- - Monday, April 1, 2019

BERLIN — Donald Trump’s America is not the only Western economy having trouble figuring out how to handle the threat and promise of China.

German Chancellor Angela Merkel spent part of last week in Paris with French President Emmanuel Macron and European Commission President Jean-Claude Juncker for a glittering summit with Chinese President Xi Jinping.

China is moving to the top of Ms. Merkel’s agenda for her last term in office. During her tenure over the past decade, Germany became Europe’s economic powerhouse, thanks in large part to its close economic ties with China. But like the U.S., Germany is increasingly uneasy about China’s adherence to international trading rules and deeply unnerved by Beijing’s inroads into the European market.

Hungary, Greece and Italy have agreed to sign on to Mr. Xi’s signature $1 trillion “One Belt, One Road” international investment program, stoking concerns of further European dependence while Beijing extends its foreign policy and influence. Many see China’s inroads as a direct challenge to Germany’s traditional role as Europe’s dominant economy and its decisive voice of EU monetary and fiscal policy.

China is Germany’s third-largest export market, behind the U.S. and France, and second-largest source of imports, behind the Netherlands, based on 2017 figures. Germany is the world’s third-largest exporting nation, behind China and the U.S., and runs the world’s largest current account balance surplus.

“It’s a dilemma because Germany is an open economy in favor of open markets, but at the same time it relies on the fact that everyone is playing by the same set of rules,” said Cora Jungbluth, a senior analyst on China with Germany’s Bertelsmann Foundation. “If this is not the case, Germany has to walk a fine line with its long-term interests.”

Staring down a recession in the early 2000s, Germany became a European pioneer when it chose to invest heavily in Chinese markets, where German cars, machinery and chemicals were seen as vital for building the emerging nation’s infrastructure.

Today, some 5,200 German companies operate in China and about 900,000 jobs in Germany depend on exports to China, according to the Association of German Chambers of Industry and Commerce. In 2018, for the third year in a row, China was named Germany’s most important trade partner, with commerce between the two nations totaling about $226 billion, according to government figures.

But as China has transformed from a low-wage, low-cost developing market into an economic juggernaut with skilled workers and massive tech companies such as Huawei and Tencent, “the fairly cozy and stable economic relationship between China and Germany is being disrupted,” said Max Zenglein, head of economics at the Mercator Institute for China Studies in Berlin.

Chinese firms have taken advantage of Germany’s open markets by attempting to buy the country’s prized small and medium-sized enterprises, which constitute 99 percent of all German firms, according to government figures.

The situation has become so worrying that the Merkel government is weighing the extraordinary step of creating a government fund to outbid Chinese investors seeking to buy German companies. Chinese interests snapped up the cutting-edge German robotics firm Kuka in 2016 and last year made a bid for the power grid operator 50Hertz.

The proposed state-owned fund would make strategic investments to foil unwanted — primarily Chinese — suitors, the Reuters news agency reported.

“In the past, Germany was too reluctant to define its national interests. This is changing now,” one government official told the wire service recently.

Barriers to entry

Expectations that China would gradually open its markets to German rivals have fallen flat. China continues to impose steep taxes on foreign companies in order to protect domestic firms.

“This is the biggest source of frustration,” said Angela Stanzel, a senior policy fellow in the Asia Program with Institut Montaigne, a Paris think tank. “There’s a lot of fear in Germany about losing our edge and selling off our high-tech.”

Such frustrations have come to a head. Since 2017, the German government has tightened rules on foreign corporate takeovers and sought to cap the percentage of a company that non-Europeans can purchase.

At the same time, German industrial lobbies have demanded that Brussels and Berlin come to terms with the fact that Chinese markets will not bend to international trade norms without pressure — a remarkable development considering German industry’s dependence on Chinese markets, Ms. Stanzel said.

“The People’s Republic is establishing its own political, economic and social model,” Dieter Kempf, president of the Federation of German Industries, said in a January policy paper. “No one should simply ignore the challenges China poses to the EU and Germany.”

Even so, Germany’s hawkish tone toward China isn’t satisfying the Trump administration. Germany has refused U.S. demands to ban Huawei from bidding to build its 5G digital networks despite fears that it would give Beijing unbridled access to confidential information.

U.S. Ambassador to Germany Richard Grenell has gone public with criticism of the Merkel government’s willingness to do business with sanctioned countries such as Russia and Iran. In March, he warned that Washington would withhold crucial intelligence-sharing with Berlin if Huawei was allowed to take part in Germany’s 5G project. It adds to the many tensions that have colored the trans-Atlantic relationship since Mr. Trump took office, Ms. Stanzel said.

The analyst said the tension is striking because Washington and Berlin should be able to find common cause in their mutual concerns with Mr. Xi’s China.

“The irony is that the German relationship toward China has never been as close to the U.S. position as it is today,” she said. “With the U.S., Germany, being the strongest economy in Europe, could have achieved a lot in leveraging China.”

Dependent on China but wary of its motives, Germany is seeking to forge a relationship with the world’s second-largest economy that reflects its own ethos. Apart from close cooperation with France and other reliable EU partners, representatives of the German government have traveled to Vietnam and other emerging economies in the region to broker trade deals that diversify away from China.

“With China and Chinese companies, they’re somehow playing by their own rules. It’s difficult for Germany to support that,” said Mr. Jungbluth. “So Germany is looking for a third way between being too naive with regards to China and being too protectionist to the point that it could damage the economic relationship.”

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