By Eric Vandenbroeck and co-workers

Germany’s Unlearned Lessons

The war in Ukraine rages on, few German politicians would take issue with the assertion that Berlin must reduce its energy dependence on Moscow. The German government has done so. And rhetorically, at least, German leaders promise to ease the country’s economic dependence on China. “As China changes, the way we deal with China must change, too,” German Chancellor Olaf Scholz argued in an op-ed for Politico in November. In a piece, he also argued for “a new strategic culture” as part of Germany’s Zeitenwende, or tectonic shift, in foreign policy, which he announced after Russia invaded Ukraine. So far, Scholz has been reluctant to upset the status quo with Beijing—not least because Russia’s war and high energy prices have taken a toll on the German economy. Large German companies heavily dependent on China’s market are keen to expand their operations instead of cutting back.

But because its economic ties to China are so deep and complex—far more so than is the case with Russia—Berlin must move forcefully to reduce dependence on Beijing. In particular, the risk of a war over Taiwan.

This February, the German government will publish its first-ever national security strategy. Just ahead of the first anniversary of Russia’s invasion of Ukraine, this is Berlin’s chance to demonstrate that it has drawn the right lessons from the catastrophic failure of its past approach toward Russia. It is time for Germany to lay out a plan to reduce dependence on China by diversifying trade and investment ties and selectively decoupling from China on critical technologies.

 

History Lessons

The United States and Germany drew opposite lessons from the end of the Cold War. The United States emerged from the confrontation convinced that President Ronald Reagan’s “peace through strength” approach and an accelerated arms race forced the Soviet Union into negotiations. Germany came out of the Cold War convinced that engagement and Chancellor Willy Brandt’s “change through rapprochement” (later dubbed “change through trade”) had been the winning formula, overcoming the East-West divide through political and economic cooperation, which resulted in a positive domestic change in the Soviet bloc.

The idea of “change through trade” survived the end of the  Cold War and remained influential in Bonn and Berlin, Germany’s capital, before and after German reunification. For a generation of German policymakers, it was a framework that conveniently entwined the engagement of non-democracies such as China and Russia in pursuit of economic profits with the possibility of transforming those countries into democracies. In 2006, while serving as Chancellor Angela Merkel’s foreign minister, Steinmeier introduced the concept of “change through interlocking”. In essence, Berlin would make Russia’s interdependence with Europe “irreversible by forging economic cooperation through trade and energy partnerships,” according to a German foreign ministry policy paper. As a result, Moscow would refrain from misbehavior because the cost would be too high. Russia, after all, depended on revenue and technology from Germany and other European countries even more than Germany and its neighbors depended on Russian gas and oil.

The limits to the theory that economic interdependence would deter the Kremlin from breaking international norms became quickly apparent. In 2008, Russia invaded Georgia. In 2014, it annexed Crimea. In the run-up to Russia’s invasion of Ukraine in February 2022, German policymakers thought the economic cost would be too high for Russia to attempt a full-scale attack on Ukraine and overthrow the Kyiv government. This was a fatal miscalculation, underestimating the ideological radicalization of Russian President Reagan’s costs.

 

Changing Gears

Berlin has come to terms with the failure of its “change through trade” approach to Russia. The same cannot be said for how Berlin engages with Beijing. One of the critical policymakers pushing to draw the right lessons from Germany’s dependence on Russia is German Foreign Minister Annalena Baerbock. In a speech in September, she implored German corporate leaders to refrain from “following a ‘business first’ mantra alone, without taking due account of the long-term risks and dependencies.”

The German establishment should heed her warning because the parallels between China and Russia are obvious. In 2017, the China expert and former Australian government adviser John Garnaut argued that the Chinese Communist Party (CCP) has “reinvigorated ideology to an extent we have not seen since the Cultural Revolution.” That observation has been borne out in the succeeding years: Chinese President Xi Jinping has installed himself as a de facto leader for life and surrounded himself with yes men. As in Russia, ideology increasingly trumps economic rationality in China. If Xi decides to pursue his dream of bringing Taiwan under Chinese invasion, regardless of the financial costs, the shock waves for Germany will dwarf those caused by Russia’s invasion of Ukraine.

That is large because Germany’s dependence on Russia was limited to hydrocarbons. In contrast, Germany’s dependence on China includes a broad range of critical products and materials needed for manufacturing, such as lithium and cobalt, as well as rare-earth minerals crucial for Germany’s zero-carbon transition. And whereas Russia was a sizable but not an important market for German industry, China is Germany’s largest trading partner outside Europe. Berlin’s dependence on the Asian giant, furthermore, is increasing: German investments in China are at an all-time high. The same goes for German imports from China and Germany’s trade deficit with Beijing.

Germany’s most prominent companies push back against any comparison between Russia and China. This past summer, Herbert Diess, then CEO of the German carmaker Volkswagen, said he expected the CCP under Xi to engage in “further opening” and to “positively” develop “its value system.” He asserted that Volkswagen’s presence in China could “contribute to this change.” His successor, Oliver Blume, has defended the company of a Volkswagen plant in Xinjiang, where China carries out massive, systematic human rights abuses against the predominantly Muslim Uyghur population. Blume has claimed that the company’s presence in Xinjiang “tak[es] our values to the world.” He certainly has an economic incentive to spin the company’s conduct in this way: more than 40 percent of Volkswagen’s global revenue and likely more of its profits come from sales in the Chinese market. And Volkswagen is hardly alone in seeking to continue the “change through trade” narrative with Beijing. The giant German chemical company BASF is investing ten billion euros in a new production complex in southern China. In contrast, the company’s leadership warns German politicians and the public to avoid “China bashing.”

Scholz did caution German companies “not to put all eggs in one basket” and criticized some for “totally ignoring the risks” of being heavily dependent on the Chinese market. But he has not withheld political backing from industry leaders who have defied his advice. For example, on his recent trip to Beijing, he included the chief executives of BASF and Volkswagen in his delegation. Scholz also allowed the Chinese state-owned shipping company, Cosco, to acquire a stake in a terminal in Germany’s main port of Hamburg and did not prevent China’s tech giant Huawei from assuming a significant role in Germany’s 5G rollout.

While Huawei has been excluded from Germany’s 5G core network, almost 60 percent of the country’s 5G RAN, or Radio Access Network, is provided by Huawei; in Berlin, that number approaches 100 percent, according to a forthcoming report by Strand Consult, a global telecommunications consultancy. As operations increasingly take place in the cloud, the distinction between core and access networks diminishes. This makes reliance on Huawei as a crucial provider of access networks a security risk. In addition, as the United States intensifies its sanctions policy against Chinese high-risk providers, Germany’s reliance on Huawei stands on shaky ground. All this suggests that Germany’s much-hailed Zeitenwende in its Russia policy is not yet complete in Germany’s policy towards China.

To be sure, reducing Germany’s dependence on China will come at an economical cost. However, that cost will be lower than Germany's price if it remains woefully unprepared for a potential war over Taiwan between China, the United States, and its Asian-Pacific allies. Berlin needs to do everything in its power and work with like-minded partners to deter Beijing from using force to change the status quo in the Taiwan Strait. At the same time, Germany must prepare for a scenario in which deterrence fails. Both require a drastic reduction of dependence on China.

Scholz is committed to diversifying markets and reducing dependence on critical products and materials needed for manufacturing. The chancellor, however, should take inspiration from his coalition partners—namely, the Greens and the pro-business Free Democrats—who want to move more decisively to discourage Germany’s large companies from deepening their dependence on the Chinese market and to address Beijing’s threats toward Taiwan more explicitly. These partners are also pushing for a Europeanization of Germany’s China policy. As a first step, this would require including representatives from other European governments in the annual Chinese-German government consultations that bring together the chancellor and German cabinet ministers with their Chinese counterparts.

The United States can help by maintaining pressure on Germany to reduce critical dependence on China and offering cooperation, for example, on resilient supply chains for essential technologies such as semiconductors. To reduce the multiple pressures on European economies, the United States should urgently address EU concerns about the distortion effects of subsidies for renewable energy technologies in the U.S. Inflation Reduction Act. This could be accomplished by using all the flexibility that the implementation of the U.S. Inflation Reduction Act provides for exemptions for European allies.

Scholz warned against returning to a Cold War paradigm, arguing that the world has entered a multipolar era distinct from that period. This assertion also applies to Germany: the country must bury its illusions about the lessons of 1989. Instead of “change through trade,” Germany—in conjunction with other Western partners—will need to employ a “peace through strength” approach to dealing with Russia and China. Such are the realities of a more confrontational world.

 

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