Angela Merkel’s predecessor as chancellor, Gerhard Schröder, had taken a business-first approach to Beijing during his seven years in office. Guided by the principle of ‘Wandel durch Handel’, or change through trade, Schröder had championed China’s entry into the WTO, which came about in 2001, and subsequently pushed (albeit unsuccessfully) for the EU to end the arms embargo on China that it had imposed in response to the crushing of the Tiananmen Square demonstrations in 1989.
Merkel, who took office in 2005, initially chose a different tack. In 2007 she hosted the Dalai Lama for a meeting in the Chancellery in Berlin, a move that infuriated Beijing. Chinese leaders retaliated by suspending dialogue with Germany for roughly half a year. This reaction was deeply unsettling for the German political and industrial establishment alike, and Merkel subsequently recalibrated, toning down public criticism of China’s human rights record. Throughout the global financial crisis in 2008–09 and the turmoil in the eurozone that followed in 2010–12, the Chinese economy continued to grow, providing vital economic support for Germany and its biggest industrial companies. In 2011, a year after embracing the concept of a ‘strategic partnership’ with China, Merkel launched annual government consultations with Beijing at senior cabinet level. Two years later, she intervened to prevent the EU from imposing punitive duties on solar panels imported from China. Fearing retaliation from Beijing, Germany’s auto manufacturers had lobbied the government to stop the push by the EU’s then trade commissioner, Karel De Gucht, to confront China over its trading practices. The episode raised uncomfortable questions about German industry’s dependence on China, and Beijing’s ability to leverage that dependence to shape decisions in both Berlin and Brussels.
In the meantime, Germany’s economic relationship with China flourished, with bilateral trade reaching new heights. In recent years, the value of goods trade between the two has exceeded that of the combined trade between Europe’s next three biggest economies (the UK, France and Italy) and China. In 2016 China overtook the US to become Germany’s largest single trading partner. Exports to China make up just 8 per cent of Germany’s total foreign sales, but trade does not tell the full story. German companies began setting up shop in China decades ago. The country’s leading automakers – Daimler, Volkswagen and BMW – all have major production facilities in China, and generate a third or more of their total profits there. Other German blue-chip companies like the engineering giant Siemens or the chemicals group BASF are also deeply embedded in the Chinese market. Under Merkel, it has been common practice for her aides to consult with big German firms before trips to China, bring their top executives on these trips as part of large industry delegations, and lobby for their interests in Beijing. This has led to criticism from some opposition politicians and NGOs that German industry retains an inordinate amount of influence over Berlin’s policy towards China.
Despite the continued importance of the Chinese market for German industry, concerns about the economic relationship have been building for at least half a decade. And it is these economic factors – rather than concerns about China’s human rights record, its more aggressive military posture, or the centralization of political power under President Xi Jinping – that prompted Berlin to reassess the cost–benefit equation in the relationship in the years before the COVID-19 pandemic. Xi’s push for greater state control over the Chinese economy – through the roll-out of its ‘social credit’ system, tighter cyber laws and a renewed emphasis on the role of Communist Party cadres on company boards – soured the mood among German firms operating in the country. Moreover, Xi’s ‘Made in China 2025’ strategy, a top-down roadmap for China’s domination of 10 key industrial sectors, came to be seen in Germany as a direct threat to the country’s manufacturing dominance. The wake-up call in Berlin, however, can be traced back to the 2016 takeover of the German robotics maker Kuka by China’s Midea Group. Midea’s $5 billion offer for Kuka caught the government off guard and sent it scrambling, ultimately without success, to find a counterbid closer to home. The experience with Kuka – along with several other attempts by Chinese firms to acquire or increase their stakes in German companies – had a transformative effect on the Merkel government’s view of China. Chinese investments were no longer viewed as mutually beneficial. Instead, they were increasingly seen as a threat – and part of a well-planned strategy to vault China into a position of technological dominance at Germany’s expense.
Germany tightened its own rules on foreign investments in 2018, and, together with France and Italy, launched a push for a new EU-wide coordination mechanism to vet foreign takeovers. A year later, German economy minister Peter Altmaier announced plans for a new industrial strategy and pushed Brussels to reassess its competition policies in the face of what his and other governments in the bloc saw as growing distortions to the EU market from Chinese state-owned and state-subsidized companies. These initiatives showed that while Germany remained reluctant to criticize China too loudly itself, it was more comfortable with the idea of robust responses at EU level, particularly in the economic sphere. Merkel, as one German official described it, had no problem pushing back against China, as long as it wasn’t Germany that was doing the pushing.
In January 2019, a paper published by the Federation of German Industries (BDI), an influential lobby group that had in the past avoided direct criticism of China, described the country as a ‘systemic competitor’, and urged Berlin and Brussels to adopt a more forceful, coordinated approach in the face of Beijing’s state-driven capitalism. This was the culmination of a major shift in how German industry viewed China. Driving the more sceptical stance were the Mittelstand companies – the SMEs that are often described as forming the backbone of the German economy – which lacked the resources to protect their intellectual property and were struggling to fend off Chinese acquisition bids and competition. Not all BDI members were happy with the paper’s critical tone, however. In fact, Siemens made a last-minute attempt to block its release, according to officials familiar with the discussions. The momentum against China continued to build in the months that followed, with the European Commission, in its March 2019 Strategic Outlook, labelling Beijing a ‘systemic rival’, and rebels in Merkel’s own Christian Democratic Union (CDU) resisting her plans to give the telecommunications giant Huawei a role in Germany’s 5G network. This brought mounting concerns in the chancellor’s own circle, as well as in some German boardrooms, that the China backlash may be going too far.
