Chinese President Xi Jinping and German Chancellor Angela Merkel were all smiles as she accepted two giant pandas for Berlin zoo this month, but underlying tensions over trade and investment suggest that building on their informal alliance will be difficult.
While Merkel and Xi have been nudged into picking up the leadership baton on global issues like climate change since President Donald Trump’s inauguration, their shared interests only go so far. Like other nations in Europe, Germany is cautious about China’s sincerity as a self-professed champion of globalization.
Addressing Xi during his visit to Berlin, Merkel said Germany was ready to take part in Xi’s signature foreign policy initiative to upgrade trade links along the ancient Silk Road. Still, just a week later her cabinet adopted regulations that can block purchases of strategic enterprises by foreign companies, a move seen as directed toward China.
Germany is among the European countries asking for tangible steps from China after Xi’s message of “openness” and “economic liberalization” to global leaders at Davos in January, in what was a riposte to the emerging protectionism of the U.S. under Trump. So far there have been few signs of Chinese action to back its claims to be pro-trade and pro-globalization.
By dragging its feet opening its own markets, China risks being sidelined as Japan moves toward a free-trade pact with the European Union after signing a preliminary deal earlier this month. Plans for a EU-China Bilateral Investment Treaty are stalled. And a lack of political and regulatory reform at home is complicating China’s efforts to promote the yuan as a reserve currency.
“The EU and China remain divided over core political and social values, strategic interests and priorities, and conceptions of international order,” said Richard Maher, a research fellow at the Florence-based European University Institute. The vision of political and economic cooperation envisaged when both sides launched their “comprehensive strategic partnership” in 2003 has failed to materialize, he said.
“We remain one of the most open economies in the world, but we also pay attention to fair competitive conditions,” Germany’s Economy Minister Brigitte Zypries said when the investment regulations were announced.
Merkel had raised concerns even before she met Xi. “If countries such as China want to simply buy up something that’s been built up with a lot of subsidies, we have to react to that,” she told business magazine Wirtschaftswoche.
Growing frustration is also reflected in French President Emmanuel Macron’s proposal to introduce an EU-wide tool for screening foreign investments.
There are signs of worry on the China side. “We hope that, when introducing relevant measures, Germany and the EU can avoid being affected by protectionism,” Foreign Ministry spokesman Geng Shuang said July 14.
Premier Li Keqiang said last month the “mere” $20 billion in two-way investment with the EU in 2014 was unsatisfactory given their size, according to the Financial Times. Still, China trade with the bloc last year was worth $589 billion, lagging only the U.S.
Frictions were on display at a June EU-China summit attended by Li, where EU Trade Commissioner Cecilia Malmstrom rejected a proposal for talks on the investment accord to be accompanied by a move toward a trade deal and pressed officials to make good on Xi’s Davos pledge.
As well as the unfinished investment treaty, the EU bans arms sales to China and is yet to recognize China as a “market economy” under the World Trade Organization. That means the EU can slap tariffs on goods it considers China is dumping on its markets. China is challenging the EU position under WTO rules.
“The convergence in economic models which was happening in terms of China opening up has reversed itself,” said Alicia Garcia Herrero, a fellow at the Brussels-based Bruegel think tank and former adviser to the European Commission. “China isn’t moving ahead in areas like corporate governance.”
A January report from Rhodium Group and Berlin-based Mercator Institute for China Studies estimated that Chinese direct investment in the EU surged 77 percent to 35 billion euros ($40 billion) in 2016. But the value of EU transactions in China fell for a fourth straight year, to 8 billion euros.
EU disillusionment with China has deepened over the past decade. In 2006, the Commission lauded a China reform agenda focused on addressing social inequality, a more independent judiciary and a freer press. By 2016, it lamented China’s “authoritarian response to domestic dissent” and backpedaling on establishing a level playing field for foreign companies.
China and Europe may make progress on issues like climate change, said Garcia Herrero. “But on the crux issues of investment and trade? I wouldn’t have very high expectations.”
— With assistance by Jonathan Stearns