Germany’s Approach to Minimizing Risks in its Relationship with China

Stay updated on EU-China relations with our free newsletter

Receive a daily email from myFT Daily Digest that summarizes the latest news on EU-China relations.

Germany and the UK, two influential European economies, have recently displayed a cooler stance towards China. This shift is a result of China’s growing authoritarianism, strained relations with the US, aggressive behavior towards Taiwan, and European concerns about Beijing’s close ties with Moscow.

Germany’s adoption of its first-ever China strategy reflects the changing global landscape. While China remains Germany’s largest trading partner and a crucial market for its industrial powerhouses, Berlin has chosen to “de-risk” its ties with China. This move disregards a warning by Qin Gang, China’s foreign minister, that such de-risking could have negative consequences for cooperation and development.

In Britain, a parliamentary report has criticized London’s inadequate response to China’s increasingly sophisticated spying operations. The report highlights the UK’s failure to adopt a comprehensive approach to addressing the problem.

Germany’s comprehensive policy emphasizes the need to diversify supply chains and export markets, reducing reliance on China and minimizing exposure to external shocks. The strategy aims to identify vulnerabilities, raise awareness among German companies about the risks of doing business in China, and establish that Berlin will not provide bailouts in case of trouble. Other EU capitals can gain valuable insights from the 64-page document, which could also guide the UK’s approach.

Both the UK and Germany aim to maintain access to the lucrative Chinese market, home to an estimated 550 million middle-class consumers. Their objective is to establish a “small yard, high fence” approach, imposing tight restrictions on trade and investment in select technologies related to national security while allowing other forms of commerce. Janet Yellen, US Treasury Secretary, recently conveyed to China’s Premier Li Qiang that targeted actions for national security should not unnecessarily harm the bilateral economic and financial relationship.

Germany is cautious about excessive dependence on China’s supply chain and market. The UK’s concerns primarily revolve around espionage. As part of the 2021 National Security and Investment Act, the UK has implemented systematic vetting of Chinese inward investment deals. It has also utilized its powers to scrutinize and reject certain Chinese-linked investments into British companies to mitigate perceived security threats.

Nevertheless, both Germany and the UK need to establish clearer parameters governing their future engagement with China. This involves identifying areas of sensitive technology where commerce should be prohibited or subject to regulatory review. This applies to Chinese acquisitions of UK companies, Chinese investments in critical UK infrastructure, and technology transfer from UK companies to Chinese counterparts in China.

Security tensions between China and Europe have intensified under the leadership of Xi Jinping, who has instilled suspicion of the US-led West into Beijing’s worldview. Fully insulating every sector and industry in Europe from Chinese security concerns may prove challenging. Germany and the UK must strike a balance between safeguarding vital sectors and infrastructure and maintaining trade and commercial relations.