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German coalition set for clash over curbing investments in China

Germany’s deputy chancellor has endorsed the idea of outbound investment screening for companies in China, highlighting the growing convergence between Berlin and Washington on trade with Beijing.

But the intervention by Robert Habeck could put him on a collision course with German business groups, which oppose the idea of creating more barriers between them and one of their biggest partners.

It could also lead to tensions within Germany’s governing coalition. Chancellor Olaf Scholz of the Social Democrats and finance minister Christian Lindner of the liberal FDP are sceptical about such export controls.

Speaking at a conference this week about the new investment controls being considered by the US, Habeck said: “I think we should do the same.”

The Biden administration is working on legislation that would create a mechanism for scrutinising overseas investment by American companies, especially those made in China.

US Treasury Secretary Janet Yellen said this week that the new US restrictions would be “narrowly scoped” and “targeted at technologies where there are clear national security implications”. 

Officials later elaborated on Habeck’s remark, made on Wednesday, saying he wanted to ensure that German and European knowhow wasn’t lost to countries beyond Europe and that “we need a debate about the appropriate tools” to stop that happening.

Habeck’s spokesperson also confirmed on Friday that his ministry was studying the implications of outbound investment screening. “We are on it, and dealing with this issue,” she said.

Business groups gave the idea a thumbs down, particularly the VDMA, which represents Germany’s machinery companies. “So far we’ve seen no plausible example of the circumstances under which an outbound investment could be security-critical for Europe,” said VDMA expert Klaus Friedrich. “The US’s argument for such screening is also thin at best.”

Scholz’s advisers are also not enthusiastic. One close aide stressed this week that the US proposals were “highly targeted”, “precise” and “narrowly focused”, suggesting they would have limited impact. “We don’t expect what is sometimes feared — a big, comprehensive set of controls,” he said.

Nils Schmid, the Social Democrats’ foreign policy spokesperson, described the idea of screening as an “important addition to our foreign policy toolbox”. But he said it must be “precisely calibrated and only apply to narrowly defined high-tech sectors”. Any measure must be closely co-ordinated between the EU and the US, Japan and South Korea, he added.

Habeck has long been concerned that German companies might be inadvertently helping Beijing to build up a high-tech arms industry, and has frequently expressed concern about the leakage of critical technologies from the west to China.

Scholz’s government has been nudging German companies to diversify away from China, and explore other markets in Asia, South America and Africa.

But they have proven largely impervious to its efforts. According to statistics from the country’s central bank, the Bundesbank, German companies invested the record sum of €11.5bn in China last year.

The total stock of German foreign direct investment in China was €103bn, according to the Bundesbank— making it second only to the US and Luxembourg.

China was also Germany’s most important trading partner last year with almost €300bn of trade between the two countries, according to the federal statistical agency. China ranked fourth in terms of German export markets with €107bn of sales and it was the biggest source of imports with €192bn of inbound shipments.

Germany already has export restrictions on so-called dual use goods that have both civilian and military applications. But many in Habeck’s ministry believe they don’t go far enough.

Habeck’s spokesperson stressed that the idea of investment screening was gaining traction in Brussels. European Commission Ursula von der Leyen said in a speech in March that the EU needed to look at the “gaps in our toolbox”, which allowed the “leakage of emerging and sensitive technologies through investments in other countries”.

For that reason, she said, the EU was considering a “targeted instrument on outbound investment”. This, she said, would be applied to sensitive technologies “where investment can lead to the development of military capabilities that pose risks to national security”.

Additional reporting by Martin Arnold

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