Germany caught in the crossfire of US-Chinese geo-economic conflict[1]
Germany is at risk of sustaining collateral economic damage in the face of intensifying US-Chinese competition and conflict. China’s ascendance and America’s desire to preserve the status quo have locked Beijing and Washington into a classic security dilemma. The United States sees China as a regional security threat and a nascent global systemic challenger[2]. Security competition is already well underway in the East and South China Sea[3]. So is geo-economic and geo-technological competition[4].
US-China competition and conflict will have profound consequences for Germany. Not only will competition limit the amount of resources Washington will be willing and able to commit to European security. It will also negatively affect Germany economically. For example, US protectionist measures targeting China may lead to Chinese exports inadvertently “flooding” European markets. It may also lead Washington to increase the pressure on Europe – and especially Germany as China’s most important European economic partner – to align with US geo-economic and geo-tech policies by resorting to secondary trade and financial sanctions. Non-alignment would negatively affect relations with the US. If Germany does align itself with US policies, however, it risks provoking Chinese economic retaliation in the form of trade and investment restrictions as well as regulatory discrimination. German companies, in particular, may suffer retaliation on the basis of a recently enacted Chinese blocking statute in case they choose to comply with US secondary sanctions targeting Chinese entities. This is a problem, not least given that the US and China are Germany’s two most important extra-EU economic partners.
Germany’s ability to affect the overall course of US-Chinese relations ranges from somewhere between very limited to non-existent. Its options in the face of US-Chinese competition are also somewhat circumscribed. Germany’s continued security dependence on the US limits the extent to which it can afford to align itself with China economically. Washington would hardly be willing to underwrite German security to the extent it does if Berlin aligned itself with Beijing economically or technologically. A position of relative neutrality or equidistance may look like a somewhat more viable option. But Washington will be reluctant to accept German economic neutrality and will therefore press Germany to support US China policy. After all, for US strategy to be successful in the geo-economic and geo-tech realm, Washington, to some extent, depends on German (and European) cooperation, lest Germany acts as a so-called third-party spoiler[5]. The more intense US-Chinese competition becomes, the greater the US pressure on Europe to align with hawkish US geo-economic policies towards China.
Leveling the playing field, while avoiding decoupling
Berlin does share many of the Washington’s strategic goals, including the preservation of the territorial status quo in East Asia, freedom of navigation, and creation of a level playing field (aka fair international economic competition), namely reciprocal market access, an end to regulatory discrimination, a reduction of government subsidies, the elimination of technology transfer requirements etc.[6] Berlin does not necessarily agree with the means the United States deploys to pursue these objectives, including unilateral measures violating the very rules-based order Germany wants to see being upheld (e.g., Trump trade war). Berlin is of course also worried that confronting Beijing too forcefully will provoke Chinese economic retaliation targeting German economic interests. All other things equal, the broader the economic front on which the US confronts China, the greater the risk to German economic interests in case Berlin supports US policies.
A broader politicization of US-Chinese and, by extension, international economic relations is not in Germany’s interest. Geo-economic policies aimed at nudging China to make concessions in line with the principles and norms underpinning the international economic system, including reciprocity and non-discrimination, is. Geo-economic policies that risk fragmenting international economic relations and leading to broader economic and technological “decoupling” are not. The preservation of a rules-based multilateral international economic order (aka non-discriminatory access to both the US and Chinese economy) is a core German interest and an important factor underpinning German prosperity. Economic decoupling where Germany is forced to closely align itself with one side or the other is to be avoided, as, again, it would mean having to choose between its most and its second most important economic partner.
Germany does have other reasons to provide conditional support to US policies – at least to the extent that they seek to level the playing field. Even a completely realpolitik oriented German policy would have cause to stay relatively close to the United States. Not only does Germany depend on the United States for its security, but the transatlantic partnership is also an important economic relationship, comprising not just trade and investment, but also, critically, offering Germany access to advanced technology. Moreover, longer-term the United States also looks “great power competitive” in spite of China’s impressive ascent. The US arguably stands a good chance of maintaining its geo-strategic and geo-economic position in Asia, and globally. China suffers from important structural weaknesses, including adverse demographics, middle-income trap (aka a growth model in need of reform), dependence on critical foreign technology and an uncertain longer-term domestic political outlook.
While the US is faced with many similar challenges, it has one major, but critical advantage: allies. Washington has formal (or informal) alliances with virtually all the major powers in the world. Beijing has virtually none. China’s geographic and geostrategic position also puts it as a disadvantage relative to the US (island chains vs open oceans). And short of armed conflict, a major geopolitical realignment in Asia will remain unlikely. The US acts as an offshore balancer in the region, while China is embroiled in a significant number of territorial (and maritime) disputes, often challenging the status quo. It is certainly true that countries in the region prefer not to have to choose between the US (security provider) and China (economic partner), but in the end security is bound to trump economics. And as long as the US is perceived to be committed to upholding the regional status quo (as opposed to challenging in), the present geopolitical structure and existing security alliances will remain little changed.
The US also has a track record of relatively liberal and benign leadership (or dominance, if you will), at least as far as allied middle powers are concerned. By comparison, the prospect of Chinese leadership (or dominance) creates greater uncertainty – not just for security competitors (like Japan, Korea or Australia) but also for economic partners (Germany). All of this is to say that Germany has good reasons to support the US as well as US policies to the extent that they help preserve the territorial status quo, an open international economic order, and a level playing field, including technological standards etc. To the extent, however, that US policies risk leading to general economic decoupling – sectors relevant to national security and emerging technology excepted – this is not in Germany’s interest. The challenge for German decision-makers is therefore how best to support US policies aimed at preserving the status quo and leveling the playing field without inviting Chinese retaliation, while not incurring Washington’s ill will if Germany fails to support US geo-economic policies that risk leading to economic decoupling and economic destabilization.
Offer Washington conditional support ….
What is Berlin to do in the face of mounting US geo-economic pressure and possible Chinese retaliation? Germany should consider pursuing a multi-track approach consisting of (1) offering Washington limited and conditional support in pursuit of narrowly defined objectives, primarily the establishment of a level playing field vis-à-vis China, while (2) minimizing critical economic vulnerabilities with respect to both the US and China – wherever necessary and/or effective from a risk-reward point of view.
The cooperative piece should, first of all, focus on resolving important outstanding bilateral US-EU disputes (trade, tariffs taxation, technology, data) and on deepening transatlantic economic cooperation. Major trade and investment deals will be out of reach given domestic political obstacles on either side of the Atlantic. But more specific, issue-oriented cooperation is possible, including politically less onerous regulatory coordination, technological cooperation and standard-setting (e.g. EU-US Trade and Technology Council[7], trilateral group consisting the EU, Japan, and the United States[8]). Such cooperation and coordination should help further agreement on a joint position with respect to multilateral reforms aimed at leveling the playing field vis-a-vis China (especially WTO). This would help provide Germany diplomatic cover and it might improve the chances of China agreeing to at least some reform of the international economic regime.
In principle, Germany and the US should be able to agree on restrictions pertaining to emerging technologies and national security in light of their potential negative security externalities. National security may be a more sensitive issue to the United States given intensifying US-Chinese security competition. But Germany also has an interest in preserving technological leadership. A challenge might arise due to Germany’s preference for narrowly restricting technological decoupling and limiting national security exemptions, while the US may push for extensive restrictions, particularly if the American objective is less to level the playing fields than to retain its technological and economic lead over China as well as to use it as geo-economic leverage. Furthermore, the US is far less sensitive to Chinese geo-economic retaliation than Germany and will therefore be more willing to weaponize existing economic and technological interdependence in pursuit of broader political and strategic objectives. This is precisely what Germany wants to avoid and where Germany will be faced with increased US geo-economic pressure, including the threat of secondary US sanctions, effectively forcing German companies to comply with them or lose access to the US market or critical, US-controlled technologies.
…. while accelerating efforts to reduce critical vulnerabilities vis-à-vis Washington and Beijing
This is precisely why Germany (and the EU) should accelerate and intensify efforts to reduce critical economic, financial, and technological vulnerabilities vis-à-vis both the US and China by accelerating efforts to gain greater autonomy, enhancing their ability to deter, and, if necessary, retaliate against geo-economic measures targeting its interests – or at least reduce the negative impact of US and Chinese geo-economic measures. Current efforts include so-called trade defense measures (trade), anti-coercion measures (secondary sanctions) and supply chain security (technology, critical commodities)[9]. These efforts need to be intensified and accelerated.
As far as critical technology is concerned, the EU, for example, should consider creating an indigenous production and innovation capacity in areas deemed critical in order to lessen its dependence on the US and the concomitant threat of secondary sanctions. In light of accelerating US-Chinese strategic competition and intensifying state-supported technology competition (Made in China 2025, China Standards 2035, US Innovation and Competition Act), Germany and the EU should also invest more in innovation and critical and emerging technologies in order to mitigate future dependence and vulnerability with respect to potentially transformative technologies (AI, quantum computing etc.). Similarly, Germany and the EU should accelerate their analytical work on mitigating supply chain related risks, particular with respect to access to critical goods, including commodities and technologies. These critical dependencies create opportunities for US and Chinese geo-economic leverage. While Germany in particular is more vulnerable to US and Chinese trade measures, the EU as a whole is relatively well-positioned to deter geo-economic measures aimed at restricting trade and investment flows[10].
Reducing critical vulnerabilities will afford Germany greater strategic flexibility by making it less susceptible to geo-economic pressure and coercion, wherever it may come from. It will in fact also enhance the prospect for cooperation, for limited economic-technological vulnerability limits potential political exploitation, thereby making it less risky to cooperate in the first place. Therefore, the German government should conduct a broad National Economic Security Review of all potential critical economic, financial, and technological vulnerabilities vis-a-vis extra-EU economic partners and evaluate the risk-reward trade-off of potential mitigation policies. The review should also explore in what areas economic cooperation can be increased without providing third parties with potential geo-economic leverage. After all, US-Chinese competition is going to intensify, as is the geo-economic pressure Germany will face over the coming years and decades.
References:
[1] Geo-economics can be defined as the use of economic means to pursue geopolitical ends.
[2] Systemic in the sense of challenging the dominant position of the United States in the international system, and systemic in the sense of China of challenging the norms and rules underpinning the present system, including the provision of international public goods.
[3] Department of Defense, National Defense Strategy, 2017
[4] Congressional Research Service, US-China Relations, 2019
[5] Bryan Early, Sleeping with your friends’ enemies, International Studies Quarterly, 53(1), 2009
[6] Germany has tightened FDI legislation and lent it support to a variety of EU-level initiatives aimed at making the level playing field less uneven, including trade defense measures, anti-coercion instruments, EU FDI screening mechanism, and so on.
[7] European Commission, EU-US Trade and Technology Council, 2021
[8] European Commission, Trilateral meeting of the trade ministers, 2020
[9] European Commission, Study on EU’s list of critical raw materials, 2020; European Parliament, Extraterritorial sanctions on trade and investment and European responses, November 2020
[10] Markus Jaeger, The logic (and grammar) of US grand strategy, 2021