A political spat with China puts German businesses on edge

Germany and China

Broken pottery
Dec 13th 2007 | FRANKFURT
From The Economist print edition




EIGHT life-size terracotta warriors, thought to be from Xian, China, went on display in Hamburg on November 25th, but are now suspected of being fakes. Museum officials are investigating the latest twist in Germany's fraught relations with China, which took a nosedive after Chancellor Angela Merkel received the Dalai Lama on September 23rd.

The worries about China come as German businessmen are having a difficult time with Ms Merkel closer to home. She has attacked the excessive pay of top executives who put their companies at risk at the expense of other employees, though she stops short of proposing a legal ceiling. She has also threatened to impose a minimum wage on more industries where collective agreements are being side-stepped. German business confidence fell to a 15-year low in the latest poll carried out by ZEW, a research centre in Mannheim.

China regards official contacts with the Dalai Lama, in exile from Tibet since 1959, as a threat to the stability of the province. In late November Wen Jiabao, the Chinese prime minister, demanded an apology, which Ms Merkel shows no sign of giving. Various official visits have been cancelled, including one by Germany's finance minister, Peer Steinbrück, and apprehension is seeping into the business community.

Deutsche Post recently said it had refused to print ready-franked envelopes bearing an image of the Dalai Lama—an attempt to steer clear of the political fracas. Der Spiegel, a weekly magazine, cancelled an exhibition at a museum in Shanghai after complaints about its content. This is small beer, but the evidence is mounting that business as well as political relations between Germany and China are going through a brief ice age. Jürgen Thumann, head of the Federation of German Industry, has urged the government to enter “constructive dialogue” with China. Other industrial leaders have dived for cover since Jürgen Hambrecht, boss of BASF, said the handling of the Dalai Lama's visit was “not very clever”. Ekkehard Schulz, head of ThyssenKrupp, an industrial giant, refused to comment on the matter on December 4th when revealing record profits, due in part to buoyant business in Asia.

There are still hopes that a visit to China by Sigmar Gabriel, the environment minister, will go ahead at the end of January as planned. A lot is at stake. China is Germany's second-biggest export customer outside Europe, and carmakers, chemical firms and makers of industrial machinery are relying on it for growth. Meanwhile the German economy benefits from cheap furniture, office equipment and sports goods from China. These flows are unlikely to be affected in the short term. And big contracts, such as those for Airbus aircraft and nuclear power-stations, in which German firms are members of international consortia, should survive unscathed. But bilateral deals are more at risk.

German projects in the pipeline in China include a €150m ($220m) tyre plant to be built by Continental in Hefei, and two joint-ventures being set up by Daimler to build vans and trucks. Siemens and ThyssenKrupp are hoping for the go-ahead to extend Transrapid, Shanghai's high-speed rail system. Many firms publicly say they are not worried, but there is “growing concern that things are getting more difficult for German business,” says Eberhard Sandschneider of the German Council on Foreign Relations. “China has a record of playing games—not having time for meetings, not signing documents and so on.”

What now? The city of Hamburg, where 400 Chinese firms are registered, hopes it can help to bring about a thaw. In 2006 it hosted an event, “China meets Europe”, which was attended by Mr Wen and three other ministers. Preparations for a similar event scheduled for next September “could be a catalyst for better relations,” says Jens Assmann of Hamburg's Chamber of Commerce. German bosses must be hoping that their strained relations with China—and with Ms Merkel—will improve before then.