Between the US and a hard place, Germany's Scholz 're-engages' with China

FILE PHOTO: German Chancellor Olaf Scholz attends the weekly cabinet meeting at the Chancellery in Berlin, Germany, April 10, 2024. REUTERS/Liesa Johannssen/File Photo

By Andreas Rinke and Laurie Chen

BERLIN/BEIJING (Reuters) -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 pressing for fairer access to a Chinese market which they say still favours local firms despite promises to the contrary.

At the same time, China is likely to press Berlin not to back 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 with its factories blamed for producing more goods than they can sell locally.

Looming over the visit is the prospect of the return of Donald Trump to the White House, who has threatened to hike trade tariffs on all countries including Germany.

With U.S. aid to Kyiv looking potentially shakier, Scholz will press China on its support for Russia’s wartime economy two years into its invasion of Ukraine.

“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.

In blunt language, German officials on Friday said Beijing’s support and exports to Russia were enabling Moscow to wage a war of aggression in Ukraine and causing a “growing loss of reputation for China” in Europe and beyond.

However, they also said Beijing could play a positive role in cooling tensions in the Middle East.

While insisting it does not want to “decouple”, 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 and fuelled a cost-of-living crisis.

Germany coordinated the visit with the United States, France and the European Commission.

Scholz is set to press China to make good on its pledge to level the playing field for companies, who say they are still waiting for concrete steps, and three studies published this week highlight concerns.

One study showed nearly two-thirds of companies feel discriminated against in the Chinese market.

A second by the Kiel Institute estimated China’s subsidies for its firms range between three to nine times that of other major economies.

And yet efforts 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 materialise.

Scholz’s government 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 Americans and the Europeans are loading the gun, meaning they’re preparing for dumping cases and so forth,” said Joerg Wuttke, former president of the EU Chamber of Commerce in China.

“I think Scholz will mention it, I think the Chinese response will be: thank you very much, but there is no overcapacity. And nothing gets resolved.”

BUILDING TRUST

Scholz takes with him CEOs of some leading companies, such as Siemens, and three cabinet ministers, underscoring Beijing’s importance.

Shi Yinhong, Professor at the School of International Studies, Renmin University of China said it was important for Beijing to win over Germany in the face of an EU push to curb China’s green energy exports.

“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 will travel to Shanghai, Chongqing, and Beijing, where he will meet President Xi Jinping and Premier Li Qiang.

Mikko Huotari, head of the Merics Institute in Berlin, calls it a “re-engaging” and stabilising of relations. He urged Scholz to emphasise that Germany has a special role within the EU and does not want Brussels to take tough action in trade disputes.

Economy Minister Robert Habeck and Foreign Minister Annalena Baerbock, who last year angered Beijing by calling President Xi a “dictator”, are likely to visit China next.

While German businesses are wary of the impact an escalating trade war could have on their own investments’ in the world’s second biggest economy, the EU also faces a dilemma. Cheap Chinese solar and wind imports, for example, could help it achieve its climate goals, but damage local industries.

“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.”

(Writing by Matthias Williams; Editing by Muralikumar Anantharaman and Tomasz Janowski)