Germany Says China Trade Could Create Perilous Dependence

The German government approved its first national strategy on China on Thursday, defining the Asian superpower as “a partner, competitor and systemic rival” and calling for a significant reduction of dependency on Chinese goods while still maintaining economic ties worth hundreds of billions of dollars.

The new policy calls for export controls and the screening of investments by German companies doing business in China to protect the flow of sensitive technology and know-how.

Chancellor Olaf Scholz’s government adopted the 64-page document on Thursday, after months of discussions and delays stemming from disagreements within his three-party coalition over how tough their position should be. The strategy echoes themes from the European Union that urge “de-risking” ties with China.

“We do not want to decouple from China, but minimize our risks. This includes strengthening our European economy as well as reducing dependencies,” said Annalena Baerbock, Germany’s foreign minister. “The more diverse trade and supply chains are set up, the more resilient our country is,” she added.

The strategy takes a tougher line toward China than the one embraced by governments led by Chancellor Angela Merkel, who viewed China as a huge growth market for German goods.

That push created a tight relationship with China, with more than a million German jobs that depend directly on China, and many more indirectly. Nearly half of all European investments in China are from Germany, and almost half of German manufacturing businesses rely on China for some part of their supply chain.

But supply chain issues prompted by the coronavirus pandemic laid bare the extent to which Germany, and Europe, had grown dependent on China for goods, ranging from medicines to processed minerals essential for green technology. Russian’s invasion of Ukraine last year also raised fears that Beijing could misuse economic dependencies in ways similar to how Moscow weaponized Germany’s dependence on its natural gas exports.

Under the strategy, companies are called on to “more strongly internalize” the geopolitical risks of doing business in China, to prevent the need to tap state funds in the event of a crisis. The government said that it was working to provide incentives to encourage German companies to diversify their businesses beyond China.

“We have understood that it is in our own, national interest to take care of our economic security,” Ms. Baerbock said, adding that Germany cannot afford to find itself needing to “pay more than 200 billion euros to get out of a dependency,” as happened when Russia cut off gas flows to western Europe.

But whether and how companies will support the policy remains a question. Some midsize and family-led businesses have said geopolitical risks have complicated their business in China, but leading industrial players, such as BASF and Volkswagen have responded to calls for “de-risking” by doubling down on their investments in China, but localizing them.

“Volkswagen Group will continue to invest in China,” Ralf Brandstätter, Volkswagen’s head of China and a member of the board, said in response to the policy announcement.

“China is a dynamic growth market and a key technological innovation driver,” he said, adding that it is “ultimately crucial for the global competitiveness of Volkswagen and the entire German automotive industry.”

The strategy will now move to Parliament, where lawmakers are expected to begin debating it when they reconvene in September. The policy is meant to guide companies, government agencies, universities and other institutions in their dealings with China and serve as a response to Beijing foreign policy.

Last month, Germany unveiled its first national security strategy, calling for a “robust” defense and other policies, as part of an effort under Mr. Scholz to coordinate the country’s foreign, domestic and economic policies. But the government had separated China from the overall strategy, given its importance as Germany’s largest trading partner, with bilateral trade volumes last year reaching nearly 300 billion euros, or about $334 billion.

The strategy makes clear that Berlin has no intention of changing its “One China” policy, which urges that only “peaceful means and mutual consent,” can resolve Beijing’s claim on Taiwan. “Taiwan is important for Germany both as a location for German companies and as a trade partner,” it said.