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‘We need a real policy for China’: Germany ponders post-Merkel shift

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Few people have heard of IMST — a small German company with just 145 employees, specialising in satellite, 5G, and radar technology. That was until last month, when the government in Berlin stopped it being acquired by a subsidiary of Casic, the Chinese arms conglomerate. The deal, concluded the German economics ministry, represented a “serious threat to public order and national security”.

“What is being sold? It’s a key technology that the Chinese don’t have […] Why is it being sold? Because there’s a gap the Chinese have to fill,” a German official told the Financial Times. “It’s not just about weapons, it’s also about high tech, different sectors where Germany is a world-leader.”

The nixing of the IMST deal is symptomatic of a growing mistrust overshadowing the China-German relationship. It also provides important pointers to the future direction of German policy on China after Angela Merkel, chancellor for the past 15 years, finally quits the political stage.

Ms Merkel personifies old ideals of western rapprochement with China — the principle that ever deepening economic ties with the west would encourage political change in Beijing, and a shift to liberalism and western values. “Wandel durch Handel” — change through trade — was for years a key precept of German policy.

The acquisition of robotics manufacturer Kuka by a Chinese firm in 2016 prompted Germany to tighten its law on overseas investment into strategic industries © Qilai Shen/Bloomberg

Yet her approach is looking to many in Germany to be increasingly out-of-date. “There is no willingness on Merkel’s side to change, but there will definitely be a more robust approach to China after she goes,” says Nils Schmid, foreign policy spokesman for the Social Democrats, the junior partner in Ms Merkel’s grand coalition.

Europe’s approach to China is in a moment of considerable flux. The EU has just signed a long-awaited investment treaty with Beijing — a big victory for both Chinese diplomacy and European business, which was completed during Germany’s six month presidency of the bloc.

But the EU is also increasingly alarmed at the growing influence of what it calls “authoritarian powers”, such as China, and has called for a stronger alliance with the incoming US Biden administration to assert the interests of democracies in global governance — putting aside the many frictions of the Trump years. Berlin will be central to how this plays out in Europe.

“There’s going to be a discussion between democratic nations about the threat from authoritarian regimes, whether it’s China, Russia or other countries,” says Noah Barkin, a Berlin-based analyst at research firm Rhodium Group. “If Germany is going to be part of that discussion, it’s going to feel huge pressure from its allies to speak out more, to be more forceful in its approach to China.”

While some German politicians want to take a stronger line on human rights, others worry about the consequences that might have for German companies active in the highly lucrative Chinese market.

‘Wandel durch Handel’, change through trade, has been a long standing precept of chancellor Angela Merkel’s when dealing with Chinese president Xi Jinping, left © Krisztian Bocsi/Bloomberg

The concern is understandable. Germany has profited handsomely from China’s integration into the global economic system, as Chinese companies and consumers snapped up German cars and machines. By 2018 Sino-German trade volume had reached €200bn and China was Germany’s largest trading partner.

Merkel’s gamble

In such circumstances, Trump-style “decoupling” of economic links was never going to be an option for Germany. Ms Merkel has strongly resisted any tendency to see China as an adversary, in a replay of the old cold war between the west and the USSR. “If we have this continental drifting apart of our nations, populations, and public opinion and so forth, that is a concern,” says Jörg Wuttke, a German businessman and head of the EU Chamber of Commerce in China. “[This] is not the Soviet Union, where you basically had a common border but no other interest. We have no border with China, but we have huge global supply chains and economic interests.”

Yet the hope of some of Merkel’s camp — that economic engagement would open China up politically — has failed to pay off. China has become more repressive at home — in Hong Kong and in its treatment of the Uighurs — and more assertive abroad, for example, in its island-building in the South China Sea. Under President Xi Jinping it has aggressively countered criticism abroad with “wolf warrior diplomacy”, while ramping up its economic and political espionage activities throughout the west — including in Germany.

“We’re all pretty disenchanted, all of us who saw China opening up and reforming in the past couple of decades and thought it would lead to a rapprochement, and that we would end up being more in sync,” says one German official. “It didn’t happen.”

Ms Merkel has defended her commitment to dialogue with China. She argues that without co-operation from Beijing, the world cannot possibly hope to solve some of its biggest challenges, such as climate change.

But her “partnership” approach has come under mounting criticism, with a chorus of politicians accusing her of prioritising the interests of German business above human rights.

Line chart of German goods exports to China as a % of total showing The Chinese market has become increasingly important for Germany

“We need a real foreign policy for China — not just a business-oriented policy,” says Mr Schmid. “We need to decouple our foreign policy from the commercial interests of big business.”

Friedrich Merz, a conservative politician who is vying to be the new head of Ms Merkel’s Christian Democratic Union, exemplifies the more hawkish tone on China. “We are dealing with an expansive, imperial foreign policy,” he told a recent campaign event. “China has a Europe strategy — do we have a China strategy?”

But any dramatic shift in policy is unlikely as long as Ms Merkel is still chancellor. “The biggest constraint is Angela Merkel herself,” says one diplomat in Berlin. “The system is already moving — now everyone’s watching to see how far Merkel will be willing to let it go.”

Some of the unresolved questions over German policy on China — and their potential to become an irritant in relations with the US — resurfaced in recent days as the EU clinched the “China-EU Comprehensive Agreement” or CAI.

Brussels says the deal, seven years in the making, will improve European companies’ access to the Chinese market and create a more “level playing field for EU investors”. It will, the bloc said in a statement, “prohibit[ . . . ] forced technology transfers and other distortive practices” and remove barriers, such as the requirement that companies form partnerships with local firms in joint ventures.

The deal was one of the crowning achievements of Germany’s 6-month presidency of the EU: Ms Merkel has been one of the CAI’s most vocal champions.

But the agreement could cause tensions with the incoming administration of president-elect Joe Biden, who would like the US and EU to show a united front in their dealings with China. Jake Sullivan, who will serve as Mr Biden’s national security adviser, tweeted recently that the new administration would “welcome early consultations with our European partners on our common concerns about China’s economic practices”. A former official with the Obama administration said the message to the EU contained in the tweet was to “slow things down”.

German company Daimler sold more Mercedes passenger vehicles in China between January and November last year than in the whole of 2019 © Qilai Shen/Bloomberg

The EU has rebuffed US criticism of the deal, saying it is merely winning similar trade benefits to those established in the so-called “Phase 1” trade deal struck by the Trump administration with China last year.

But there has also been criticism of the CAI from human rights advocates. As part of the agreement, the EU had wanted China to ratify International Labour Organization conventions, including those on forced labour — an issue that has taken on increasing urgency in the light of China’s incarceration of millions of Uighurs in Xinjiang. In the end, though, the Chinese government merely agreed to make “continued and sustained efforts” to ratify the relevant ILO conventions.

Some smaller EU member states felt that Berlin had swept aside their misgivings about the CAI in its rush to conclude the deal. “The internal EU tensions caused by the way Germany whipped through this deal at the end of its EU presidency are leaving their mark,” Mikko Huotari, head of the Mercator Institute for China Studies, wrote this week.

Friction over the CAI came to the surface in the Bundestag last month when a Green MP, Margarete Bause, brought up the ILO issue and asked Ms Merkel whether, in her eagerness to clinch a deal, she was ignoring the plight of the Uighurs and the Chinese crackdown in Hong Kong.

The chancellor said that when it comes to trying to help people affected by Chinese repressive practices, one should always ask oneself whether “dialogue is more useful than not speaking at all”.

“This contradiction between the values we share. and the interests we have . . . that’s the point where we will always have to make political trade-offs,” she said.

The exchange shed light on how German rhetoric on China could change after the Bundestag election in September, when Ms Merkel bows out after 16 years as chancellor and a new governing coalition is formed.

Green MP, Margarete Bause, pictured here with Chinese artist and activist Ai Weiwei, has expressed concern that Germany is ignoring human rights abuses in its eagerness to make a deal with Beijing © Michaela Rehle/Reuters
Nils Schmid, foreign policy spokesman for the Social Democrats: ‘There will definitely be a more robust approach to China after [Merkel] goes’ © Omer Messinger/EPA-EFE

“Regardless of who replaces Merkel, the next German government is likely to include the Greens, who are the most hawkish party in Germany on China and very focused on human rights issues,” says Mr Barkin. “If they’re in government, that is going to change the way the government sounds on China.”

Sputnik moment

Ask any German official when alarm bells began to ring about the intentions of the Chinese leadership, and the answer is always the same: the €4.5bn acquisition of Kuka, Germany’s largest maker of industrial robots at the time, by the Chinese appliance maker Midea in 2016.

The deal prompted fear that critical German knowhow was ending up in Chinese hands. Politicians complained about a lack of reciprocity — German companies would never be able to acquire any Chinese firm as strategically important as Kuka. Shortly afterwards, Germany tightened its law on overseas investment, enhancing ministers’ powers to block foreign acquisitions of strategic assets. It was this change of law that allowed the cabinet to block the IMST deal last month.

Yet concerns about Beijing’s economic strategy continued to grow, fuelled by Made in China 2025, President Xi’s 10-year plan to transform the country into a technological superpower. Germany fretted that in pursuit of these goals, Beijing would target German companies and siphon off their intellectual property.

In 2019 the BDI, Germany’s main business organisation, released a landmark policy paper saying the country’s liberal, open model was increasingly in competition with China’s “state-dominated economy” and needed to protect itself more effectively from Chinese companies.

Mr Wuttke says Germany and Europe should see China’s comprehensive industrial policy, which contrasts so starkly the approach of most western countries, as a “Sputnik moment” — a reference to the panic the Soviets unleashed with the launch of the world’s first satellite into space in 1957. “They have a plan,” he says. “How come we don’t have a plan?”

There are also concerns about China’s Belt and Road Initiative, which Germany began to see as a “fundamental challenge to the EU”, according to one senior official in Berlin. He said Europe was investing similar amounts in infrastructure in areas like Central Asia, a key element of the BRI, and yet the “political impact of China’s investments was much greater [ . . .] It’s still very difficult to find an answer to a state controlled system.”

The sense of gloom is, if anything, deepening, with German companies increasingly concerned that they will end up being squeezed out of the Chinese market by domestic upstarts. A recent study by the Bertelsmann Stiftung, a think-tank, warned that if Made in China 2025 is a complete success, Germany’s critical machine-building industry could see its exports to China shrink from €18bn in 2019 to €13bn in 2030.

Ulrich Ackermann, head of foreign trade at the German Machinery Association, says the age of “eternal growth” in exports to China may be coming to an end. “We need to be constantly aware of our dependence on the Chinese market and prepare to develop new, alternative growth markets in Asia in a timely manner,” he says.

Yet despite calls for greater diversification, some German companies continue to retain a laser-like focus on China. The auto industry in particular has become, if anything, more dependent on China — largely because it has recovered so much more quickly from the corona pandemic than other countries.

Daimler recently announced that it sold more Mercedes passenger vehicles in China between January and November last year than in the whole of 2019. It also said that it produced more than 600,000 Mercedes cars last year in China itself, up from the 560,000 it made there in 2019.

German politicians say auto industry executives are lobbying hard against a tougher stance towards Beijing, warning a backlash that closes off the Chinese market could cost jobs at home.

‘China+X’

The example of Chinese telecommunications equipment maker Huawei highlights the dangers. In 2019 German politicians first began demanding that the company be excluded from the buildout of Germany’s 5G network, on security grounds. The reaction from Beijing was forthright: its ambassador to Germany, Ken Wu, said Berlin would have to “expect consequences” from such a move. “The Chinese government will not stand idly by,” he said.

Fears of repercussions for German companies was seen as one of the main reasons why Ms Merkel firmly resisted any move to explicitly bar Huawei. But the pressure from China sceptics — even those in her own CDU — has been relentless. Late last year her cabinet finally adopted a new IT law that creates significant hurdles for any participation by Huawei in the 5G network.

The German foreign ministry has also signalled its desire for a shift. Last year it issued new Indo-Pacific Guidelines, which reflect a fundamental rethink of its policy on the Asia-Pacific region. The message is that the country has become too reliant on China, and must now “diversify” its relationships in Asia, “in order to avoid lopsided dependencies and to become more closely interconnected with the power centres of tomorrow”, according to the document.

German officials stress that this bears no resemblance to US-style decoupling: one foreign policy official refers to the new policy as “China + X”. There have already been some successes: officials point to the trade deals the EU has struck in recent years with Japan, Vietnam and Singapore, and the one it is currently negotiating with Indonesia.

The recently signed China-EU Comprehensive Agreement could cause tensions with incoming president Biden, who would like the US and EU to show a united front in their dealings with Beijing © Dursun Aydemir/Pool/Bloomberg
EU Commission President Ursula von der Leyen oversaw the EU-China deal which was seven years in the making © Lukasz Kobus/EU Commission/dpa

The dangers of moving too slowly on trade were made clear in November, when China spearheaded the Regional Comprehensive Economic Partnership, a new free trade deal with 14 other Asia-Pacific nations that account for 30 per cent of the world economy.

Politicians in Europe saw RCEP as a wake-up call — and a sign that the EU must join forces with the US to counter China’s efforts to establish an international economic architecture more suited to its interests.

Speaking to reporters last month, Manfred Weber, head of the centre-right European People’s party group in the European Parliament, said the west was losing economic influence in the world “at breathtaking speed”. When the EU and US negotiated their aborted Transatlantic Trade and Investment Partnership, he noted, they accounted for 50 per cent of the global economy: now it is just 42 per cent

“Either we team up with the Americans to try to shape the global agenda, or the Asian countries will do it instead,” he said.



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EU and US agree to suspend tariffs in Airbus-Boeing dispute

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The EU and US have agreed to suspend punitive tariffs related to their longstanding feud over aircraft subsidies, in the first breakthrough in trade relations since President Joe Biden took office. 

The two sides reached a deal after intensive talks, according to people familiar with the discussions, in a sign that the 16-year-old transatlantic trade battle over state aid to Airbus and Boeing could be coming to an end. 

The accord, announced by Ursula von der Leyen, European Commission president, means both sides will suspend tariffs linked to the dispute for four months. The duties have hit products ranging far beyond aircraft, encompassing an eclectic array of goods such as US self-propelled shovel loaders, French wine and even US ornamental fish.

In a statement issued after a call with Biden, von der Leyen said: “President Biden and I agreed to suspend all our tariffs imposed in the context of the Airbus-Boeing disputes, both on aircraft and non-aircraft products, for an initial period of four months.

“We both committed to focus on resolving our aircraft disputes, based on the work of our respective trade representatives,” she said.

The goodwill gesture is intended to prepare the ground for negotiations on a permanent solution to the dispute by setting joint rules on permissible aircraft subsidies.

The US trade representative’s office said that a settlement was needed to address challenges posed by new entrants to the aircraft sector from China. Beijing has made it a priority to break the global duopoly that has dominated for decades.

It added that limits on future subsidies and monitoring and enforcement mechanisms would be part of a deal between the EU and US.

A European official said the announcement came “earlier than expected”, given that Biden’s nominated trade representative Katherine Tai has yet to be confirmed. Countering China and setting transatlantic standards for the aircraft industry were keys goal, the official said.

One European diplomat said that four months would be “enough time to focus minds while still being very do-able”.

The deal came a day after the UK and US came to their own arrangement whereby Washington also agreed to suspend punitive tariffs linked to the dispute for four months.

The UK had already unilaterally stopped imposing its own tariffs at the start of this year. EU officials and other trade experts have questioned whether the UK would have had the right to continue to impose them anyway, given its exit from the bloc’s customs union.

Brussels imposed extra tariffs on $4bn of US goods in November, covering a wide range of products including sugarcane molasses, casino tables and fitness machines. 

By then the US had already imposed extra duties on $7.5bn of European exports — the result of Washington’s own World Trade Organization victory against aid to Airbus. 

Brussels sees today’s step as a breakthrough that can pave the way for broader co-operation on trade after the tensions of the Trump era — tensions that at times threatened to boil over into a full-scale trade war.

The US-EU aircraft subsidies dispute is one of the longest-running cases in WTO history. Both sides have been found over the years to have failed to properly implement WTO panel rulings on illegal subsides. 

The battle dates back to 2004, the year after Airbus overtook its US rival in terms of deliveries for the first time. Having earlier brokered an agreement with the EU on state aid in 1992, the US launched a case against subsidies for the European group that dated back to the 1970s. Initially the US claimed that $22bn in illegal funding had been given to Airbus.

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The EU followed up a few months later with a challenge of its own, originally claiming $23bn in illegal aid was offered to Boeing.

The two sides have long remained far apart on the terms of any agreement on how to fund new aircraft development. But with both Airbus and Boeing focused on recovering after the coronavirus pandemic and a hiatus in new commercial aircraft development, industry experts said the timing was right.

The deal will come as a relief to aircraft manufacturers and other businesses on both sides of the Atlantic. French wine producers and Italian cheesemakers have been among those in the vanguard of calls for an end to the dispute. The spirits industry has also been among the US sectors strongly urging a solution. 

Airbus welcomed the decision to suspend tariffs. The company said it supports “all necessary actions to create a level-playing field and continues to support a negotiated settlement of this longstanding dispute to avoid lose-lose tariffs”.

Boeing said it hopes the deal would allow for talks to “bring a level playing field to this industry”.

 



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US suspends tariffs on UK exports in Airbus-Boeing trade dispute

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The US will temporarily lift punitive tariffs on £550m worth of UK exports such as Scotch whisky and Stilton cheese, imposed as part of a row with the EU over subsidies to Boeing and Airbus, in an attempt to de-escalate one of the longest trade disputes in modern history.

The move follows the UK’s unilateral decision to suspend tariffs against the US from January 1, which took both Brussels and Airbus by surprise. Brussels has disputed that the UK had the right to act unilaterally in a trade dispute between the EU and the US when it has left the bloc.

Liz Truss, UK international trade secretary, said she was delighted that US president Joe Biden had agreed to suspend tariffs on UK goods for four months. The move would help to improve transatlantic relations, she said.

The US trade representative’s office confirmed that it would temporarily suspend the tariffs, to allow time to negotiate on settling the aircraft dispute.

The Johnson government has come under heavy fire over the tariffs in particular from the Scotch whisky industry, whose exports to the US plunged 30 per cent last year.

“The easier it is for Americans to buy a bottle of Macallan, Talisker or Glenmorangie, the more money those producers will have to invest in their businesses, their staff and futures,” Truss said. “Trade equals jobs.”

The US-EU aircraft subsidies dispute is one of the longest-running cases in the World Trade Organization’s history, reflecting the importance of the industry to each side and the intense competition between Boeing and Airbus.

The battle dates back to 2004, the year after Airbus first overtook its US rival in terms of deliveries. Both sides have been found guilty of providing billions in illegal subsidies to their aircraft makers.

Brussels was last year given the green light by the WTO to impose tariffs of up to 25 per cent on $4bn worth of US products, after Washington announced duties on $7.5bn worth of European imports. 

Both Boeing and Airbus welcomed any move that could help to bring the two sides together. “We welcome USTR’s (US Trade Representative) decision to suspend tariffs for allowing negotiations to take place,” Airbus said in a statement. “Airbus supports all necessary actions to create a level-playing field and continues to support a negotiated settlement of this longstanding dispute to avoid lose-lose tariffs.”

Boeing said: “We commend this action by the US and UK governments creating an opportunity for serious negotiations to resolve the WTO aircraft dispute. A negotiated settlement will allow the industry to move forward with a genuinely global level playing field for aviation.”

However, Britain’s departure from the EU has raised questions about how effective any UK-US suspension can be. With no precedent to follow, trade lawyers have said it is unclear whether the UK still had a right to impose or suspend tariffs that were granted to the EU. 

Whitehall officials insisted the UK had the right to revoke retaliatory tariffs. One individual close to the process said: “This whole issue shows the benefit of being an independent trading nation . . . if we can get this done, it paves the way to a deeper trading relationship with the US and will help free trade deal negotiations.”

Despite this, there appear to be very few signs of progress in the trade talks between the US and UK. In January, White House press secretary Jen Psaki indicated that securing a deal would not be a priority for the Biden administration.

Last month, Biden’s nominated top trade adviser Katherine Tai told senators that she would “review the progress” of the talks that had taken place between the two sides over the previous two and a half years.

Both the EU and the US have long argued for a resolution to the dispute, but have remained far apart on the terms of any agreement on how to fund new aircraft development. 

After Biden’s election as US president, there was a feeling in Europe that a deal could be within reach. There has been growing speculation that talks were progressing.

However, in late December, the US further raised tariffs on European goods, specifically targeting French and German products.

The EU has said it is in intensive talks with the US in a bid to quickly secure a deal to remove punitive tariffs. 

“We have proposed that both sides agree to suspend tariffs for six months,” a European Commission spokesperson said. “This will help restore confidence and trust, and thus give us the space to come to a comprehensive and durable negotiated solution.”

A US administration official said that while he could not indicate whether there were plans to imminently remove the EU tariffs, the Biden team was continuing to review the dispute. “The goal is to resolve the dispute and create a level playing field,” the official said. 

Both Brussels and Washington are keenly aware that the rules need to be set before China becomes a significant competitor to Boeing and Airbus.

China is expected to be the fastest-growing market for commercial aircraft over the coming decades and Beijing has made it a strategic priority to break the global duopoly in an attempt to claim some of that market for Chinese industry. Later this year, China’s Comac is expected to have fully certified its first major commercial aircraft, the C919 single aisle.



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FC Barcelona and Real Madrid will be forced to pay back illegal state aid

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FC Barcelona and Real Madrid will be forced to pay back millions of euros in illegal state aid after the EU’s highest court ruled Brussels was right to declare that beneficial tax arrangements they enjoyed for a quarter of a century were illegal.

The decision by the European Court of Justice upholds previous rulings by the European Commission and comes as Barcelona, the world’s highest-earning football club, is enduring one of the biggest crises in its history. 

This week police arrested the club’s former president, its current chief executive and its general counsel, in connection with a separate legal case ahead of a vote on Sunday to decide its next president. Barcelona, which recorded a loss of €100m last year, also has to contend with a debt pile of more than €1bn.

In 2016 Margrethe Vestager, the EU’s competition chief supremo, ordered four Spanish football clubs to pay back tens of millions of euros received since the 1990s in the form of sweetheart property deals, tax breaks and soft loans.

FC Barcelona subsequently contested the decision before the General Court, the EU’s second-highest tribunal, which annulled the commission’s judgment. However, after a final appeal from Brussels the ECJ ruled in favour of the EU.

In its decision on Thursday — which is final — the ECJ deemed the tax scheme “liable to favour clubs operating as non-profit entities over clubs operating in the form of public limited sports companies”, holding that it could therefore qualify as illegal state aid under EU rules.

The General Court had previously annulled Brussels’ decision over what it said was lack of sufficient evidence that the tax arrangements offered to the four football clubs, which also include CA Osasuna and Athletic Bilbao, were illegal.

But the commission had questioned the court’s “heavy burden of proof” on regulators in its appeal, arguing that a lower tax rate was obviously more favourable than a higher one.

The ECJ argued that the difficulty in assessing the extent of state aid — because of the complexity of tax deductions — did not preclude the commission from banning government practices that it considered gave sports clubs unfair advantages. 

It said: “The impossibility of determining, at the time of the adoption of an aid scheme, the exact amount, per tax year, of the advantage actually conferred on each of its beneficiaries, cannot prevent the commission from finding that scheme was capable, from that moment, of conferring an advantage on those beneficiaries.”

The Spanish government said on Thursday it had “absolute respect” for the court’s decision. FC Barcelona and Real Madrid did not immediately respond to requests for comment.

The judgment will be seen as a big win for regulators in Brussels who have for years been trying to stop highly successful commercial clubs from freeriding on the back of taxpayers.

The European Commission said on Thursday it noted “the judgment by the Court of Justice to follow the Commission’s arguments”.

Thursday’s ruling is the second time Brussels has won an appeal of its state aid decisions in recent weeks. Last month judges at the General Court rejected a legal challenge by budget airline Ryanair to state aid given to rivals on discriminatory grounds.

At present Barcelona is dealing with the fallout of what the Spanish media dubs Barçagate — allegations, denied by the club, that it corruptly hired outside groups to defame former president Josep Maria Bartomeu’s adversaries on Facebook.

Bartomeu was temporarily detained by the Catalan police earlier this week. He, the club, and other individuals in the case, which is being investigated by a Barcelona court, have all denied any wrongdoing.



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