China - Germany: A ‘new special relationship’

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This weekend, the newly appointed Chinese Prime Minister Li Keqiang makes his first offical visit to the EU - he travels to Berlin to meet Angela Merkel. This is a meeting of the two economic powerhouses of the East and the West – and a continuation of the ‘special relationship’ between both countries.

Li has inherited a healthy relationship with Germany built on a “technology for markets swap”. China needs German machinery and technology for its next phase of growth; and Germany needs China’s market to absorb a growing part of its exports. Interestingly, Germany represents close to half of EU exports to China dwarfing France, UK and Italy. Last year we showed that China replaced Europe as as the most desired investment destination for German business. That is particularly striking when it comes to the German car industry: If China’s demand for German cars didn’t exist; car manufacturers in Germany would face a less secure future.

Li’s predecessor, Wen Jiabao translated the economic relationship into a political one. Wen kick-started China’s government to government consultations with Germany which saw a full cabinet meeting with Angela Merkel and her ministers discussing everything from innovation policy to renewables and vocational training. For China, this is the largest official gathering it undertakes with a foreign power and can be seen as an unprecedented diplomatic gesture  (but the military-strategic element that dominates relationship with the US is largely absent in the case of Germany). More crucially, China seems to prefer bilateral relationships with individual EU member states instead of negotiating with the EU. China even produces a specific government scorecard on its relationship with Germany. Hans Kundnani and I described this unique partnership as an emerging special relationship between China and Germany.

Germany’s minister for the economy, Philip Roesler, already rolled out the rhetorical red carpet for the Chinese guests by calling the European Commission’s punitive strike against Chinese solar panels, ‘a grave mistake’. On the other side is the European Commission’s trade Commissioner de Gurcht voicing his concern that China continues to be a ‘free-rider’ in international trade. The European Commission has taken several steps to enforce free and fair trade with China. The anti-subsidy case, involving Chinese companies exporting photovoltaic and solar panels worth €21bn a year, is the EU's largest ever trade dispute. And de Gurcht is now aiming at the subsidies that bolster rising Chinese telecoms giants Huawei and ZTE raising the stakes with China.Yet Germany’s size and growing power in Europe makes it more damaging when it goes bilateral which ultimately weakens Europe’s hand. The Chinese are taking about possible counter-measures so the statement by Roesler makes a lot of sense in a German context – but it is undermining a European approach to China

German solar production is still rather small-scale compared to Germany’s car industry. However, the recent controversy also demonstrates the increased German dependence on China. Paradoxically the European-Chinese fight over solar panels has its origin in Germany as it was sparked by German producers of solar panels complaining to the European Commission. During his visit, Li will also tour Brandenburg where Li is may spot the reflections from the 388.000 thousand solar panels set up at Brandenburg-Briest airport, the largest solar park in Europe. Ironically, the park is also a testimony of how the globalised economy works. German producer Q-Cells went belly up during the production and now only survives thanks to South Korean owners.

But Germany’s reaction follows a typical pattern among European countries to play ‘good cop’ with the Chinese and then blame “Brussels”. For example, EU member states have repeatedly promised China in bilateral talks to work to lift the arms embargo or give China the status of a market economy - but then they do nothing about it on the EU level. Another example is French President Hollande who went to China a few weeks ago: first friendly diplomacy in Beijing and a few business contracts but when he was back in Paris, he called for full reciprocity and complained about unfair Chinese business practices.

Intrestingly, Li's stop-over in Switzerland  will be used to start negotiations on a free trade agreement with Switzerland following a similar deal with Island. It will be Li’s signal to the EU that China is in fact open to more free trade - and that the problem is Europe which is taking a protectionist turn.

Relations with China will pretty much define Germany’s new role in Europe. It will be a test case of whether the interests of a stronger Germany are still aligned with broader European interests. Germany still needs to convince European partners that this is still the case. Right now, Berlin is increasingly replacing Brussels as the go-to-place for China’s decision makers. 

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