When Olaf Scholz criticised the European Union during a visit to China earlier this month it seemed like a gaffe. The German chancellor warned the EU not to impose tariffs on Chinese electric cars. A few days later, at a summit in Brussels, he doubled down by criticising the Union for its lack of success in concluding free-trade agreements. He is clearly not happy with Brussels. Chinese state media was unsurprisingly full of praise of Scholz’s courage to break with the Western establishment.
Can he possibly succeed in shifting EU positions? I don’t think so, but this will be the next big battle. The overwhelming consensus in Brussels is that the EU needs to respond to unfair trade practices from China. Thierry Breton, the French industry commissioner, is the driving force behind an EU investigation into Chinese subsidies for electric cars. His investigation will almost certainly be followed by a tariff. Washington is expected to do the same.
So how can it be that the US-China and the EU-China relationships are getting colder, whereas the Germany-China relationship is getting warmer?
I doubt that Scholz has thought this through to the end. He stands in an old corporatist tradition – to follow workers’ interests at home and company interests abroad. Scholz is surprisingly immune to complaints from companies about taxes and bureaucracy. He recently said, “The lament is the merchant’s song.” Then he goes off to China with a planeload full of businessmen in tow, and calls for a deepening of the commercial relationship between the two countries. It is as though geopolitics has never intruded.
A reminder that it has never gone away came this week with the news of the arrest of three Germans accused of facilitating the sale of critical military equipment to the Chinese Ministry of State Security. The German prosecutor said such spying rings had become increasingly common.
During a visit to Washington last week, I noted US officials were far more worried about China than about Israel or Ukraine. The Biden administration recently strong-armed the Dutch government into stopping ASML, the maker of sophisticated lithography machines, from servicing its products in China. From its base near Eindhoven in the Netherlands, ASML manufactures machines with which semiconductor producers can etch high-performance chips. The Dutch government ended up bowing to American pressure. If you are dependent on the US for your security, what else can you do?
There is an old joke in the EU that only two types of member states exist. Countries that know they are small; and those that don’t. Germany falls into the category of EU countries that thinks it can have an independent China strategy – or even an independent trade policy. Good luck with that.
One immediate consequence of this illusion is the attempt by the German government to shield companies from the influence of geopolitics. That worked well – until it did not. The reported comments in the Financial Times by Ralf Thomas, head of Siemens, exemplifies the geopolitical naivety of German business leaders. Thomas said global value chains had built up for over 50 years. It would take decades for them to unravel. Germany companies may work that way. History does not. The Russia-Germany relationship took decades to develop, but unravelled in a few months.
When you believe that your government protects you from geopolitics, you are far more likely to expose yourself to risks that those with a greater awareness of the geopolitical environment would not have taken. China accounts for almost 40 per cent of the sales of Mercedes vehicles. Does the manufacturer have nobody on its board raising their hand to warn about the risk? The chemicals group BASF is betting the house on a future in China. This is Germany’s subprime mortgage crisis.
If Scholz wanted to help German companies he would alert them to their risk exposure. I have no idea whether the US and China will end up in a military conflict over Taiwan. But it is clearly a possible scenario. Corporate leaders behave as though the probability of an escalation is zero.
Ultimately, the reason why Scholz’s softness on China will fail is a lack of allies. President Emmanuel Macron of France favours a much more assertive China policy, a position on which he is more closely aligned with the US and the UK than with Germany. The only European leader I can think of who behaves similarly as Scholz over China is Viktor Orbán, the Hungarian prime minister.
But I also have a warning for geopolitical hard-liners who are full of contempt for economic reasoning. The dismantling of globalisation and the break-up of the world into adversarial trading blocs will be the most expensive thing anyone has ever done. I am saying that without qualification. The opportunity costs of the new cold war will run into the tens of trillions of dollars. Its bill will come in the form of lower productivity growth, lower public investment, greater defence spending, greater inequality, and a weakening of multilateral institutions and of democracy itself. Be careful what you wish for.
Many European countries are at risk of falling further behind in critical technology. When Western governments banned Huawei, the rollout of 5G mobile services slowed down everywhere. China, meanwhile, is already preparing for 6G, a technology so fast that you can run factories on it. Unless our geopolitics-first approach is accompanied by an economic policy focused on investment and innovation, we risk losing both the geopolitical and the commercial wars at the same time. Indeed, this is my baseline scenario.
I see the tariffs on Chinese electric cars as the beginning of a trade war that Europe will not win. It is also a tax on voters. Olaf Scholz clearly has not thought this through. But neither have other leaders.
[See also: Goya’s lessons for a world at war]
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