Germany Inc.’s China syndrome

Politco. 26 October 2021

Below is an article published by Politco. Photo: Getty Images.

For decades, German industry — an early mover in the Chinese market — looked the other way amid Beijing’s human rights abuses, as managers and engineers from the likes of Siemens and Volkswagen helped transform the country into Germany’s largest trading partner. But as Chinese leader Xi Jinping tightens the country’s surveillance state, threatens neighbors and takes on an increasingly belligerent tone with the West, Germany’s China strategy, shaped to serve the needs of its export industry, is looking increasingly unsustainable.

So much so, in fact, that leading German industry players are joining prominent politicians in calling for a rethink of the country’s approach to China and other autocratic states.about:blank

“Human rights are not the internal affairs of states,” said Siegfried Russwurm, the head of the Federation of German Industries (BDI), adding that companies have “the obligation to define red lines for their global commitment themselves,” instead of waiting on their own governments to do so.

If Russwurm sounds more like an activist for Amnesty International than the head of German business’ main lobbying arm, that’s because Germany Inc. is more worried than ever about the optics and on-the-ground realities of doing business in China and other autocratic states. Like many foreign investors in China, German companies were long convinced that they would eventually be on a level playing field with their local counterparts. But Xi, who has put foreign firms on a tighter leash, has convinced them otherwise.

Now, German business, which is more exposed to China than any of its European peers, faces an impossible choice between preserving a crucial trade relationship and observing the liberal ideals Germany holds dear. 

Asked how trade could be upheld amid reports of human rights abuses in China, a spokesman for Siemens said in an emailed statement that the conglomerate “categorically rejects all forms of oppression and participation in human rights violations,” adding that they “put trust in the U.S., China and Europe to find political solutions based on … reliable and transparent rules of cooperation as well as on an open dialog.”

In an effort to help firms square that circle, the BDI recently published a paper titled “Responsible Coexistence with Autocracies.” Even as the paper underscores the importance for Western firms to “lead by example” on questions of human rights and environmental protection, it also makes clear that severing commercial ties with difficult regimes isn’t a viable option.

“It is a fact that companies must generate profits in order to retain long-term competitiveness,” the paper concludes. “We cannot defend democratic values any better if we weaken ourselves economically.”

Nonetheless, it’s a difficult case to make in the face of Beijing’s suppression of the Uyghurs, its crushing of Hong Kong’s democracy movement, and its belligerent stance toward longtime partners like Australia.

VW, the world’s largest carmaker, came under scrutiny this year over running a factory in Xinjiang — the region where extensive inhumane treatment has been documented against China’s Muslim Uyghur minority. Some countries, including the U.S. have labeled China’s actions a genocide.

But Herbert Diess, the CEO of VW, defended his company’s engagement in the region, arguing that it upholds its “values in Xinjiang, including employee representation, respect for minorities, and social and labor standards.”

Once seen as the key to Germany’s long-term prosperity, China is now viewed in Berlin as a long-term problem.

Something’s different

Not even China’s biggest defenders in Germany are pretending any longer that economic prosperity will turn Asia’s juggernaut into a Western-style democracy, an idea known as “transformation through trade” that has been propagated by German executives and politicians since the Cold War. 

“The sober assessment is that ‘transformation through trade’ has reached its limits,” the BDI concluded. “The expectation that global economic interdependence would automatically facilitate the spread and development of market economies and democratic structures has not come to pass.”

That reality check has left German business in a bind, and not just concerning China. One in four German jobs depends on exports and despite persistent pressure from its partners, Germany has run one of the world’s largest trade surpluses for decades. Much of that trade is with autocratic states like China and Russia.

While Germany has always traded with unsavory regimes, it has never relied on one to the degree it now relies on China. Though the U.S. is still Germany’s largest export market overall, China has driven much of the growth for demand in German machinery and autos in recent decades and has been Germany’s largest trading partner (combined exports and imports) for five years running. 

The question is how sustainable those trends are. It’s begun to dawn on many German industrialists that China, which has relied on their engineering acumen to modernize its economy, might not need them anymore. Over time, China has become quite good at designing and building the specialized machinery, tools and other equipment it used to need Germany for.

German industry’s China debate comes as the country’s political winds are shifting. Both the Greens and the liberal Free Democrats, the two parties expected to join the Social Democrats in forming a new government, take a considerably harder line on China than did outgoing Chancellor Angela Merkel.

Merkel has been criticized for years as being too soft on China. In the midst of last year’s democracy protests in Hong Kong, Merkel flew to China with a large trade delegation and met with Xi. She also was the driving force behind the EU’s investment agreement with China. The deal, signed last December, met with strong resistance in Washington, where a bipartisan consensus has formed in recent years that the West needs to take a more forceful position toward China.

“Those who expect Europe to be neutral in the standoff between China and the U.S. are missing the reality,” said Bijan Djir-Sarai, the foreign policy spokesperson for the Free Democrats in the German parliament. “Of course, we also fight for European interests, but our place is in a close partnership with the U.S. and we should not be under any illusion.”

Among the BDI’s guidelines for new European foreign economic policy, for example, there is a call for a stronger euro relative to other currencies, arguing this “would provide Europe with more weight in the international payments system and global financial markets.”

Nils Schmid, the SPD’s foreign policy spokesman in the German parliament, argued Germany needs to push harder within the EU for a common stance on China — one that isn’t necessarily in opposition to the U.S.’s but that puts European interests first. 

Germany’s incoming government needs to “strengthen the foundations for the ability to act — on the national as well as the European level,” he said. “Then there will be no need to declare a new Cold War with China.”