Germany is in talks to limit the export of chemicals to China that are used to manufacture semiconductors, as Berlin steps up efforts to reduce its economic exposure to the Asian nation. 

The proposal is part of a package of measures that Chancellor Olaf Scholz’s government is discussing that would cut off China’s access to goods and services needed for the production of advanced semiconductors, according to people familiar with the matter. 

If implemented, such a step would limit German companies like Merck KGaA and BASF SE from selling some of their semiconductor chemicals to China, said the people, who asked not to be identified because the discussions are private. 

Mr Scholz has been taking a more hawkish approach to Beijing as the Chancellor tries to strike a balance between supporting Germany’s massive economic interests in China and national security and human rights concerns.

But relations between Europe and China have been fraying, particularly after Chinese President Xi Jinping and Russian President Vladimir Putin declared a “no limits” friendship weeks before Moscow invaded Ukraine. 

A spokesman from the German Economy Ministry declined to comment.  

BASF shares fell back to session lows following the news, to trade down 4.3 per cent at 12.37pm in Frankfurt. Merck KGaA was little changed. Spokesmen from the two companies declined to comment. 

Mr Scholz and his Economy Minister Robert Habeck are liaising closely on the matter with European allies and the United States, which is pushing for a global blockade of China’s access to key technologies, including semiconductors.

Officials in Berlin said there is no pressure from Washington on the matter but, rather, a strong desire to work together and to close ranks on China. 

Semiconductors are a key part of the global supply chain, found in everything from cars and smartphones to refrigerators, and the materials and machines needed for their production are often difficult to obtain. Choking off an already limited supply line could thwart China’s ability to advance its own industry.

Talks within the German ruling coalition on such export controls are still at an early stage, and officials are aware that any such decision could damage business ties with China, which has become Germany’s largest trading partner, the people said.

Mr Habeck, who is also the Vice-Chancellor, has advised officials in his department to work on a toolbox of measures to strengthen Germany’s economic resilience in certain areas and reduce one-sided dependencies on China. The idea of imposing export controls on chip chemicals is part of these deliberations, the people said.

The quickest and most practical way to implement such export controls would be to put the respective goods and services on Germany’s national dual-use list, one of the people said, adding that other approaches via international lists and treaties would probably take too long.

Export controls restrict trade in goods which can be used in both a civilian and military context. The aim of such dual-use lists is to prevent the development and proliferation of chemical, biological and nuclear weapons as well as the hidden production of conventional military weapons.

Earlier in April, German Foreign Minister Annalena Baerbock traded barbs with her Chinese counterpart Qin Gang during a visit to Beijing, saying Taiwan’s destabilisation would be a “horror scenario”.

Ms Baerbock and Mr Habeck are helping Mr Scholz shape a new security strategy that is meant to reduce reliance on China and shield critical infrastructure from hybrid attacks. 

The Netherlands in March agreed to join the US effort to limit exports of chip technology to China. The new measures will rein in exports of ASML’s immersion DUV lithography products, adding to restrictions that already exist for the most cutting-edge lithography machines, which are critical to producing the world’s most advanced chips. The rules are expected to be published before the summer.

While Germany does not have advanced chip-making technologies, Merck and BASF provide firms around the world with critical chemicals required for making semiconductors. Merck’s products or services are found in almost every single chip in the world, while BASF is a market leader in Europe and Asia, home to the world’s most important contract chipmakers, including Taiwan Semiconductor Manufacturing Co (TSMC). 

Without supplies from Merck and BASF, China could face more challenges in developing advanced chip technologies, and even its capabilities to make semiconductors could be affected.

Mr Xi has evoked a Soviet-style “whole nation” system to encourage state-owned enterprises, research institutes and private companies to create technologies that can replace foreign imports amid US efforts to curb China’s technological rise, but the country’s chip industry is still lagging years behind TSMC and Samsung Electronics.

Even as Mr Scholz considers these restrictions, he is seeking to maintain open relations with Beijing. The Chancellor has invited Chinese Premier Li Qiang for talks in Berlin on June 20 in his latest bid to ease tensions between Europe and the government in Beijing, Bloomberg reported earlier this week.

In the talks, Mr Scholz wants to gauge China’s readiness to be a constructive partner on challenges including promoting global peace and tackling climate change, while setting out red lines to any changes to the status quo in Taiwan, according to people familiar with the plans. 

Germany is determined to reduce its footprint in China, with Berlin still struggling with the consequences of its over-reliance on Russian energy following Mr Putin’s decision to invade Ukraine.

Mr Scholz has argued against an economic decoupling from China overnight, and instead is advocating a policy of “derisking”, which means actively reducing Germany’s exposure to the Chinese market over the coming years. BLOOMBERG