Germany’s slow-motion move away from China

Germany is becoming, ever so slowly, less obsessed with China.
A year after Chancellor Olaf Scholz signed up to a G7 call for de-risking from China, Berlin is gradually reacting to the challenges posed by Beijing.
From offering largely rhetorical dissent to Europe-wide tariffs on Chinese electric vehicles to arresting German citizens on suspicion of spying for the Chinese state, Germany is trying to send a political signal to Beijing: that the business-über-alles heyday of the Angela Merkel era is over, and strategic competition is here to stay.
Perhaps the biggest shifts are taking place in the fields of security and defense. And the slowest? Germany’s powerful auto industry is digging in its heels, fearful that it could end up being squeezed out of the vast Chinese market.
Within weeks, Scholz will have to decide whether two warships currently on a mission in the Indo-Pacific will sail through the Taiwan Strait, a move that will infuriate China. Germany wouldn’t be the first Western power to do this — U.S., British, French, Dutch and Canadian warships have all sailed through the Strait — but for Berlin, this would be the first time in two decades that it has made such a deployment.
Germany has also stepped up military exercises with Japan, the West’s closest ally in East Asia. The chief of the German air force was in Japan last month to lead a training exercise with Japanese counterparts who are increasingly concerned about the Chinese-Russian presence in the area.
Technologically, too, Scholz is playing a different game from Merkel — by joining forces with Taiwan’s best-known corporate giant.
Flanked by another German — European Commission President Ursula von der Leyen — Scholz was in Dresden last week to launch a major tech project that’s being led by the Taiwan Semiconductor Manufacturing Corporation, or TSMC.
In a way, it’s a no-brainer. TSMC is the world’s leading player in advanced microchips, and supply-chain vulnerabilities caused by geopolitical tensions could wreak serious havoc on Germany’s manufacturing prowess (as happened when Beijing threatened to blockade Taiwan in the wake of then-U.S. House Speaker Nancy Pelosi’s visit to the island in 2022).
Still, a photo of Scholz, von der Leyen and TSMC boss C.C. Wei holding shovels was yet another sign of the closer relationship Taiwan is building with a continent that long tried to stay away from what Beijing insists is a purely domestic dispute.
In the words of Nils Schmid, the lead German lawmaker on foreign policy from Scholz’s Social Democratic Party: “It’s very much about qualitative de-risking.”
Next comes the quantifiable part.
Over the last half year, Germany’s trade figures have shown a surprising trend: Exports to Poland overtook those to China, against the backdrop of a weakening Chinese economy beset by the financial fallout from a property market bust.
“Seeing Poland overtake China in terms of trade with Germany is quite amazing,” Schmid said. “There has always been this distorted view about China as the leading trade partner for the German economy. [In fact] it has always been the EU and major EU partners like Poland.”
The auto industry, a backbone of Germany’s export-oriented economy, is still very wary of rocking the boat with China.
China remains the sector’s most important market, despite the rise of local competitors in the electric vehicle field.
“In Germany, there is still a substantial gap between the rhetoric and the reality on de-risking from China,” said Noah Barkin, a senior adviser and expert on EU-China relations at Rhodium Group, a research group.
Volker Treier, head of foreign trade at the German Chamber of Industry and Trade, put it even more bluntly.
“There is … a geopolitical risk. Companies have to assess this for themselves. They won’t decide based on a statement from the Foreign Office,” Treier said.
That was an apparent reference to German Foreign Minister Annelena Baerbock’s remarks in May, when she said Berlin would learn from its mistakes in being energy-dependent on Russia and resist the lure of the Chinese market: “We are not looking for decoupling,” she said at the time, “but we do not want to repeat our mistake twice that we are so dependent, that we cannot do our foreign policy.”
So far, though, the German car industry is not heeding her call — even though German products are losing their appeal for Chinese customers.
Both Volkswagen and BMW have seen sales decline in China, their biggest market. Some 97 percent of respondents in a recent AlixPartners survey in China said their next vehicle will be electric.
VW’s China sales dropped 19 percent in the second quarter year-on-year to 651,500 vehicles, while BMW saw a 5 percent drop.
Not only are Chinese consumers going all-in on EVs, their consumption power is also weaker than before. “The biggest risk now is the slowing Chinese economy,” said Jörg Wuttke, partner at DGA Group, a global advisory firm, and former head of the EU Chamber of Commerce in China. “That’s what everybody’s worried about.”
Still, as its most lucrative market, China remains a critical component of European champions’ bottom line and their EV transition strategies.
“They have to be in China in order to catch up [with] their followers on EVs,” said Wuttke.
The auto industry vehemently opposed the European Commission’s decision to impose tariffs on imported Chinese EVs, fearing that Beijing would sooner or later retaliate against their market share even further.
This also makes top officials — including Scholz — all the more reluctant to go tougher on China in the weak German economy, noted Barkin.
There is “no better illustration” of this, he said, than the deal struck between the government and telecoms operators this summer on the role of Chinese suppliers in the German 5G network.
“Despite all the talk from the government about protecting critical infrastructure, it was ultimately the operators that dictated the terms of this deal, and Huawei emerged as the big winner,” said Barkin. “At the top levels of the German government there is a reluctance to impose economic costs on companies in pursuit of greater security.”