTC would need to systematically engage the EU member states. This could complicate the negotiations and stall further progress.

In contrast to such partnerships, the strategy explicitly states that Germany will not join China’s flagship infrastructure project, the Belt and Road Initiative (BRI).

5G and critical infrastructure:

As the protection of critical infrastructure is a widely discussed subject, the strategy reserves a separate paragraph to it. Telecommunication, data, energy and transport infrastructure are explicitly named. The document also states that public procurement of critical infrastructure should consider risks more cautiously in the future. The government refers to a new legislation that is currently being drafted (“KRITIS Dachgesetz”).

Most notable is that the existing legislation for public 5G networks is mentioned as a positive example that the government wants to replicate with regard to energy and non-IT infrastructure. That Foreign Minister Annalena Baerbock addressed 5G networks and the investment of Chinese shipping company in the container terminal “Tollerort” at Hamburg Harbor in a resigning tone in the same sentence confirms the suspicion that Germany will not re-sharpen the conditions for Chinese equipment in 5G networks. This is significant because the government, spearheaded by the Ministry of Interior, is currently reviewing legacy components in Germany’s 5G network. The distinction between public and private 5G networks might make it possible that the government will consider whether and how to protect strategic private 5G+ networks.

Research and education:

Tensions exist between mitigating risks and preserving the openness of Germany and Europe that make our economy and research community strong. In the field of research and education, the government promises more investment as well as more foresight identifying future strategic technologies. However, the role of China remains ambiguous. On the one hand, the strategy voices support for academic exchange as freedom of research and openness are seen as core principles and assets of Germany. On the other hand, such exchanges should not fuel technology transfer, be value- and interest-based and avoid supporting China’s civil-military fusion ambitions (explicitly including restrictions of exchanges in foundational research). The government reminds research institutions hosting Confucius Institutes of their responsibility to guarantee the freedom of research. The federal government offers support to research institutions to help them avoiding dependencies on Chinese actors while remaining open and thereby attractive and innovative.

Standards:

Remarkable (and very positive!) is how often the strategy refers to technical standards. The government promises to strengthen German and European actors in international standardization. The document rightly strives to cooperate with China for the sake of integrating further it into existing international standard-developing institutions (SDOs). This is wise because China has become such an innovation powerhouse that its technical specifications will further spread around the globe, no matter whether we like it or not. Under these circumstances, it is the best to incentivize Chinese participation in existing institutions. This helps not least to harmonize standards wherever possible and avoid their localization and fragmentation.

At the same time, the strategy adopts critical language where necessary. Germany supports the EU’s legal actions against China’s anti-suit injunction that aims to gain control over patent pricing. As more and more technical standards consist of standard-essential patents, this is a worrisome development.

Germany further commits to coordinate with like-minded partners to promote alternatives to Chinese infrastructure standards and strengthen the acceptance of European norms. In this context, a deepening of transatlantic coordination on standards and regulations is explicitly mentioned.

Finally, Germany demands reciprocal access for foreign companies to participate in domestic standardization in China. The government also voices resistance against Chinese certification – an issue that gains importance with regard to market access requirements based on association standards in China.

Security, Russia and Taiwan:

The security chapter situates Germany deeply in the western alliance. China’s partnership with Russia and partial support for the war of aggression in Ukraine takes center stage. The government argues that China does not convincingly supports the sovereignty and territorial integrity of Ukraine. China is violating its special responsibility as a permanent member of the UN Security Council with veto power, the strategy reads. China is warned of supplying weapons, especially chemical weapons, to Russia. It further mourns that China adopts anti-NATO propaganda of Russia. However, the German government urges China to put pressure on Russia and help end the war of aggression.

Another potential conflict mentioned several times is a crisis in the Taiwan Strait. Germany reconfirms its One-China policy. The country will not recognize Taiwan as a sovereign state but continues to selectively cooperate with the democratically elected authorities in Taiwan. Germany insists on a peaceful and mutually agreed solution of the tensions in the Taiwan Strait. Germany recognizes that an escalation would directly affect German and European interests. Taiwan is not only an important technology partner, but large shares of the global trade in goods passes the Taiwan Strait.

What comes next?

The China strategy is published, but the work is only starting now. Implementing the China strategy requires careful further analysis of risks in different technological and economic ecosystems. It needs political decisions because de-risking will come at a cost. We will never live in a “risk-free” world. It is a highly political decision at what cost, by which means and to what degree risks are supposed to be mitigated. The strategy provides more leverage to those that opt for a broader understanding and more ambitious de-risking, but the document is open enough to different interpretations.

Apart from the above-mentioned lack of resources it also falls short of European implementation. The strategy speaks of several forms of coordination across the federal government – including a coordinative institution at State Secretary level discussing China –, with sub-national governments and the parliament as well as stakeholders such as employer organizations and labor unions. But European partners are not mentioned specifically in this regard.

The strategy is a step forward. But it is not a breakthrough. Plenty of work remains to be done.

Additional information

China Strategie

Picture: Foreign Minister Annalena Baerbock presenting the China strategy. Source: private.