Between the U.S. and a hard place, Germany's Scholz reheats China ties

Last year, Germany launched a strategy to "de-risk" from China, but on Saturday, Chancellor Olaf Scholz starts a high-stakes visit there hoping to shore up ties at a delicate point, with the U.S. and EU threatening to hammer Chinese goods in subsidy rows.

With the German economy in the doldrums, its companies are pushing for fairer access to a Chinese market, which they feel still heavily discriminates in favor of local firms despite promises to the contrary.

At the same time, China will likely press Berlin not to fall in behind threatened European Union measures against its cars, solar and wind park equipment that Brussels feels are being dumped on its market too cheaply.

China's own economy is also struggling, hit by another ratings outlook downgrade this week and its factories blamed for producing more goods than they can locally sell.

The possibility of Donald Trump — who has threatened to hike trade tariffs on all countries including Germany — returning to the White House also looms over the visit.

With the prospect of U.S. aid to Kyiv looking shakier, Scholz will also likely push China on its support for Russia's wartime economy as Russian forces continue to pound Ukrainian cities two years into the invasion.

Scholz, on a previous visit in 2022, trumpeted persuading President Xi Jinping to warn Russia off using nuclear weapons.

"The Europeans urgently need to clarify how they can position themselves as a pole between the USA and China and not be crushed between their conflicts," said Maximilian Butek, the head of the German Chamber of Commerce in eastern China.

"There is still no solution as to how to protect your own market without risking giving up your China business at the same time."

Scholz's government has become wary of tethering Germany to the Chinese economy after the invasion of Ukraine exposed Europe's reliance on Russian gas exports and fueled a cost-of-living crisis.

Scholz meets Chinese President Xi Jinping in Beijing in November 2022. | Pool / via Reuters

Three studies published by German institutions this week highlight other German concerns.

One study showed nearly two-thirds of companies feel discriminated against in the Chinese market, with the rise of local firms also eating into profits and market share.

A second by the Kiel Institute estimated China's subsidies for its firms range between three to nine times that of other OECD countries such as the U.S. or Germany.

But at the same time, efforts by the German economy to diversify from China have been patchy, a third study showed, and other measures, such as moves by Berlin to curb use of Huawei equipment from German networks, have yet to materialize.

Scholz's government had last July produced a 64-page strategy document outlining China's increasing assertiveness, "unfair practices" and the risks to supply chains in a potential conflict over Taiwan.

"The EU has been preparing restrictions against China's green-energy exports, seemingly with France at the vanguard,” said Shi Yinhong, Professor at the School of International Studies, Renmin University of China.

"At this juncture, making Germany — which has been inclined to follow its allies in China-related trade restrictions but is still quite hesitant and slow — oppose it in this period is really important for China's rearguard actions."

Scholz takes with him CEOs from some of Germany's most prominent companies, such as Siemens and Mercedes, as well as three cabinet ministers, underscoring Beijing's importance.

The chancellor will travel to Shanghai and Chongqing as well as the capital and meet President Xi and Premier Li Qiang.

Mikko Huotari, head of the Merics Institute in Berlin, calls it a "re-engaging" and stabilizing of relations.

He urged Scholz to emphasize that Germany has a special role within the EU and does not want Brussels to take tough action in trade disputes.

Scholz's trip will likely be followed by visits to China by Economy Minister Robert Habeck and Foreign Minister Annalena Baerbock, who only last year angered Beijing by calling President Xi a "dictator."

"Some countries in the West and the United States say de-risking when they mean removing China. Risks need to be managed and not removed," said Victor Gao, chair professor at Soochow University.

"I believe China will emphasize to Germany that it should not listen to other countries and embrace peace (regarding Ukraine). It will probably also emphasize that there is no other market in the world that can replace China, and that China is now the world leader in many advanced technologies."

China had in March pledged to treat foreign and domestic companies equally, but German businesses reacted with skepticism and asked for concrete steps.

However, they are also wary that an escalating trade war between China and the West could rebound on their own investments in the world's second-biggest economy.

The EU also faces a dilemma, as it could benefit from cheap solar and wind products, for example, to further its climate goals but risks damaging its own industries as a result.

"I think all sides are lacking trust, so the visit is seen as a good sign from the Chinese," German Chamber of Commerce's Butek said.

"We insist on open markets because this is essential to our survival. The price of losing the market here is way too high than what we gain from import tariffs on Chinese goods."