Ship-to-shore cranes stand alongside the Al Dahna container ship, operated by the United Arab Shipping Co. (UASC), at the Port of Hamburg in Hamburg, Germany. (Photographer: Krisztian Bocsi/Bloomberg)

China’s Trade Deal With U.S. Leaves Germany Squeezed in Middle

(Bloomberg) -- Chancellor Angela Merkel heads to China with another U.S.-prompted headache threatening to hurt German interests.

China’s pledge to buy more American goods as part of a deal to avert a trade war with the U.S. puts Germany on the spot. As China’s biggest European trading partner, with a total volume of some $179 billion last year, Germany is first in line to suffer the impact of any reduction in business.

“China will buy more and more products from the U.S. that we might have otherwise bought from Europe or other partners,” said Wang Yiwei, director of Renmin University’s Institute of International Affairs in Beijing, and a former Chinese diplomat in Brussels. “This will certainly have a spillover effect.”

The upshot is a complex balancing act for the chancellor, as she champions open trade and the multilateral system, knowing that China is failing to allow reciprocal access to its markets while targeting strategic interests across Europe. On the other axis is the U.S. under Donald Trump, whose protectionist moves are straining the trans-Atlantic bond and preventing a common front against China’s trade transgressions.

German Industry

With a large group of corporate leaders in tow, Merkel plans to drive home Germany’s demand for China to ease barriers on foreign investment when she meets President Xi Jinping in Beijing on Thursday. Fresh from a visit with Russia’s Vladimir Putin, she’s also expected to seek China’s backing for upholding the Iran nuclear accord.

“China and Germany are committed to the rules of the World Trade Organization,” Merkel said in her weekly podcast on Saturday. “Yet we will also talk about reciprocal access in trade and intellectual property issues.”

It would take much to dismantle the European Union as a favored region for Chinese business. China has bought or invested in European assets amounting to at least $318 billion over the past 10 years, according to data compiled by Bloomberg, a figure that’s approximately 45 percent more than the equivalent in the U.S. Germany is Europe’s largest economy.

Read more: How China is buying its way into Europe

“China-Germany relations have been developing with a sound momentum,” Chinese Foreign Ministry spokesman Lu Kang said Friday. “China highly values its relations with Germany.”

Still, Germany has joined EU partners in examining instruments to better screen China’s open access to the bloc’s $17 trillion economy. That prompted China’s ambassador to Germany, Shi Mingde, to turn the European grievance on its head, accusing Germany of overseeing a “protectionist trend.”

“China is opening itself further, but we are concerned that the door to Germany that has been opened will be closed again,” Shi told the Stuttgarter Zeitung newspaper in an interview Monday.

View from Berlin

German officials played down the impact of any deal between the U.S. and China. A bilateral agreement would be helpful at least in terms of moving away from protectionist tendencies championed by Trump, according to an official in Merkel’s delegation.

China’s announcement Tuesday that it would slash import duties on passenger cars to 15 percent from 25 percent signaled an opening by China’s policy makers. Whether or not it’s viewed as a concession to Trump, the move helps German carmakers including Daimler AG and Volkswagen AG.

The U.S. leader backed off his threat to impose billions in tariffs on Chinese goods, hamstrung by disputes among his trade negotiators and worries over upcoming negotiations on North Korea. Trump said on Twitter on Monday that China had agreed to purchase unspecified amounts of American farm products.

Read more: China’s Latest Move on Trade Is a Massive Cut to Car Tariffs

China’s handling of intellectual property has surfaced as an issue on which both Germany and the U.S. could form a common line, according to officials on both sides. But divisions within the Trump administration and the trans-Atlantic rift have pushed off that prospect, Mikko Huotari, who leads research on economics at the Mercator Institute for China Studies in Berlin told reporters Tuesday.

Trump’s decision to withdraw from the Iran nuclear pact is creating another front on which Merkel and Chinese leaders can seek a common line. The calculation is that China’s economic might could help keep the deal afloat, helping to counter an exodus from Iran by businesses that fear U.S. sanctions.

“The rescue of the nuclear agreement with Iran and the WTO might end up being such prominent themes in the talks that other controversial issues between Germany and China will take a back seat,” Jan Weidenfeld, head of the European China Policy Unit at Merics in Berlin, said in an email.

©2018 Bloomberg L.P.

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