Merkel’s quiet diplomacy: “A meaningful milestone for EU-China relations”

Asia House Advisory assesses Chancellor Merkel’s recent visit to China and what it means for German, and EU, relations with Beijing. 

Trade tensions between the US and China have dominated headlines over the past year, as the world’s top two economies continue to clash over a range of issues, from market access to forced technology transfer.

The European Union (EU) – the world’s second largest economy in GDP terms, and the largest in PPP terms – has so far stayed out of these tussles directly. Many European businesses and politicians are quite happy for this to remain the case. However, some strategic thinkers see a role for the EU as an international arbiter, while others see the EU getting dragged into the fracas as an inevitability.

German Chancellor Angela Merkel perhaps falls into this latter category, and as Europe’s largest economy (indeed, fourth in the world), Germany has a unique role in Europe’s foreign and economic relations. In addition to the importance of the German economy, Merkel’s tenure, temperament and diplomatic nous have put her on the speed-dial of global leaders who want to “speak to Europe” and don’t fancy calling the European Commission’s High Representative for foreign affairs.

Earlier this month, Merkel visited China for the twelfth time in the fourteen years she has been Chancellor. This was a distinctly German – not European – trip, with China-Germany relations the key focus of the talks. However, China’s broader relationship with Europe also came up, as did the situation in Hong Kong.

Trade remained front and centre during the trip. The Chancellor was accompanied by a large business delegation, and several deals were signed between German and Chinese companies. An MoU was signed between Deutsche Post and Chinese automobile manufacturer Chery Holding Group, on developing an electric light utility vehicle for last-mile delivery. Chery has a 20 per cent market share in China’s electric commercial vehicle sector, and production is scheduled to begin in 2021 with up to 100,000 units a year. Another deal done during the trip will see Airbus work with China’s AVIC Aircraft company on fuselage production, with the value of the cooperation set at US$900 million.

According to Asia House Advisory Board member Anne Ruth Herkes, former State Secretary at the German Ministry for Economic Affairs and Energy, the visit represented steady progress for German business interests in China.

“While there were no major breakthroughs on the trip, there were significant piecemeal steps. The trip represented a continuation of the Chancellor’s quiet diplomacy with China, walking a narrow line between raising sensitive issues and making progress on trade and economic issues.”

The trip itself was an exercise in skilful diplomacy that balanced the importance of the economic relationship with human rights messages. Merkel stated that the rights and freedoms of the people in Hong Kong “must be guaranteed” and that “everything must be done to avoid violence”.

China’s social credit system, due to be rolled out in 2020, was also discussed, particularly its potential impact on business. The European Chamber of Commerce in China has released a report to help businesses think through the system.

In recent years, Germany’s relationship with China has been mixed. In 2018, trade between the two countries was worth US$225.7 billion; Germany is China’s biggest trading partner in Europe. The German government has portrayed China as a strategic partner, though it is increasingly seen as a systemic rival.

Walking the line between partnership and competition is not getting any easier. Noises from the German government indicate that a more protective policy is being developed. This includes economy minister Peter Altmaier’s proposed fund to work with the private sector to foil ‘unwelcome take-overs’. The idea was reportedly prompted by the Chinese takeover of robotics maker Kuka in 2016. In addition, Germany’s National Industry Strategy 2030 is primed to provide increased government support to nine strategic industries, providing a more defensive posture against overseas competition.

Similar noises are being made at the EU level, building on historic anti-dumping cases against China on footwear and solar panels. Most recently, the EU has taken a somewhat passive-aggressive approach to defending itself against China. An EU foreign investment screening regulation entered into force in April this year, to be fully applied by October 2020.

There are more seismic decisions that could be taken at the EU level. Industrial policy, a concept that had fallen out of fashion in the West, is making a comeback in EU members states – including Germany – and at the EU level. It has also been more than a decade since the largest competition law review, around the Lisbon Treaty in 2007. Beside any assumptions, the EU and China have been negotiating a bilateral investment treaty since 2013, which will no doubt continue to be a major focus for the relationship.

However, Anne Ruth Herkes suggests that it is “too early to speculate” on the line that the new Commission will take on China, and on whether we’ll see more of a ‘Fortress Europe’ mentality.

Indeed, it is impossible to look at Merkel’s trip without considering the European dimension.

Ms Herkes described the mission as a “meaningful milestone in the shaping of the relationship between China and the EU”.

With the new Commission under former German defence minister, Ursula von der Leyen, due to take seat in November, with the current international environment as it is, the next five years will be critical for the EU-China relationship.

In any case, the Chancellor’s most recent trip has shown that, despite issues that have arisen over competition and investment, the German-Chinese relationship – and by extension, a significant part of the EU-China relationship – is on relatively stable ground for the time being.

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