The recently departed former Chinese Premier Li Keqiang knew what he was doing when he chose Germany in May 2013 for his first visit to Europe.

Struggling to put an end to China’s smokestack industries and to leap into a new era of smart (IT-driven) manufacturing, Li knew that Germany was his best choice as a willing, reliable and technologically most advanced business partner.

In a speech to representatives of large German corporations on May 27, 2013, Li said that “… if we both come together in an ideal and optimal way, a dream team will emerge." Calling for a close cooperation in manufacturing, he assured his audience that there were also several other areas – such as logistics, education and healthcare – that Beijing would “preferentially” open to German investors.

Li’s “dream team” soon ran into political and trade roadblocks, but Germany is still China’s by far the largest European business partner.

German companies hold dominant market positions in China. Germany’s BASF, the largest chemical company in the world, was exceptionally allowed to operate a wholly owned subsidiary in China. And, with a current market share of 16.3%, German automobile manufacturers are the largest foreign car suppliers in China.

“Dream team” no more

China also became an important investor in German economy. Germany’s industrial robots and factory automation systems company (Kuka) was purchased by a Chinese electrical appliance manufacturer (Medea), Mercedes-Benz got a largest single shareholder from China and a Chinese shipping company COSCO now owns 24.99% of the Port of Hamburg.

But how much will Germany be allowed to do business with China crucially depends on trans-Atlantic political and security considerations. Several ominous signs are already there.

Italy, for example, notified China earlier this month that it will not renew its BRI (Belt and Road Initiative) agreement expiring in March 2024. Italians are invoking a largely inactive nature of that infrastructure agreement over the last five years, but its cancellation is generally understood as a gesture to restore the country’s firm Atlanticist positions.

That is fully consistent with the E.U. China policies. During the E.U. summit meeting in Beijing on December 7, 2023, Brussels maintained a very selective approach (aka “de-risking”) concerning trade and investment transactions with China.

Trade numbers for the first 11 months of this year are confirming that new trend in Sino-European relations. The total trade volume is down 7.6% from the year earlier, with Chinese exports to the E.U. falling 11%. Those numbers are much beyond the range that could be readily explained by the weakness of the E.U. economy.

The same is true of Germany where, over the same period, the bilateral trade with China declined more than 9% and Chinese exports to Germany fell 14%.

U.S.-China collision course

Germany is now in a very difficult position. Seen from Washington, Berlin’s business dealings with China are not simply trade issues. At stake are questions of security with transfers of sensitive dual use technologies and access to key logistics assets.

In fact, fundamentally, things are very clear. The U.S. led liberal democracies are confronting Russia and China to defend the “rules based international order.”

Confrontation with Russia is under way in a war where NATO (The North Atlantic Treaty Organization) -- the most powerful military alliance in the history of the world – is providing political, military and financial support to Ukraine. Russia is also completely cut off from the Western controlled flows of trade and finance.

China’s defenses are probed by U.S. air and naval assets in the South China Sea. Ignoring China’s claims of its air and maritime borders, the U.S. conducts “freedom of navigation operations,” complains about China’s unsafe intercepts and insists on emergency hotlines with Beijing to avoid “accidents, miscalculations and misunderstandings.”

Those “skirmishes” between two nuclear armed adversaries are challenging China’s red lines of territorial integrity. The U.S. and its allies are also interfering with China’s global power projections and barring its access to advanced technologies.

How can Germany – and the entire E.U. -- work around that?

There is no way around. The recent E.U.-China summit showed that the U.S and the E.U. have established a common and coordinated policy toward China. Germany must follow that line.

During the U.S. election year, Washington and Beijing appear to have agreed to keep stable and peaceful relations. The U.S. Treasury Secretary Janet Yellen even wants to go to China early next year to discuss cooperative economic and trade policies.

In spite of that -- and most probably regardless of the U.S. election outcome -- Washington and Beijing will remain on a collision course because of fundamental differences regarding China’s air and maritime borders, the status of Taiwan and the world order.

Germany will lose its privileged China trade partnership owing to those political and strategic limitations, Beijing’s technological advances and its more diversified trade patterns.

MERRY CHRISTMAS!