Strategic Shifts

Excellent Business Partner

As in the past, Merkel's current visit to China is focused, above all, on the expansion of business relations. Over the past few years and decades, the People's Republic of China has assumed a vast importance for the German economy. In 2014, that country was Germany's most important non-European trading partner - even ahead of the USA, and second non-EU site of investments after the USA. German companies' direct investments in China - both those made directly and those through intermediaries - supersede, in the meantime, by far, those made in Italy or France, with the tendency rising. Government circles estimate that around 5,000 German companies are doing business in China, accounting for between five and ten percent of their total turnovers. Automobile companies are exporting up to a third of their products to China. That Matthias Müller, Volkswagen's CEO, is accompanying the chancellor on her trip to Beijing, is an indication of the importance the auto industry places in the People's Republic of China. During the first semester of 2015, Volkswagen's market in China slumped by 70,000 autos, much worse than in Russia, which gives cause for serious concern at the production headquarters in Wolfsburg.

Structural Transformation in China

Berlin is already worried about these business relations. Since some time, the People's Republic of China has been engaged in the systematic transformation of its economy from an investment-driven towards a consumer- and service-driven growth model. This can be seen in the transition from lo-tech to hi-tech production, accompanied by a systematic increase in income and living standards for the population. This is relatively unfavorable for German industry, explains the expert on China, Sebastian Heilmann, Director of the Mercator Institute for China Studies (MERICS) in Berlin. Due to the "changing economic structure in China, the level of demand for industrial goods" from abroad is significantly falling.[1] "German capital goods and automobiles will no longer enjoy the same levels of demand growth in China as previously," warns Heilmann: "In light of this structural crisis, German companies and investors must adapt their strategies." Indeed, this change is already clearly showing its effects in the German foreign trade statistics. This year, whereas German imports from the People's Republic of China have increased by more than one-sixth in comparison to the same period last year, exports to China have stagnated. This is a heavy blow to the export-oriented German industry.

London rather than Berlin

This is aggravated by the fact that the structural transformation of the Chinese economy, as Heilmann explains, implies that "a strategic shift is taking place in European-Chinese relations which could have serious repercussions for Germany." With its mechanical engineering and automobile producers, Germany had been "for more than a decade ... the anchor state for Chinese involvement in Europe," summarizes the specialist on China. "The Chancellor and her government were wooed by the Chinese."[2] It is true that currently, 30 percent of the Europe-China trade volume is with Germany. Now, however, "from the Chinese side, the demand for industrial goods has declined." while simultaneously, China's "demand for access to international finance and currency markets, as well as its general demand for service-related know-how, has increased massively." In this respect, "the UK is much better positioned than Germany and is better able to meet China’s substantial requirements," explains Heilmann. Chinese President Xi Jinping made a state visit of several days to London, last week, to jump-start the expansion of Chinese-British business relations. "Suddenly the UK has left Germany in its tracks with a highly proactive China policy," concludes Heilmann: "London is taking over the lead role in relations with China" (within the EU - editors note). This is "significantly" due to "changing Chinese interests."

Provocations

Whereas in Beijing, German Chancellor Merkel is now seeking to stabilize the German position in the Peoples Republic vis à vis its British rival, the USA has staged provocations in the South China Sea,[3] where China and several other Southeast Asian countries are disputing sovereignty over various islands and archipelagoes of the area. A while ago, China began to elaborately enhance construction on some of these islands - earlier, Vietnam and Taiwan had done the same - preparing some for military use. Tuesday, a US Navy destroyer transited through the maritime waters claimed by China near the Spratly Islands. The sole purpose for the destroyer's transit through this area was to contest Beijing's claims to this territory. This provocation has led to a diplomatic dispute. The Chinese government has summoned the US ambassador. As was confirmed by government circles in Berlin, Chancellor Merkel will also raise the issue of territorial conflicts in the South China Sea. Because it is unlikely that the Chancellor would disavow Germany's most important NATO partner, serious discord can be expected regarding the US destroyer affair.

Strategically not a Focus

Just recently, the German Institute for International and Security Affairs (SWP) took a much more sober approach toward the disputes over these islands. Major Christian Becker, an associate of the General Staff of the German Bundeswehr, did research on "the strategic military significance of the South China Sea" for the SWP. In his analysis, he concludes that the military bases on islands in the South China Sea would, at best, provide Beijing "meager military advantages," whereas, in times of war, they would "either have to be relinquished, with a substantial loss of face, or defended with high risks."[4] Therefore, the idea - also widespread in German media - that the construction of military bases are a "prelude to a more comprehensive projection of military power into Southeast Asia," lacks any logic. Most likely, these bases offer China the opportunity "through reconnaissance of foreign weapons systems" - for example, those mounted on a US destroyer, transiting through the South China Sea - "to glean important information on their technical features." Much speaks in favor of seeing "Chinese measures, building up these islands, ... as based more on a defensive strategy for maintaining the status quo." To avoid an escalation of the conflict, Becker strongly advises that "all parties to the conflict assess the situation as rationally as possible." "As a first step, European policy ... should renounce the narrative that these islands are of decisive strategic significance, which is, above all, being propagated by the media."[5]

For more information on this topic see: Germany in the Island Dispute, Germany in the Island Dispute (II), and Using Double Talk (II).

[1], [2] Merkels China-Reise: "Deutschland verliert in den Beziehungen zu China an Boden - Wirtschaftliche Abkühlung und diplomatische Ernüchterung". www.merics.org.
[3] Peking empört sich über amerikanischen Zerstörer. Frankfurter Allgemeine Zeitung 28.10.2015.
[4], [5] Christian Becker: Die militärstrategische Bedeutung des Südchinesischen Meeres. SWP-Aktuell 82, September 2015.