Beijing's High-Tech Ambitions: The Dangers of Germany's Dependence on China

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During her most recent visit to Beijing, the chancellor handed her hosts a list of dissidents in Chinese prisons. She addressed the subject of human rights, but she did it quietly enough so as not to embarrass the Communist Party leadership.

Merkel is convinced that China wants to become a superpower at all costs. The financial crisis has only accelerated this process. The chancellor senses the new self-confidence of Beijing's leaders, and she wants to ensure that Germany will not be left in the dust when the world's political center of gravity shifts.

Hence, she is interested in a good relationship with the Chinese. But how does one build close relations with a country when one is simultaneously criticizing it for its human rights violations and contempt for international rules?

This is the big question that currently shapes Germany's China policy. Merkel's challenge is to cultivate the relationship without creating the impression that she doesn't care about democracy, civil rights or protecting German economic interests.

German Impotence

Speaking recently to a small group of confidants, she mused that it doesn't help to vehemently parade one's own impotence on the issue of human rights. Instead, during her recent visit to Beijing in July, she encouraged German business leaders to air their frustrations over trademark piracy and mandatory discounts -- and she was successful. Siemens CEO Peter Löscher complained about the poor prospects for Western companies in bidding for government contracts in China. BASF CEO Jürgen Hambrecht criticized Beijing's policy of forcing Western companies to disclose their know-how, noting that it "doesn't quite correspond to our notion of a partnership." Officials at the German Economics Ministry say that "there was a completely new tone" at the meeting.

The effort shows that, 30 years after the beginning of Chinese reform policies, Germany's involvement in China has reached a turning point. Until now, it was considered de rigueur for anyone doing business in China to conform to local norms, sometimes to the point of self-denial. Those who managed to sidle up to Beijing's functionaries -- derisively referred to as "panda huggers" -- were most likely to garner the best contracts. In the future, Germans will face a completely new challenge in China. They'll have to learn that sometimes it's in their best interest to say no.

For politicians, this means defending Western values of democracy and the rule of law, even in the face of Chinese opposition. All around the world, from Africa to Asia to South America, Beijing is trying to tout its model of authoritarian state capitalism as the better alternative. If the West hopes to preserve its influence in these regions, it will have to prove that it is not prepared to abandon its basic principles. After all, credibility is also a value.

No Choice

It is no less important for the rivals of East Asia's rising industrial power to do their homework. For example, the United States, by long pursuing a policy of paying for its consumption with borrowed funds, has become dangerously dependent on Beijing. China has been the US's biggest creditor for years. With its trillions in foreign currency reserves, Beijing could manipulate the value of the dollar almost at will.

If the United States hopes to liberate itself from this dependency, it has no choice but to find its way back to the type of economy that was long held in high regard in the US. The government in Washington should finally clean up its deficit, and US consumers need to save more.

For Europe, too, much depends on whether it manages to solve the financial problems in the euro zone. As long as countries like Greece, Ireland and Spain are threatened by bankruptcy, the euro remains acutely at risk. But if the monetary union collapsed, the Germans would also suffer. Their currency would most likely become much stronger, thereby significantly curbing exports.

The challenges for European politicians are obvious. Merkel, French President Nicolas Sarkozy and others must avert national bankruptcies in the euro zone and reestablish a sustainable basis for the monetary union in the long term.

Defending Germany's Edge

Germany's business elite must defend their technological edge against Beijing's aggressive advances more vehemently than in the past. Until now, no one cared much whether Chinese companies were flooding world markets with their counterfeit, mass-produced goods. In fact, it enabled the Germans to sell even more of their high-tech equipment in China. But today, as the country encroaches on Germany's traditional industrial sectors, the protection of intellectual property becomes a question of survival.

More is at stake than a few copied blueprints or the small print on licensing agreements. The underlying issue is whether the German business model is still viable in the 21st century, an era that will be strongly influenced by the Chinese.

If German companies manage to maintain their technological edge over the increasingly powerful Asian competition, doing business in East Asia will still prove to be a blessing for German industry in the future. But if they relinquish their unique position, they will sooner or later be steamrollered by China's industrial power. And if they do, German industrial giants like Siemens and Daimler could end up with little more than a few niche markets in northern Europe.

The leading position of German universities and research institutions also has to be defended. The German economy still benefits from the fact that the average engineer in Germany is better trained than his or her counterparts in Beijing or Guangdong. In the future, making sure that this remains the case will be a key issue in German industrial policy.

The German economy faces an enormous challenge, and yet sometimes it seems as if its business leaders are still reluctant to take on the Chinese. "We can either do without this huge growth market, or we submit to the Chinese conditions," says one German auto executive. "There is nothing in between."

FRANK DOHMEN, KATRIN ELGER, DIETMAR HAWRANEK, RALF NEUKIRCH, RENÉ PFISTER, CHRISTIAN REIERMANN, MICHAEL SAUGA, WIELAND WAGNER

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• Part 1: The Dangers of Germany's Dependence on China
• Part 2: Risky Symbiosis
• Part 3: Growing Demand for German Consumer Goods
• Part 4: Warning Signs for German Industry
• Part 5: Optimizing Imported Technology
• Part 6: War of Nerves
• Part 7: Cultivating a Difficult Relationship