China in Germany and Europe
On October 24, German economics minister Sigmar Gabriel blocked the bid of the Chinese company Fujian Grand Chip to purchase the German silicon chipmaker Aixtron. He did so on the basis of information provided by the United States that certain products of this company could have military applications for China. The withdrawal of approval and review of the deal will likely mean an end to the sale. It marked the first effective government-level intervention to slow the surge of Chinese investment in Germany, which had reached unprecedented levels. It was followed three days later by denial of another Chinese overture to buy the Ledvance lightbulb unit of the Osram Company.
Encouraged by the “Go Out” policies of the Chinese leadership and a chronic cash surplus, Chinese overseas economic activity in the last decade has not only increased but shifted “upstream in the value chain,” to quote Albert Ng, Managing Partner of Greater China. In terms of both trade and investment, the recent focus has been on European Union countries. As late as 2004, EU-China trade accounted for less than €200 billion and Chinese investment in Europe was almost nonexistent. Now, China is the EU’s second largest trading partner, just behind the U.S., and its leading supplier of imports. The EU is also China’s largest trading partner and, though trade is significantly unbalanced, EU exports to China support more than 3 million jobs in Europe. In a trend likely to become more marked after Brexit, Germany has become China’s preferred trade partner in Europe, accounting for nearly one-half of EU trade and providing one-third of EU exports to China.
Chinese investment in Europe reached nearly €20 billion last year. While cumulatively Germany ranks third, behind the UK and Italy, the pace in Germany has recently accelerated. In the first half of 2016 alone, Chinese investment in Germany surpassed the total for the entire decade 2005-15. As they have done elsewhere in Europe, Chinese firms have concentrated on high value-added technology and manufacturing firms, hospitality and real estate ventures, and well-known brands. Among the acquisitions that drew substantial attention was the purchase of German robotics maker Kuka by China’s Midea group after an effort by the German government to find a European buyer failed.
For China, these actions serve several key domestic and international needs. Though slowing lately, economic growth has trended upward since 2000, peaking at more than 14 percent in 2007. This has created a significant overcapacity in several sectors, including construction. Now, as the Chinese economy executes a “rebalance” toward consumption, returns for both private and state-run enterprises have declined. As growth has slowed, so have the gains from trade. At the same time, with the official backing of the “One Road, One Belt” policy announced in 2013 to link China to Eurasia and Europe, Chinese firms see opportunity for infrastructure development and trade along the entire “Silk Road” from China through the Middle East and Eurasia to Europe.
With EU economies mired in a decade long pattern of slow growth and stubborn (and in some age brackets crisis-level) unemployment, countries are eager for an infusion of cash. Thus the marriage of Chinese interests and European opportunities is both convenient and profitable. In some European cases, for example Greece, key pieces of the geographic puzzle—like the port of Piraeus—are available at bargain prices.
The growth of Chinese involvement in the world economy mirrors the “rise of China” overall. Once a minor player in the global economy, China now accounts for more than 17 percent of global GDP and nearly 10 percent of the world’s foreign direct investment (FDI). It is the world’s largest national economy (as measured by PPP), the world’s most active national trader, and largest consumer of major commodities. At the same time, it seeks to attain a level of political involvement and respect befitting its role as major power. Its national assertiveness globally and in its own neighborhood represents in some instances an explicit challenge to the dominance of the United States and thus potentially stresses U.S. cooperation with allies in Europe, including Germany.
Dilemmas for Germany
For Germany, which has had a long and not always positive relationship with China, these recent economic, political, and strategic developments present some difficult dilemmas. Some, like trade dependence, are familiar. Germany is an export-led economy with a moderately high ratio (86 percent) of trade-to-GDP. After the 2008 financial crisis, trade with China became an important “economic driver” and for some sectors, like automotive exports, crucial. Now, some wonder to what degree the health of the German economy should be a reflection of (now slowing) Chinese economic plans.
Other challenges, reflected in Minister Gabriel’s decision, have a more recent vintage. While Chinese investment in Germany is welcome, Germans—like many others—are wary about the selloff of the jewels of their economy: high tech, innovative firms that produce high value-added products and skilled jobs. In addition, a public once favorable toward China has turned decidedly negative in its views, to the point where the percent of Germans who view China favorably is now the lowest in Europe. High profile instances of Chinese purchases of German Mittelstand (smaller, family owned-companies) like Putzmeister represent both the danger and appeal of these investments. Many German businesses report positive experiences with new Chinese owners,  but other factors trouble the atmosphere.
One repeatedly stated by German government is the lack of reciprocity. German (and indeed all foreign) firms have a difficult time making investments in China. A lack of opportunity for bidding in the public sector, for example, or in profitable areas like banking have produced a situation in which Germany is open for business but China is closed. In its summary report on China in March 2016, the German Foreign Office made this assessment of the Chinese environment:
“In recent years, China has been very successful in attracting foreign direct investment, but it needs to improve transparency and certainty for investors to ensure that it remains an attractive business destination, especially for small and medium-sized companies. Investors expect more freedom of contract and equal market access conditions, in particular the same access to public tenders as Chinese companies. Particularly in the country’s hitherto strictly regulated but fast-growing service sector (banking, insurance, logistics and trade), time will show whether the Chinese government’s reform plans bring about any improvement. Up to now, foreign companies have been legally denied access to many interesting business sectors—or such access has been de facto impossible.”
Persistent concerns about Chinese unwillingness to protect intellectual property—or willingness to exploit it for the good of China—also worry German manufacturers. Some fear that Chinese purchases of German firms, demands for technology transfer when trading, or “reverse engineering” will mean that Germany is essentially funding the creation and strengthening of its own economic competitor—not a good long term scenario.
The Aixtron case represents an example of one other worrisome feature of Chinese investment: the prominent role of the Chinese government. In this instance, it appeared that one firm with government ties cancelled a large order, driving down the Aixtron share price, just in time for another, government-run investment firm to purchase the company at a bargain price. Roughly two-thirds of Chinese foreign direct investment is wielded by state-owned firms (SOEs). This means that what might be business decisions in a free-market context, can be government-directed mandates to SOEs. The specter of businesses doing the government’s bidding, serving the political demands of China’s government, rather than the market or needs of investors or customers, heightens national concerns. Sebastian Heilmann of the Mercator Institute for China Studies in Berlin said the Aixtron case “makes it very clear: It is not regular investment that is at work here. Instead, we see governmental-program capital working behind the scenes.”
Viewed in a European context, other hard choices face Berlin. German economic and political success has been based on and derived from the strength of Europe and its economy. But for some time the European economies have shown little growth. This endangers the health of the German economy, which has sustained modest growth, because of the dependence of Germany on exports to its fellow European states. So, to the extent that Chinese trade and investments stimulates growth in Europe, Germany is likely to benefit.
But China has been able to pursue a “divide and conquer” strategy in Europe that produces for Beijing much more favorable trade and investment outcomes than would emerge if Europe were to act effectively together. This year the European Commission put forth a draft “EU Strategy for China” which pointed out that “As China’s biggest trading partner, representing about 15% of China’s trade, and an attractive and secure designation for its outward direct investment, China needs the EU as much as the EU needs China.” However, as multiple exhortations in the EU strategy indicate, the EU states have consistently failed to act together or take advantage of their combined economic power to arrange trade or investment deals with China (though overall trade and investments pacts are in the works). An example of the erosion of the EU role is the successful creation by China of the “16+1” group of Central and Southeast European states—which includes eleven EU members and five nonmembers—to deal with China outside of the framework of the EU.
The dilemma for Germany in this respect is that in such an “everyone for themselves” environment, Germany is likely to emerge as the winner. Already the dominant economy in the EU and with the UK on the way out, Germany will be an even more attractive partner for China, for trade, investment, and overall influence in Europe. As one observer put it, “In diplomatic circles you can hear that when China is talking about Europe, it means Berlin.” However, to the extent that Germany dominates the Europe-China relationship, it may weaken its commitment to—or the perception of its commitment to–a common European project. Coming on the heels of the sharp criticism of German insistence on austerity policies for the Greeks and its unilateral pursuit of a second Germany-Russia gas pipeline in the North Sea, this would not be the kind of European view of Germany Berlin would want to encourage.
Implications for German Foreign Relations
On the strategic level, the pressure is not quite as acute, but the challenge for what might be termed the German-EU-U.S.-China “rectangle” is still present. In the South China Sea, Beijing has been pressing in words and actions its contention that the land and waters are under its sovereign and unique jurisdiction. In doing so, it not only has increased tension levels with many of its neighbors, but also challenged directly the United States’ power and influence in this region. While Germany does not have the capacity either alone or with the U.S. to challenge Chinese assertiveness, it is called upon to support the position of its European and American allies. In July China rejected the ruling of the Permanent Court of Arbitration, convened under the Law of the Sea Convention, which denied its unilateral claims to the region. Germany dutifully supported a mild EU statement urging respect for international law and law of the sea. But Germany also was part of a much tougher response voiced by the G-7 group which expressed its “strong opposition to any intimidating, coercive or provocative unilateral actions that could alter the status quo and increase tensions, and urge[d] all states to refrain from such actions as land reclamations including large scale ones […].” As China is the only state to engage in such “large scale” acts, this is a fairly pointed criticism of Beijing. Moreover, in the summer of 2016 a German naval vessel for the first time participated in maneuvers in the South China Sea with the U.S. fleet.
China’s “rise” also calls the question for Germany in other ways. Part of China’s foreign policy orientation involves criticism of Western-dominated economic institutions, such as the World Bank and International Monetary Fund (IMF). And it is determined to see its currency, the renminbi, take its place alongside other world currencies, especially the dollar, in global trading. In support of both of these goals and driven as well by the prospect of a U.S.-led Trans Pacific Partnership (TPP) that excludes China, Beijing sponsored the creation of the Asian Infrastructure Investment Bank (AIIB). All of the European states, but especially the UK and Germany, found themselves caught between U.S. opposition to this institution and their own desire to maximize burgeoning economic ties along the Silk Road. In the end the Germans, like most other European countries, did join the AIIB.
At the end of this year, a new dimension of the rectangular relationship will be further tested, as the EU must decide if China merits the designation of “Market Economy Status,” ending its fifteen-year probationary period within the World Trade Organization (WTO). The United States and many Europeans oppose granting this designation on a variety of grounds and the EU appears to agree. If a common EU-U.S. position is sustained, Berlin, which had favored granting the status, will nevertheless have some protection against a possible Chinese negative reaction directed toward them.
Looking through the Rectangle
Because of its size and importance as an economic actor, China matters. Because power in global politics is something of a zero sum game, the degree of power that China absorbs comes at the expense of other actors, both Europe and the U.S. For European states, which have a huge stake in the peaceful success of China, their degrees of freedom are restricted by their alliance with Washington and by the dynamics of their own intra-group alliance, the EU.
For the past three years, the EU has struggled with several severe, simultaneous, and tenacious crises: migration, terrorism, economic sluggishness, the rise of populism, a challenge from Russia, and now, Brexit. For the remaining “leader of the pack,” Germany, the pressures are and will continue to be significant. Dealing with China brings with it a suite of issues on which, as the saying goes, “not to decide is to decide.” Germany does not have the luxury of simply letting dynamics—economic or political—unfold. Now with European action in many arenas needed more than ever, with leadership fragmented and, in this case, with the economic momentum of Chinese involvement growing, Germany must act, either alone or, if it can manage it, with its EU allies. In traversing this geometry, the Merkel government—as its predecessors–faces what Hans Kundnani calls the “paradox of German power.” Economics minister Gabriel’s action on Chinese investment reflects only the latest attempt to resolve that paradox.
Dr. Ronald H. Linden was a DAAD/AICGS Research Fellow in September and October 2016. He is Professor of Political Science at the University of Pittsburgh.
I would like to express my appreciation to the DAAD and AICGS for this fellowship, to the AICGS staff for their support and to Simon Schütz for his research assistance.
 Paul Mozur, “Germany Withdraws Approval for Chinese Takeover of Aixtron,” New York Times, October 24, 2016; “U.S. warned Berlin on China-Aixtron deal: Handelsblatt,” Reuters, October 26, 2016.
 “Germany stalls Osram unit sale to Chinese buyers: WirtschaftsWoche,” Reuters, October 27, 2016.
 Going Out—the global dream of a manufacturing power (China: Ernst & Young, 2016), p. 7.
 “Nation’s FDI in Germany surges in H1, ministry says,” Global Times, October, 17, 2016.
 “Vision and Actions on Jointly Building Silk Road Economic Belt and 21st Century Maritime Silk Road,” National Development and Reform Commission, Ministry of Foreign Affairs and Ministry of Commerce (March 2015).
 Data on FDI from Thilo Hanemann and Mikko Huotari, A New Record Year for Chinese Outbound Investment in Europe (Berlin: Mercator Institute for China Studies and Rhodium Group, 2016), p. 3.
 Christoph Schnellbach, Joyce Man, Germany and China: Embracing a Different Kind of Partnership? CAP Working Paper, September 2015.
 Schnellback and Man, Germany and China, pp. 14-15.
 Hans Kundnani, “Germany’s New Skepticism About China,” German Marshall Fund, October 24, 2016, available at: http://www.gmfus.org/blog/2016/10/24/germany%E2%80%99s-new-skepticism-about-china.
 Philippe LeCorre and Alain Sepulchre, China’s Offensive in Europe (Washington, DC: Brookings Institution Press, 2016), pp. 24-5
 “China,” Federal Foreign Office, Updated March 2016; available at: http://www.auswaertiges-amt.de/EN/Aussenpolitik/Laender/Laenderinfos/01-Nodes/China_node.html
 “BDI calls for greater market access to China,” Deutsche Welle, September 12, 2016.
 Paul Mozur and Jack Ewing, “Rush of Chinese Investment in Europe’s High-Tech Firms is Raising Eyebrows,” New York Times, September 16, 2016.
 Hanemann and Huotari, A New Record Year for Chinese Outbound Investment p. 6.
 Mozur and Ewing, “Rush of Chinese Investment.”
 Sophie Meunier, “Divide and Conquer? China and the cacophony of foreign investment rules in the EU,” Journal of European Public Policy, 21:7 (2014), pp. 996-1016. Philippe Le Corre, “What China’s checkbook diplomacy means for Europe,” Politico, May 12, 2016.
 European Commission, “Elements for a new EU strategy on China” (Brussels, June 22, 2016), pp. 5-6.
 IHS Economics and Country Risk, China’s new Silk Road in Central and Eastern Europe (IHS, October 20, 2016).
 Markus Kaim, senior fellow for Security Policy at the German Institute for International and Security Affairs, quoted in Charlotte Potts, “Germany’s new global responsibility,” Deutsche Welle, October 25, 2016.
 This represents an adaptation of David Shambaugh’s notion of a U.S.-Europe-China “strategic triangle.” See David Shambaugh, “The New Strategic Triangle: U.S. and European Reactions to China’s Rise,” The Washington Quarterly, 28:3 (Summer 2005), 7-25. For an update, see Jackson Janes and Yixiang Xu, “Changing Parameters of Interdependence: The Triangle of German-Chinese-U.S. Relations,” American Institute for Contemporary German Studies, January 29, 2016.
 European Council, “Declaration by the High Representative on behalf of the EU on the Award rendered in the Arbitration between the Republic of the Philippines and the People’s Republic of China,” July 15, 2016.
 “G7 Foreign Ministers’ Statement on Maritime Security,” Hiroshima, Japan, April 11, 2016.
 “The German Navy Returns to the Pacific Ocean to Militarily Encircle China,” Asia Pacific Research, July 21, 2016.
 See the discussion in Philippe Le Corre and Jonathan Pollack, China’s Global Rise Can the EU and U.S. Pursue a Coordinated Strategy? (Washington, DC: Brookings, 2016), pp. 7-10.
 Insa Ewert and Jan Philipp Pöter, “Market Economy Status for China: The Views From Brussels and Beijing,” The Diplomat, July 25, 2016.
 Hans Kundnani, The Paradox of German Power (New York: Oxford University Press, 2015).
Made possible by the support of German Academic Exchange Service (DAAD) with funds from the German Foreign Office (Auswärtiges Amt - AA)