Merkel in China as trade troubles, tensions loom

German leader likely to focus on imbalance in trade with China, support for Iran nuclear deal

After the recent high-profile visits to the United States and Russia, German Chancellor Angela Merkel arrives in China today on a trip designed to reaffirm her country's key international objectives.

These include the maintenance of the multilateral order and free trade - from which Germany, as Europe's top exporter, has much to gain.

But although Dr Merkel is likely to get a sympathetic hearing from Chinese President Xi Jinping and Prime Minister Li Keqiang, tensions are rising in German-China relations, and there is a growing feeling among German officials that China simply does not seem to understand the change of mood in Europe.

Dr Merkel is a frequent visitor to China - this is her 11th trip to the country in almost as many years. Accompanying her on the trip are 18 captains of German industry. But officials close to her are tamping down on expectations of new trade deals.

Instead, they are stressing on the need for serious political discussion.

Although Germany continues to share China's fears about the dangers of a global trade war unleashed by US President Donald Trump's policies, the Germans have, paradoxically, emerged as the indirect winners from the latest trade spat between the US and China.

Among the chief beneficiaries of China's decision to lower the tariffs of imported cars are Germany's high-end carmakers such as BMW, which exported 224,000 cars to China last year. Daimler sold 184,000 vehicles over the same period, including all variants of its highly profitable Mercedes-Benz S-Class series, and the Volkswagen Group exported 179,000 vehicles.

  • €76b

    Amount that German companies invested in China by 2016.

    €4b

    What Chinese companies put into Germany.

Not surprisingly, German manufacturers are elated. Tariff cuts are "another important step for open markets and a sign of strengthening international trade", German Association of the Automotive Industry president Bernhard Mattes said.

Yet, Germany is still worried about the spectre of trade clashes.

An official close to Dr Merkel said: "Tariff reductions are better than increases but China and Germany should remain committed to the rules of the World Trade Organisation."

And there are trade troubles in the Sino-German relationship, such as the low level of Chinese investment in Germany. German firms invested €76 billion (S$122 billion) in China by 2016 - the last year for which full figures are available - while Chinese companies put only €4 billion into Germany.

But it is the nature rather than the quantity of Chinese investments in Germany that worries Dr Merkel.

Much of the Chinese interest is in small to medium-sized German technological firms - the real innovators behind the country's industrial prowess. Many of these are family-owned and cash-strapped, and China picks them up one by one.

A recent study compiled by the Bertelsmann Foundation - a respected German research body - found that much of this Chinese investment in Germany is not just about economic interest, for it coincides precisely with Beijing's "China 2025" development plan.

The 175 German firms taken over in part or in full by the Chinese are in the automotive, energy, medical and robot technology sectors, and in the three federal states of Baden-Wurttemberg, North Rhine-Westphalia and Bavaria - all innovation powerhouses.

"Our country is open, Europe is open, we are not protectionist," a government spokesman said on the eve of Dr Merkel's visit.

Still, the Germans are spearheading demands for the adoption by the European Union of regulations allowing European governments to vet Chinese purchases of sensitive technologies. And there is a strong debate within the German government over the need to strengthen the country's powers to restrict foreign shareholding.

China has expressed its displeasure about these rumblings. Ambassador to Germany Shi Mingde, in recent interviews with the German media, spoke about a "growing sentiment of protectionism". Beijing also gave French President Emmanuel Macron an unusually warm reception on his visit in January, amid suggestions in the Chinese media that France is now China's "preferred European partner".

Over the next two days, Dr Merkel will do her best to smooth China's ruffled feathers. She will seek Beijing's support for the continuation of the nuclear deal with Iran that the US recently renounced. And she will stress other areas of Sino-German cooperation, particularly in environmental protection measures.

Still, the mood of the bilateral ties between the two countries is downbeat. A recent poll by leading German daily Frankfurter Allgemeine Zeitung found that no less than 70 per cent of German business executives are concerned about China's growing political and economic influence in their country.

A version of this article appeared in the print edition of The Straits Times on May 24, 2018, with the headline 'Merkel in China as trade troubles, tensions loom'. Print Edition | Subscribe