Battered by trade war, Merkel begins controversial China trip
Critics fear Germany could put European unity on the line. Angela Merkel will have to tread carefully on her visit to China this week to avoid tripping over Hong Kong and stepping on Germany’s car industry. Angela Merkel will have to tread carefully on her visit to China this week to avoid tripping over Hong Kong and stepping on Germany’s car industry.
The German chancellor faces pressure to stand up to Beijing on issues like democracy in the semiautonomous Chinese territory, but she also doesn’t want to alienate the Asian powerhouse on which her country’s major industries depend at a time when Berlin faces the prospect of a recession as well as auto tariffs from Washington.
The approach she takes could also put her at odds with a broader push for a tougher, united EU front against China, which Brussels in March deemed a "systemic rival."
"The visit comes amid difficult circumstances," said Mark Hauptmann, a lawmaker from the chancellor’s conservative Christian Democrats (CDU). "[Germany and China] are economically very dependent on each other. This makes it more difficult to address critical issues that need to be addressed."
Especially sensitive is the issue of Hong Kong, where tensions between authorities and protesters have escalated over weeks of at times violent demonstrations pushing for greater democracy for the city. Ahead of her visit, Hong Kong activists on Wednesday appealed directly to Merkel to "express concern" over the situation and to "convey our demands to the Chinese government."
But observers say Merkel could opt for a soft approach to Beijing given the larger economic context. Data released by the German economy ministry on Thursday showed that the country’s industry recorded a significant decline of orders by 2.7 percent in July in comparison to the previous month.
"Perhaps the biggest danger to a united European position on China will be how Berlin is going to position itself now," said Mikko Huotari, deputy director of the Mercator Institute for China Studies. "There's clear pressure from big companies not to alienate China too far and instead say: 'Let's get back to business.'"
Alicia García-Herrero, a senior fellow at the Bruegel think tank, also warned of a threat to the joint EU approach. "I hope Europe won‘t lower its expectations [on Chinese reforms] because of bilateral negotiations between China and Germany," she said during a panel debate in Brussels on Wednesday.
A similar warning came from Paris:
- "What Europe needs is a strong, coherent, collective approach to China, and what we’re getting in reality is more of a piecemeal approach at the European level with each member state pursuing its own interests at the bilateral level," said John Seaman, a research fellow at the French Institute of International Relations (IFRI).
Before heading to China, one senior government official conceded that Berlin and Beijing enjoy a “complex bilateral relationship," part of an ongoing discussion on market access and trade.
Das Auto in the driver's seat
German automakers have a lot to lose in China, where producers such as Volkswagen, BMW and Daimler churn out millions of vehicles a year.
Since 2010, German automotive companies have expanded their production base from eight factories in China to 30, looking to capitalize on the world’s largest car market. Sales for the country’s producers have ballooned from 2 million units in 2010 to 5.2 million in 2018, around a fifth of the overall Chinese market, according to figures compiled by the German Association of the Automotive Industry (VDA).
Underscoring the importance of Merkel’s trip for German industry, demand for seats on the government jet leaving Berlin on Thursday was overbooked. Those onboard will include senior managers from everything from car firms to energy companies and financiers, a government official said.
A significant portion of German car sales in China are satisfied by in-country production: Just 290,000 passenger cars were actually exported from Germany to China last year. But some 150,000 cars were shipped from German auto plants in the U.S. to China, leaving Germany vulnerable to the escalating Sino-American trade conflict.
After years of increases, sales in China recorded a modest fall last year — and that's not just because of the "enormous transformation process" toward electric cars and autonomous driving, a VDA official said.
“The main point is the trade policy. The weak point of the Chinese market is not that they don’t want to buy cars. It’s over the trade struggle with the U.S.,” the official said.
Merkel urged U.S. President Donald Trump during last month's G7 summit to try to reach a trade truce with Beijing, and she’s expected to do the same over dinner with Chinese Premier Xi Jinping on Friday.
- Seaman from the French IFRI think tank said the push for a European investment agreement with Beijing could help Merkel's de-escalation push. The EU is hoping to get China to commit to market openings and granting EU investors guarantees that they won’t be treated worse than Chinese companies.
- "If Europe were able to obtain concessions from China on many of the issues that have irked both Europeans and Americans, it could offer a face-saving way for China to move forward with reforms without appearing to give in to pressure from Washington,” Seaman said.
German officials say Merkel indeed plans to promote the investment protection agreement while in China. Negotiations for this deal have advanced slowly in recent years because of Beijing's reluctance to open its market to foreign investors, and another round of talks is set for later this month.
“An agreement with reciprocity, that’s a word that’s important,” another senior German government official said. “The same chance and same conditions.”
At the last EU-China summit in April, both sides agreed to make "decisive progress" this year, and officials said Merkel aims to finalize the agreement — which would also be a boon for German companies — in the second half of 2020, when she plans to host a China summit with other EU leaders when Germany takes over the rotating presidency of the Council of the EU.
"Now is the time to tell China: 'Especially in times of a weakening economy in Germany, you have to open up more and create new opportunities and markets for European companies,'" said Jörg Wuttke, president of the European Chamber of Commerce.
Trains and telecoms
Merkel’s visit also comes amid debate over a push to create European champions that can battle state-backed heavyweights in global markets, especially those from China. Over the past year, Berlin has gradually swung behind the push, led by French President Emmanuel Macron, to reform EU competition rules to allow for such giants.
That debate was reinvigorated recently when China’s CRRC, a state-owned behemoth that is already the world’s largest trainmaker, announced it would buy a locomotive factory in Kiel, northern Germany, from Vossloh. Critics say the acquisition is a prime example of how China is moving into Europe's industrial backyard, just months after a Siemens-Alstom merger to create a European rail giant was scotched by EU competition authorities.
French Economy Minister Bruno Le Maire reacted furiously to the Vossloh takeover, saying that Europe "must come together to push back against the Chinese giants."
But while Germany has criticized Beijing's market-distorting subsidy programs, and the growing influence of state-owned enterprises, it has also expressed interest in China’s plans like the “Made in China 2025" strategy and "One Belt, One Road" infrastructure plan. That soft-pedaling approach was on full display during Economy Minister Peter Altmaier's visit to China over the summer.
Merkel's trip will include a visit to Wuhan, a provincial city twinned with Duisburg, a strategic terminus for Chinese freight trains running to Europe under the One Belt initiative.
Another issue high up on the agenda will be the rollout of 5G licenses. After Germany crossed swords with China in July, when the Asian country largely gave preference to its own companies in tenders for next-generation telecoms networks in 40 leading Chinese cities, it's now the Chinese who are pushing Berlin to allow Huawei to participate in the German 5G network.
Merkel is expected to make a decision on the sensitive issue in the coming weeks, but the chancellor's office has already signaled that Berlin won’t just automatically follow the U.S. line and ban Huawei due to alleged security risks.
"If Huawei wants to be internationally successful, it must gain a foothold in Europe, and approval for the German market plays an important role," said CDU lawmaker Hauptmann, who is also a member of the Bundestag's foreign affairs committee.
He urged Merkel to remain tough on Huawei if it was necessary for security reasons. "If there are serious reservations about granting licenses to Huawei, the chancellor must issue a ban, despite strong pressure or possible countermeasures from Beijing."
Jakob Hanke and Laurens Cerulus contributed reporting.
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