There is no breaking with Trump legacy
China is an interesting country. I first visited it about seven years ago and was much impressed not only by the infrastructure of a developing country but also by the way Chinese industrial policy operates top-down. Greater respect for the might of that machine that is now changing the deepest parts of the Western state apparatus. As Trump is leaving office in total disgrace, I see no break from Trump’s legacy when it comes to relations with China. Better policies, perhaps, but the limits of engagement are there to stay. Let me elaborate.
December 2020 ended with the EU-China Comprehensive Agreement on Investments (CAI). To the surprise of many, Brussels refrained from a vacation possibility. The EU completed the deal before the Biden administration took over, which has raised questions about how the EU was going to position itself in post-pandemic great power struggles.
January 2021, on the other hand, started with the German government blocking the Chinese takeover of IMST, a research-driven satellite/radar communication and 5G technology firm with only 145 employees. The Chinese takeover of IMST was about to be completed when the German Ministry of Economics, BMWi, prohibited the transaction. Close observers of the deal found two significant points.
First, a prohibition decision under German foreign direct investment (FDI) laws is rare, especially under the clause regarding “critical technology.” This is only the second case, following the one in 2018, again preventing a Chinese takeover of a German firm.
Second, the decision was not leaked to public unintentionally. Authorities allowed FDI advisors in Germany to read a copy of the “no in the case of IMST” to get their insights. It looks as if Berlin, just like Washington, does not want “critical technology” to be sold to the Chinese.
Why is this interesting? The signing of the China-EU investment deal stressed the importance of engagement with China when it comes to trade and investment relations. Germany’s actions are in part signals on the EU’s expectations from the U.S. The share of the U.S. and the EU in the global economy, after all, was around 50 percent in 2013, when negotiations started for the Transatlantic Trade and Investment Partnership (TTIP). Trump shattered TTIP, along with other big deals, and the share of the EU and the U.S. in the global economy declined to 43 percent. This was bad for the transatlantic partnership and good for China and its interests in Asia.
Germany supported the EU-China CAI on the grounds of its “Wandel durch Handel” (change through trade) policy. It then signaled the limits of its engagement by blocking the takeover of IMST. It has thereby set a framework for engagement with China.
Why? It’s all delineated in a policy paper of January 2019 by the Federation of German Industries (BDI), a business organization. It’s about the challenge of competition between a liberal, open and social market economy, and a state-dominated economy.
According to the paper, Germany’s understanding of how China’s comprehensive industrial policy framework is operating seemed to be a slow-moving version of a Sputnik moment -- when the country realized that it would be beaten if it didn’t change its game. That’s where we all now are – or should be – regarding the might of Chinese industrial policy.
I remember getting the same gloomy and a rather grave message from Trump’s December 2017 National Security document. Let’s wait for Biden’s. I tend to think that we will see a continuation, rather than a break when it comes to the terms of engagement with China.