Watching China in Europe—April 2024

I am the Ostrich

There will come a day when Germany has no choice but to take an economic decision that Beijing does not like. The Dutch have done it by restricting exports of chipmaking equipment to the People’s Republic of China (PRC). A host of eastern European and Nordic countries have done it by choosing to ban or phase out Chinese suppliers from their 5G networks. And the French have done it by openly pushing for the European Commission investigation into electric vehicle (EV) imports from the PRC. Throughout all of this, Germany has remained unusually quiet, a giant ostrich in the middle of Europe, driving its head deeper and deeper into the sandy swamp that Berlin is built on. US pressure on the neighboring Dutch? Not our problem. Restrict Huawei? Take two years to introduce a baffling new law instead and then refuse to implement it. Shield the European car industry from an onslaught of subsidized competitors? Not Germany, where faith in free trade remains unbroken, even in the face of seismic Chinese distortions.

Perfected by former Chancellor Angela Merkel and mimicked with deadening determination by her successor, Olaf Scholz, this risk-aversion has defined Germany’s approach to geopolitics for years. The problem is that it was never a sustainable strategy. At some point, even an ostrich needs to come up for air, and I fear, dear Olaf, that this time may soon be upon us. The Americans, the Dutch, and the Japanese have all passed through Berlin in recent months, pressing the German government to join their coalition of the willing (and not so willing) on chip controls. The primary target is Zeiss, a German company that produces lenses for the Dutch chipmaking giant ASML and products that help chipmakers detect defects in their wafer production. These products are just the kind of technology Chinese companies such as SMIC might find useful as they ramp up efforts to produce advanced semiconductors at scale.

Transatlantic Disconnect

“Right now, you have three countries bickering over what to restrict and why,” said a European executive who has been watching the transatlantic export controls debate unfold. “Germany does not want to join this club. It doesn’t want to pick a fight with China.” If Germany refuses to budge, it could come under the same acute pressure from the Biden administration that the Dutch and Japanese faced in past years, including the threat of extraterritorial measures. This could deepen a slow-burn transatlantic estrangement on trade that has been brewing since the Inflation Reduction Act (IRA) was unveiled in mid-2022, and Brussels and Washington subsequently failed to reach a green steel and aluminum deal last October. A few months ago, European officials were optimistic about injecting some eleventh-hour momentum into the relationship at the last Trade and Technology Council (TTC) meeting before EU and US elections. That gathering is being held this week in Leuven, Belgium.

But the two sides have failed to overcome their differences on what looked to be the biggest prize, an EU-US deal on critical raw materials. “Even If we gave USTR 100% of what they wanted, I am not sure they would have the courage to take such a deal to Congress,” one senior EU official noted. The US side, I was told, has shown little interest in discussing a streamlining of the TTC and its resource-guzzling 10 working groups. I asked a veteran US trade official if anything will change on transatlantic trade if Biden wins a second term. “Would we do more with Europe? Or would we do less with Europe? It could go either way,” he said. If Trump wins, the TTC will probably die and transatlantic trade tensions will rise exponentially.

Slashing and Ramping

Members of a German business delegation that spent several days in Washington last month spoke of troubling encounters with their US hosts. And the feeling appears to have been mutual. In an attempt to shake the German visitors out of their complacency, one US official brought a picture of a massive car-carrying Chinese ship to a meeting with the delegation to highlight the threat. The official then bluntly told the group that the odds of the German car industry disappearing completely over the next decade were probably no better than even.

The message did not go down well. I attended several PRC-focused gatherings with senior German executives over the past month and found their appetite for the Chinese market undiminished, despite a litany of problems from slowing Chinese growth to unfair competition from state-owned enterprises. German car suppliers, in particular, seem to be thriving, as they deepen their relationships with Chinese carmakers such as BYD, Nio, and Geely, and—in an ironic twist—hedge their bets with struggling German clients. One of these suppliers is ZF Friedrichshafen, which is slashing jobs in Germany and ramping up aggressively in the PRC.

I recommend watching this interview on Chinese state media with Stephan von Schuckmann, a senior executive at the company, which sits near the shores of Lake Constance in southwestern Germany. “The stronger they become, the stronger ZF becomes,” Schuckmann said of Chinese carmakers, before noting that all the company’s top technology was now being developed in the PRC. Last year, Schuckmann rejected the idea that EU trade measures could protect German carmakers. He predicted that Chinese producers would descend on Germany, set up new factories and take over others. Perhaps ZF believes that, when all is said and done, it will be the last German domino left standing.

Football Field

If the Germans need to wake up, the Americans need to calm down. US National Security Advisor Jake Sullivan’s “small yard” is growing, generously fertilized and watered with new data and cybersecurity measures, and metastasizing chip controls. Some technology experts in Europe, who support a tougher approach to the PRC, are growing worried that a dangerous groupthink is taking hold in Washington, fueled by a relentless search for new chokepoints. “No one is taking a step back and asking themselves whether the yard is still small, or whether we are now standing on a football field,” one expert told me.

US pressure on allies to rein in the servicing of chip-making equipment already sold to Chinese clients is a massive ask, particularly of the Dutch, whose outgoing Prime Minister Mark Rutte visited President Xi Jinping in Beijing last week at an especially sensitive time. In what read like a veiled threat, Xi told Rutte that severing industrial supply chains would lead to “division and confrontation”. Beijing has not retaliated against the Netherlands for restricting, at Washington’s urging, the export of chipmaking machines produced by ASML. But the risk of a forceful response remains real, and it would increase if the Dutch (or the Germans) were to stop servicing machines delivered to Chinese customers. As the US yard grows, so do the costs for US allies.

Scholz to Beijing

It is against this backdrop that Chancellor Scholz will travel to the PRC in mid-April with a 12-strong business delegation in tow. Scholz is expected to visit Shanghai as well as Beijing, meeting with Xi and Premier Li Qiang. I am told that a deal will be announced to resume German pork exports to the PRC. They were halted in 2020 due to African swine fever. But business deals of the kind that were announced on French President Emmanuel Macron’s visit last April are unlikely. “They don’t dare cozy up to Xi like Macron did,” a person involved in preparations for the trip told me. “It would create a storm within the German government, and Scholz would be vilified in the media”.

A Scholz visit to Volkswagen’s local operations to celebrate the 40th anniversary of the carmaker’s joint venture with state-owned Chinese firm SAIC had been envisioned. But with the controversy over Volkswagen’s presence in Xinjiang at a boiling point, I was told this idea was scrapped. What Scholz says or does not say about economic ties and the European Commission’s EV probe will also be closely watched. “It is important that China hears that we, too, have concerns about the trade relationship,” a German diplomat told me. “They can’t just hear this from the Commission or from France.” But German business has been urging the Scholz team to play down concerns about Chinese overcapacities and focus instead on securing better conditions for German firms in the Chinese market. “We may not be able to stop the Commission from imposing duties on Chinese cars, but we can send the Chinese a message that Germany is pushing to limit their scope,” the person preparing the trip said. The German leader is also expected to confront Xi with what European diplomats say is rising evidence of Chinese military equipment being used on the battlefield in Ukraine.

The Scholz visit will be followed in early May by Xi’s first trip to Europe in five years, and Russian President Vladimir Putin’s second trip in half a year to see Xi in Beijing. While in Europe, Xi will pass through France, Hungary, and Serbia. It is an awkward mix for Macron, who would have preferred to avoid being lumped together with Hungarian Prime Minister Viktor Orbán and Serbian President Aleksandar Vučić, two eastern European strongmen who have cultivated close ties to Beijing and Moscow. A month later, in mid-June, German Economy Minister Robert Habeck will make his first trip to the PRC. In a world of doves and ostriches, we can expect a little bit of hawk from him.