By Irene Ezran and Joseph Vaughan
'New Perspectives on Asia' highlights the research of junior CSIS staff and interns on issues that are quietly shaping the world's most dynamic region.
On November 4, German chancellor Olaf Scholz arrived in Beijing with a high-powered entourage of business executives from his country’s most prominent multinational corporations
, including the CEOs of Volkswagen, Adidas, Deutsche Bank, BASF, and Siemens. Scholz’s visit with Chinese president Xi Jinping will be the first from a major Western leader following the 20th National Congress of the Chinese Communist Party, in which Xi secured a norm-breaking third term and is widely acknowledged
to have significantly consolidated his power. Some view the trip as evidence that the Scholz government is content with a business-as-usual approach to Sino-German relations, even though many EU and German officials—including members of Scholz’s cabinet
—have urged the reevaluation of continued economic interdependence with China and called for a “China Strategy”
to address Germany’s vulnerabilities. Scholz took the unusual step of explaining his trip in an op-ed
, in which he promised Germany would “continue to insist on reciprocity” in market access and “not ignore controversies.”
China’s entry into the global trading system in 2001 marked the beginning of two decades of mutually beneficial exchange: German consumers benefited from a flood of cheap Chinese imports, while Chinese businesses imported products and expertise from Germany’s sophisticated manufacturing base.
But as China has climbed the development ladder, its leaders have deliberately opted not to de-industrialize and instead to focus their industrial policy efforts on moving up the value chain to compete in high-end manufacturing. The share of German exports sold to China
has tripled since 2000, during which time the value of those exports increased nearly eightfold
. Meanwhile, sales of German subsidiaries based in China now exceed total German exports to the country (see Figure 1), making access to the Chinese market a top priority for Berlin. German business leaders have criticized policy proposals
intended to prompt diversification away from China. For his part, Scholz has attempted a middle path
of accepting the EU’s description of China as a “systemic rival” while also resisting calls within the EU and Germany to partially “de-couple” from China’s economy.
Figure 1: Sino-German Economic Ties (2000–2021)
Source: Eurostat, Statistisches Bundesamt. Note: “Affiliate sales in China” reflect the sales of German-owned subsidiaries located in China.
China’s Industrial Policy Goals Pose a Direct Challenge to Germany’s Economic Model
The depth of Sino-German trade and investment integration speaks to historical complementarities between the two economies. In the 1990s and 2000s, as China became the world’s factory, German exporters benefited
from insatiable Chinese demand for robotics, electrical equipment, and other high-end machinery in which they specialized. China is the world’s largest automotive market
, and German automakers, along with their U.S. and East Asian rivals, capitalized on the Chinese consumption boom through highly profitable joint ventures with local firms
. Volkswagen now makes half its net profits
in China, and Mercedes-Benz sells three times as many cars
in China as it does in the United States. In addition to the automotive industry, China accounts for the bulk of global growth in chemicals
, leading German giant BASF to announce plans to curtail its European presence
in order to focus on the opportunity presented by China. Moreover, amid the worsening market sentiment caused by Covid-19 restrictions and rising geopolitical tensions, European foreign direct investment (FDI) in China has become increasingly concentrated in a handful of large firms
, with Germany far outpacing its neighbors by contributing 43 percent of the total FDI over the last four years.
But some fear that German industry’s efforts to “stay a step ahead [of China] in terms of technology and quality”
may have begun to falter over the past few years. Since China’s accession to the World Trade Organization, its global market share in vehicles, machinery, chemicals, and electronics has risen substantially, while Germany’s has stayed relatively stable (see Figure 2). It remains to be seen whether that stability can persist, or if future Chinese growth will come at Germany’s expense. In many areas of advanced manufacturing—perhaps most prominently the electric vehicle market
—Chinese competitors have caught up to, if not surpassed, their once-dominant German counterparts.
Figure 2: China and Germany's Share of the Global Market by Sector
Source: Harvard Atlas of Economic Complexity.
As China’s demographic dividend and labor cost advantages have waned, Beijing has sought to upgrade its domestic manufacturing base. The stated objectives of its development strategy resemble Germany’s economic model of high-end export-driven growth; in some cases, Chinese industrial policy documents pay explicit homage
to analogous German plans. Released in 2015, the “Made in China 2025
” plan set ambitious import-substitution targets across a wide range of high-tech applications. Similarly, Beijing’s nascent “dual circulation
” strategy envisions a future in which Chinese companies capture a dominant share of high-end manufacturing domestically and, in time, compete fiercely with German, Korean, and Japanese rivals in overseas markets. Echoing Germany’s “Industrie 4.0” plan
, official Party propaganda emphasizes the importance of dominating the “Fourth Industrial Revolution”
—a term that refers to highly automated and interconnected manufacturing processes critical to producing next-generation technologies. Beijing sees its manufacturing prowess as a crucial point of competitive advantage.
Xi’s vision for his country’s development path will likely bring China into more direct competition with German manufacturers both in China
. Beijing’s ambitions for greater self-sufficiency in high-end manufacturing derive in large part from a desire to reduce China’s vulnerability to foreign interference. Ongoing U.S.-led efforts to restrict China’s access to core technologies, in particular semiconductors
and the specialized equipment needed to make them, have laid bare the uncomfortable extent of China’s dependence on Western technology. In an April 2020 speech
, Xi underscored the importance of building production chains that are “independently controllable,” declaring that “the real economy is the foundation, and the various manufacturing industries cannot be abandoned.”
Divisions within German Politics on Revising Sino-German Relations
Former German chancellor Angela Merkel’s departure from office in 2021 after 16 years of dominance over German politics prompted a flurry
regarding the pitfalls of Germany’s economic dependency on China. Throughout her chancellorship, Merkel had kept up the practice begun by her predecessor, Gerhard Schröder
, of mixing diplomacy with business through regular trips to Beijing alongside titans of German industry bent on securing new investment deals. Towards the end of her time in office, Merkel, a staunch proponent of engagement with China, admitted that her administration may have been naïve
in its early dealings with China, but that “these days we look more closely, and rightly so.”
German politicians are increasingly divided
between those who focus their agenda on values such as human rights and democracy in China, and those who focus on commercial interests. The divisions between and even within German political parties came to the fore during a recent debate over whether to allow COSCO, China’s state-owned shipping giant, to purchase a stake in one of the four container terminals
in the Port of Hamburg, Germany’s largest maritime shipping hub. Prominent members of Scholz’s executive cabinet—including his economy minister
, foreign minister
, and chiefs of domestic and foreign intelligence
—had voiced opposition to the deal. In addition, a recent Der Spiegel
poll found that 81 percent of Germans opposed COSCO’s involvement in the port. While the Scholz government ultimately approved the agreement, intense political pressure prompted Berlin to reduce COSCO’s maximum ownership stake from the proposed 35 percent to 24.9 percent
in order to ensure that the Chinese company would not have strategic control.
Since 2019, the EU has characterized China
as a “partner, economic competitor, and systemic rival”—a description that Scholz’s coalition government has officially adopted
. Recent years have seen an uptick in EU legislation and policy instruments that appear to have arisen with China at least partly in mind, including a stricter screening mechanism
for inbound FDI, an anti-foreign subsidy instrument
, an anti-economic coercion instrument
, a measure requiring reciprocal government procurement access
, and a proposed rule
designed to crack down on the use of forced labor in global supply chains.
Wandel durch Handel
(“change through trade”)—an established tenet of German foreign policy referring to the idea that trading with authoritarian regimes can prompt political reform—met fierce criticism
in the wake of Russia’s invasion of Ukraine. In October, European Commission president Ursula von der Leyen directly compared
the potential embedded risks of closer economic ties with Russia and China. A recent paper circulated by Josep Borrell, the European Commission’s high representative for foreign affairs and security policy, called for member states to diversify their trading relationships
in order to reduce the “strategic vulnerability” posed by overreliance on the Chinese market. The ongoing war in Ukraine has upended Germany’s most critical energy relationship
and, thanks in part to Beijing’s “no-limits” embrace of Moscow
just weeks before the invasion, renewed fears that Berlin’s cozy relationship with China could also compromise Germany’s autonomy
Still, Berlin currently appears unwilling to match the EU’s tenor in directly challenging China. Germany has joined calls for EU member states to exercise greater sway
in deciding when the EU can use its new anti-coercion instrument. In the instrument’s current form, the European Council appears to yield this power, which may facilitate easier deployment of the tool. The uneasy position of German industry was showcased in a recent dispute between China and Lithuania, in which Beijing responded to the opening of a Taiwanese Representative Office in Vilnius
by—among other actions—pressuring multinationals
to sever ties with Lithuanian companies or else risk exclusion from the Chinese market. Although a powerful German business lobby condemned
China’s coercive tactics, German car manufacturers also pressured the Lithuanian government to de-escalate tensions with China and seek a “constructive solution
.” Moreover, it is sometimes difficult to parse out Germany’s overall sentiment regarding trade disputes given that German companies and policymakers do not always see eye to eye
on how to tackle the China challenge.
In December 2020, near the tail-end of Germany’s presidency of the European Council, the EU and China tentatively signed the Comprehensive Agreement on Investment (CAI)
—perceived by some as a victory for Beijing
after a year marked by rising tensions with the United States. Despite German industry’s initial enthusiasm for the deal, the CAI stagnated after a row broke out in March 2021 between the EU and China
over alleged human rights abuses in Xinjiang, resulting in both the EU and China placing sanctions on each other’s officials. Despite Scholz’s assurances to Xi
that he hoped a new CAI would soon be signed, political support for the agreement in Germany appears to have waned significantly
The fractured state of Sino-German relations reflects a central paradox. China’s industrial policy goals threaten the long-term viability of Germany’s export-driven growth model, and the specter of Ukraine raises fears that deeper interdependence with China could pose future risks to European national security. But a sizable faction within Germany’s political and business class appears reluctant to meaningfully reduce that interdependence. It’s possible that despite vulnerabilities resulting from this interdependence, Germany may yet be unwilling to endure the high cost of curtailing trade with China
. This year’s efforts to reduce energy dependence on Russia have exerted enormous financial and social hardship, likely representing just a fraction of the economic pain that Germans would endure in a future forced decoupling from China. The degree of integration between the two economies is such that small, incremental reductions in trade with China would likely not meaningfully improve Germany’s security.
Still, Germany’s relationship with China continues to evolve. German foreign minister Annalena Baerbock, a member of the more Sino-skeptic Green Party, is set to release the country’s first-ever China strategy
early next year. The much-anticipated document will likely assess risks associated with China’s leverage over the German economy and highlight opportunities to diversify commercial ties from China to other developing countries. In addition, given the divergent views of Germany’s political elite, future governing coalitions may seek to confront some of the national security vulnerabilities that Scholz seems to have accepted as an unavoidable reality.
Irene Ezran is a research intern with the Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Joseph Vaughan is a research intern with the Economics Program at CSIS.
'New Perspectives on Asia' is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).