Milan Babic, Adam Dixon: What the Cosco affair told us about Germany’s relations with China

Contrary to popular opinion, Chinese investment into Germany is declining. On the otherhand, German capital is flooding into China, while reliance on Chinese imports is rising too

Milan Babic is an Assistant Professor in Global Political Economy at the Department of Social Sciences and Business at Roskilde University. Adam Dixon is an Associate Professor of Globalization and Development at Maastricht University.

Cross-posted from the LSE EUROPP blog

Picture by Terry Chapman

In October, German Chancellor Olaf Scholz permitted the Chinese state-owned China Ocean Shipping Company (Cosco) to buy a stake in a terminal at the port of Hamburg. Observers of German and European politics were taken by surprise as the move came against the explicit advice of Germany’s US alliesEuropean partners, secret services, and six German ministries.

The decision prompted criticism from both inside and outside the government, with many observers concerned about the potential for China to exert strategic influence over key transportation infrastructure. A document put together by the German foreign ministry noted there were ‘considerable risks’ associated with the decision. A large majority of German citizens have also opposed the move.

Political symbolism

While the response from German politicians and society was clear, it is nevertheless worth asking what drove this opposition. Cosco’s potential stake was reduced by the government from 35% to 24.9%, excluding it from management decisions regarding the port. In addition, the stake only relates to one of the three terminals in Hamburg’s harbour. Cosco itself also raised doubts about whether it would proceed with the deal due to the initial backlash.

As has been argued elsewhere, the practical implications of the deal are less significant than its political symbolism. The Chancellor’s decision went not only against the views of the public and his own ministries but also against his pledge, announced in his so called Zeitenwende speech following Russia’s invasion of Ukraine, to oversee a reversal of the decade-long German complacency against authoritarian ‘partners’ like Russia and China.

The fear is the Cosco deal signals a return to the German government prioritising economic interests over potential risks in its relations with China. However, while this concern is understandable, these fears are unlikely to be realised. Indeed, despite the symbolic importance of the Cosco deal, the decision was far less dramatic than it appears.

Germany is becoming more protectionist, not less

In a recent study, we show that German protectionism against Chinese state-led investment has been constantly increasing in recent years, while Chinese state-led investment inflows have fallen at the same time. Germany has introduced several measures that have curbed foreign investment inflows. Starting in 2009, its foreign trade law was tightened and the review mechanism for foreign acquisitions extended to all economic sectors as an answer to the rise of sovereign wealth funds from China and elsewhere.

Successive German governments repeated this legal trick, for example in 2017 and when the Covid-19 pandemic hit in 2020. The increasing stock of Chinese state-led investment in Germany went hand in hand with the tightening of these investment laws. Germany has also started to use more direct means of protectionism: described as a ‘dirty state trick’ in 2018, the government blocked a potential investment by Chinese state-owned SGCC in the German power grid network 50Hertz by instrumentalising its state-owned development bank KfW to buy a veto share in the company.

From a peak of 12 billion US dollars in 2016, Chinese state-led investment into Germany fell 40% by 2018 and further decreased in the following years. Cases similar to 50Hertz followed, such as the blocking of a takeover of Leifeld in 2018 or even the intentional bankruptcy of military supplier PPM in 2020 to stop a takeover by a Chinese firm. Our research suggests that over time, the German policy-making community has converged on closing sensitive and strategic sectors for Chinese state-led investment.

We dub this incremental change the China effect. An increasing stock of Chinese state-led investment in sensitive sectors pushes policymakers to re-evaluate issues of national security at the expense of investment attraction. By comparing the German to the UK case, we also find this effect holds true across different cases. Policymakers in the UK have also adopted a quite critical stance towards Chinese state-led investment over the last decade. Both cases suggest the China effect is changing European political economies in the long run.

The real problems lie elsewhere

The strong reactions the Cosco deal evoked are in line with the overall rise of protectionism against Chinese state-led investment in Germany. Scholz’ hesitancy is merely one data point in a longer history that points in a different direction. Independently of whether or not the deal will finally materialise, Germany’s policymaking community has already undergone a major shift towards more protectionism against Chinese state-led investment and a revival of economic statecraft for the 2020s.

The rise of domestic protectionism does not, however, imply a total decoupling of Germany from China. A recent report from the German Economic Institute shows that German investment into China almost doubled to 10 billion euros in 2022. Likewise, imports from China rose significantly, while German exports to China decreased strongly. This indicates that it is not regulation of Chinese state-led investment at home that is the problem, but rather the movement of German businesses and capital into China.

The security and dependence problems created here are very different from cases like Cosco. The intertwining of Germany’s growth model as such with China is the key driver of potential dependencies and security issues. The fact the German ‘export machine’ is seeking to uphold and deepen ties with a market of 1.4 billion people has already been identified as a major reason for Angela Merkel’s complacency towards China during her tenure.

The real problems therefore lie in other realms of the China-Germany relationship. This was also made clear by Scholz after the Cosco controversy when he argued that supply chain diversification will reduce dependencies and risks. It is here, in the complex relationships of the German growth model with China, where difficult questions of decoupling must be decided. The German inwards investment regime has already taken a step in this direction, despite headline-making deals like Cosco suggesting otherwise.

You decide if we close down BRAVE NEW EUROPE and the Gig Economy Project

At the end of 2022 thanks to many of you we had raised round 13,000 GBP/€/ for 2023.With 14,000 we can continue, although in a reduced format of five days a week. Thus we are asking those of you who have not donated yet to do so. If we made it this far, we should manage the last mile.

Please donate HERE

Be the first to comment

Leave a Reply

Your email address will not be published.