China's trade deal with US leaves Germany squeezed in middle

Chinese President Xi Jinping with German Chancellor Angela Merkel in Hamburg, Germany on July 7, 2017. PHOTO: REUTERS

BERLIN (BLOOMBERG) - Chancellor Angela Merkel heads to China with another US-prompted headache threatening to hurt German interests.

China's pledge to buy more American goods as part of a deal to avert a trade war with the US puts Germany on the spot. As China's biggest European trading partner, with a total volume of some US$179 billion (S$240 billion) last year, Germany is first in line to suffer the impact of any reduction in business.

"China will buy more and more products from the US that we might have otherwise bought from Europe or other partners," said Professor Wang Yiwei, director of Renmin University's Institute of International Affairs in Beijing, and a former Chinese diplomat in Brussels. "This will certainly have a spillover effect."

The upshot is a complex balancing act for the chancellor, as she champions open trade and the multilateral system, knowing that China is failing to allow reciprocal access to its markets while targeting strategic interests across Europe.

On the other axis is the US under President Donald Trump, whose protectionist moves are straining the trans-Atlantic bond and preventing a common front against China's trade transgressions.

With a large group of corporate leaders in tow, Dr Merkel plans to drive home Germany's demand for China to ease barriers on foreign investment when she meets President Xi Jinping in Beijing on Thursday (May 24). Fresh from a visit with Russia's Vladimir Putin, she is also expected to seek China's backing for upholding the Iran nuclear accord.

"China and Germany are committed to the rules of the World Trade Organisation," Dr Merkel said in her weekly podcast on Saturday. "Yet we will also talk about reciprocal access in trade and intellectual property issues."

It would take much to dismantle the European Union as a favoured region for Chinese business. China has bought or invested in European assets amounting to at least US$318 billion over the past 10 years, according to data compiled by Bloomberg, a figure that is approximately 45 per cent more than the equivalent in the US. Germany is Europe's largest economy.

"China-Germany relations have been developing with a sound momentum," Chinese Foreign Ministry spokesman Lu Kang said last Friday. "China highly values its relations with Germany."

Still, Germany has joined EU partners in examining instruments to better screen China's open access to the bloc's US$17 trillion economy. That prompted China's ambassador to Germany, Mr Shi Mingde, to turn the European grievance on its head, accusing Germany of overseeing a "protectionist trend".

"China is opening itself further, but we are concerned that the door to Germany that has been opened will be closed again," Mr Shi told the Stuttgarter Zeitung newspaper in an interview on Monday.

German officials played down the impact of any deal between the US and China. A bilateral agreement would be helpful at least in terms of moving away from protectionist tendencies championed by Mr Trump, according to an official in Dr Merkel's delegation.

China's announcement on Tuesday that it would slash import duties on passenger cars to 15 per cent from 25 per cent signalled an opening by China's policy makers. Whether or not it was viewed as a concession to Mr Trump, the move helps German carmakers including Daimler and Volkswagen.

The US leader backed off his threat to impose billions in tariffs on Chinese goods, hamstrung by disputes among his trade negotiators and worries over upcoming negotiations on North Korea. Mr Trump said on Twitter on Monday that China had agreed to buy unspecified amounts of American farm products.

China's handling of intellectual property has surfaced as an issue on which both Germany and the US could form a common line, according to officials on both sides. But divisions within the Trump administration and the trans-Atlantic rift have pushed off that prospect, Mr Mikko Huotari, who leads research on economics at the Mercator Institute for China Studies in Berlin, told reporters Tuesday.

Mr Trump's decision to withdraw from the Iran nuclear pact is creating another front on which Dr Merkel and Chinese leaders can seek a common line. The calculation is that China's economic might could help keep the deal afloat, helping to counter an exodus from Iran by businesses that fear US sanctions.

"The rescue of the nuclear agreement with Iran and the WTO might end up being such prominent themes in the talks that other controversial issues between Germany and China will take a back seat," Mr Jan Weidenfeld, head of the European China Policy Unit at Merics in Berlin, said in an e-mail.

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