 Hello, I'm pleased to welcome you all to this IIEA webinar on the end of Germany's China Illusion. European policy towards China stands at a critical juncture. In recent years, China in the European conversation has gone from a place that is primarily framed in economic terms with politics mostly absent to a long-term geopolitical challenge and a pivotal factor influencing the competitiveness of the European economy, security of European citizens, and the EU's ability to fulfill its ambitions in terms of climate change, digitization goals, and many other issues. This shift poses a distinctive challenge for Germany, as its dependencies on the Chinese market are perhaps more pronounced compared to other European Union member states. To address the challenges posed by today's China and to establish a forward-looking vision, Berlin unveiled its first-ever China strategy in July 2023. We are delighted to be joined today by Dr. Yonka Ertl, who is director of the Asia program at the European Council on Foreign Relations, who has been generous enough to take time out of her schedule to speak to us on these themes. Dr. Ertl will speak to us for about 20 minutes or so, and then we'll go to questions and answers with the audience. You'll be able to join the discussion using the Q&A function on Zoom, which you should now see on your screen. Please feel free to send your questions in throughout the session. You don't need to wait till the end, and we will come to them once Dr. Ertl has finished her presentation. A couple of reminders. Today's presentation and Q&A are both on the record. Please use the Q&A function for your questions, and please introduce yourself in the Q&A function so that we know who's asking the question. For those people who are still on Twitter, please join the discussion on Twitter using the handle at IIEA, and now I will formally introduce Dr. Ertl and then hand it over to her. Dr. Yonka Ertl is director of the Asia program and a Senior Policy Fellow at the European Council on Foreign Relations. Dr. Ertl previously worked as a Senior Fellow in the Asia program at the German Marshall Fund of the United States Berlin Office, where she focused on transatlantic China policy, including on emerging technologies, Chinese foreign policy, and security in East Asia. Dr. Ertl has published very widely and very impressively on topics related to EU-China relations, U.S.-China relations, security in the Asia-Pacific region, 5G emerging technologies, as well as climate cooperation. Her new book, The End of Germany's China Illusion, How We Must Deal with Beijing's Claim to Power, was published in German by Piper Press in 2023. So with that, welcome, and I'll hand it over to you for your remarks. Thank you, Alex, very much for the kind introduction and IIEA for the kind invitation. It's a great pleasure to be here and I think I will just jump right into it and then hope they leave a lot of time for discussion because I think that's what's most needed right now. I don't claim any kind of definitive knowledge on this matter but I would love to engage in a conversation with all of you on where we are at the moment because if one thing is certain is that China is becoming harder and harder to read and it is not easy for us to kind of make sense of what's going on at the moment so I think we all need to stick our heads together and figure out what's happening. I thought I would do three things. I would kind of explain what has led to Germany's change in China policy and then explain what has changed in China and then end with sort of an outlook on where we are at the moment particularly because we are at such a pivotal day today, the day before the EU-China summit that's happening tomorrow and how that integrates with the conversation. So if we start out with what has led to Germany's change in China policy, I think it's really important to recap briefly that the kind of 30 years before 2018 have been really great for Germany but also really good for China. This was a complementary relationship in which the German companies made loads of money where this was really beneficial for the German economy, where this led to growth in China and where it seemed like this whole notion of win-win was just really working out. This has never been the case for all European countries but for the Germans this really did work and it seemed like this was a never-ending story. There would always be growth in China, there would always be more growth in China, there would always be more avenues for the Europeans to make money, for the Germans to make money and even if that cake that kept growing, even if that slice was starting to get a bit smaller for the German companies and the Chinese companies were taking a bigger slice of that cake, because that cake was still growing at such rapid speed, it didn't really matter and I think what is also important to understand is just a background of this, in comparison to the sort of China shock logic that we saw in the United States where a lot of jobs in manufacturing actually went to China and the kind of economic downturn that the country experienced and deindustrialization that happened had a lot to do with the engagement in China, the same just didn't hold true for Germany. It wasn't that there were cars that would no longer build in Germany that were then built in China, which is more cars built. German companies integrated nicely into the Chinese market, became huge players there and 40% of Volkswagen's cars are now sold in China, well those were cars that could never have been sold anywhere else. So this was just a fundamental growth story and it was so good. Some industry representatives have said it was sort of like a drug, you always wanted more and more of the Chinese market because it just felt so good and you knew at a certain point that there was going to be some after effects and that you would wake up with a big hangover at a certain point, but it was just too good to stop. Well that hangover moment, that stopping moment came in towards 2017-18, 2017 with Xi Jinping's big speech at the party congress that was sort of laying out some of the priorities for the Chinese leadership that they were actually striving for industrial leadership in precisely the areas that Germany was good at and trying to grab market shares globally in precisely the areas that Germany saw as their market shares and as their growth areas and therefore becoming less complementary but much more of a competitor. And this was actually dawning on German companies first before it even dawned on politicians. So in 2018 the German Federation of Industries, a place that is not known for revolutionary overthrows but actually more of a kind of conservative institution of German Mittelstand, brought out this really revolutionary paper naming China for the first time a partner competitor and a systemic rival. And that was quite something because the notion of system competition, it seemed so gone. If one country has lived the post-1989 dream, it was Germany, it was this whole idea of all of that stuff of system competition is no longer relevant for us. But that didn't hold true anymore and this was becoming something that became a real problem for German companies on the ground and therefore the German Federation of Industries was sounding the alarm and was saying well actually what we're experiencing here is being that we're pushed out of the market, that we're experiencing unfair competition on global markets and that we're experiencing heavy competition in our home market in Europe and this is becoming a problem for us. The European Commission took this up in March 2019 and actually formulated this new holy trinity around the partner competitor rival in its communication that came out in March 2019 and I think also here just to understand there were lots of Germans involved. This was because of all of the key positions there were Germans that were running this process. So there was already a huge German dimension in this and it was the political dimension then saying well actually we have to do something about that. In parallel though, while the Germans at the Brussels end of things were a bit visionary and thinking ahead and seeing these challenges at the German national end with Merkel still in power with looking back at kind of her 20 years of almost 16 years of experience as a chancellor and very close relations with China and very good relations with China it was really hard for her to change and for me one of the most ironic moments was the 2019 last visit that she paid to China which was ironically to Wuhan of all places where she was talking at a university in Wuhan about technology and innovation cooperation with China which felt at the time already slightly out of dates and slightly out of tune with where reality was actually moving then Covid hit and everything changed and it actually brought home a message much clearer than any crisis could have done supply chain disruptions dependencies were all of a sudden conversations that everyone had on their mind and it just brought something to the German home audience here to people in Berlin and in vast parts of Germany that hang on being dependent on China may not be such a great thing. The next hit was then this was already then you know this was something that that was had a huge influence on how the conversation was progressing and the speed with which it was changing. We saw that in the coalition treaty of 2021 that used language that was never there before where it was a reference to Xinjiang a reference to Taiwan a reference to we need a China strategy we need to talk about what is going on so this was already a massive shift in the narrative and then the next shock hit and that was the Russian invasion of Ukraine and I think that was something that was a bit unexpected came a bit unexpected to the China conversation but it actually had it sucked in all of the political energy and sort of parked the China conversation for a second no one wanted to actually focus on drawing up a China strategy while we were trying to keep houses warm for the first winter and Germany's dependence on Russian oil and gas was becoming a real issue but it also catalyzed the conversation about kind of oh hey what does that mean if you're dependent on an authoritarian country that changes tack on you and then you have to respond and react in sort of a panicked that version with huge a huge price that you pay for this and huge costs that are inflicted upon you because of that so it did have a huge effect on the China conversation and then adding to that there was this initial notion that China must have made a mistake 4th of February 2022 when they signed that joint statement with Russia no they can't be serious after this anymore this was obviously they were obviously tricked by Putin into signing something like this and they will obviously now get to their senses and see what Putin is up to and therefore change their ways this was the first few weeks and months of the Russian invasion of Ukraine and sitting there and looking at this and thinking well I think it was very deliberate what they signed there and I think they actually made some comments about what kind of future security order they would support in Europe and they had some thoughts about NATO expansionism and none of this seemed like a big trick pulled by the Russians on the Chinese but actually the opposite that they actually agreed on this and this was then dawning on people in Europe in general but also in Germany in particular that maybe and maybe after all the Chinese were actually serious about this because they kept supporting the Russian government there was continued support economically there was continued support in terms of diplomacy and on all other fronts amplifying narratives etc so this was some then the next thing that has catalyzed the way the China conversation was changing and into all of this then with all of that background the China strategy was formulated and I think it is something that you know normally strategy documents of governments are pretty boring they never really have a lot of substance in them because you can't write stuff that you actually mean down because you don't want to give away your strategy actually you just have a kind of rough political statement on where you're at this document is is a bit different because it really isn't all of this diplomatic prose it is very clear in the analysis of what kind of China Germany sees now and what needs to be done about it it's more muddled in terms of the concrete steps that need to be taken but I do think that this analysis bit on what kind of China are we actually seeing it's very important for the European conversation it is very much linked to how Commission President von der Leyen has described China in her speech in March of the year but also has a lot of a with this coalition in Germany with the Greens and the Liberal Party and the SPD you have a very big variety of political players and political views included in one government the fact that they could agree on a collective description of reality of this is what we are seeing is already something that is quite indicative of where European conversations are so let me just kind of briefly skip through four things because when Alina Baerbock the German foreign minister was describing was saying China has changed therefore we have to change she was stating something that may not have been so obvious to everyone before but how has this China changed so much that we have to change so much and four of those kind of exemplary illusions that needed to be shed about what China was was about the party so that the party is no longer a guarantor of stability but actually has become a risk factor in and of itself the way it governs and the way it operates from the COVID measures to the tech crackdown to the current economic problems that we're facing to the market conditions that companies are facing on the ground the party is no longer that player that German industrial officials used to like when German industry officials would go to to China they would say everything goes so nice and fast and compare this you could never do business like that in Europe if you need a permit you get a permit you get all of the things are just kind of easily done and stability is being provided that was no longer the case now everything has become arbitrary security and politics are reining and it's not that actually the economic dimension economic growth are at the forefront of this this is something that is changing massively then for Germany the outlook on how companies are operating within China the second big illusion I think is that there was this idea of win-win that the communist leadership would actually be interested in reciprocity what we can see now over at least the last I would say eight to ten years is that the Xi Jinping's leadership relies on dominance and wants dominance and not reciprocity that also has some implications for for its economic policy when you look at overcapacities for example in the EV sector or in the green industries where these overcapacities the decisions inside the Chinese leadership have global repercussions but it also means something for de-risking I think that's you know the new buzzword that we throw around a lot in Europe where we say we have to just de-risk a little bit de-risking is a zero sum logic it just means that once China when China de-risks its own relationships with Europe because that's what it wants to do this Chinese leadership wants to have the world more dependent on China but be less dependent on the world that means our risk goes up and whenever we de-risk then their risk goes up again and therefore there's no interest on the Chinese side to actually for us to actually pursue de-risking and to find an equilibrium of some sort but to actually actively act against any kind of de-risking efforts that are being pushed forward by European leaderships and and I think that's an important notion that this win-win thing needs to be beaten out of the heads of people because it's been repeated so many times by the Chinese leadership that it almost became true but it isn't I think a third illusion that has really kind of started to sink in here in the German debate is China's military does not just seek regional control but actually seeks global power from cyber security and surveillance measures to global military activity it now has more soldiers than anyone else on the planet more ships than the US Navy more aircraft in the air than any Asian player and massive investments of nuclear capacities satellite industry building up so all of the things that you're seeing in terms of the military build up none of this speaks defensive regional moderate all of this is talking in superlatives all of this is speaking for a global power with global interests economically and on the security front this has been the hardest one I think to realize for Germans and this has been one that has become more relevant now particularly with the Russian invasion of Ukraine and then the last illusion I think that we can tackle a bit is the one that I was most curious about when we wrote a report about this a couple of years ago so when you travel through Europe and you ask in capitals so if China is our partner competitor and rival where exactly is it a partner and then you ask that question in roughly 20 so I asked it in 24 capitals I didn't manage 27 but 24 and the answer was always climate change and then you know something is rotten because Europeans never agree on anything that much you know you can't have that amount of agreement on a on an issue like that so either they haven't thought about it or it's becoming a default sort of talking point that it doesn't have anything attached to it and any meaning attached to it and I think what is currently sinking in in light of the cop that we are seeing right now and in light of the development recently is that China is not a partner actually in tackling climate change but that we are in intense competition with China that that doesn't necessarily only vote horribly for the climate but that that does something to the way our green industries will develop and that there is the sense of this notion of heightened competition in the industries for the future that will have a huge impact on the way we can actually operate and we can decarbonize so now that Xi Jinping's face is on the kind of decarbonization agenda and the national logic is around ecological civilization and decarbonization and China's pushing forward with enormous amounts of renewables that still doesn't mean it's a partner and I think this is the kind of the logic in Europe and particularly in Germany has been but we need to sort of hold hands and work on this together because it's such a global challenge and if we don't work together then we can't change anything about this whereas the Chinese logic is well this is actually fundamentally a national policy of decarbonization it has nothing to do with international collaboration it actually has to do something with domestic action and if you want to be ahead in the race for a green future then you know China has made the investments in those critical areas quite early on and it has positioned itself quite well so with tomorrow's kind of EU-China summit coming up what does all of that mean for us the developments in Germany the developments in China all of the things that have fundamentally changed for us well for the first thing it means is that the relationship is in really really really bad state at the moment Europe and China I would say have not hit rock bottom yet but the downward spiral is quite significant and the tonality of the conversation has changed this is the first time that Mozilla von der Leyen and Tchai Michel can sit down together in person with Xi Jinping invading tomorrow and have like an official summit meeting the expectations couldn't be lower the two things that they are traveling with to to to China are kind of the China-Russia relationship and actually kind of tightening the screws on China saying you know actually what you are doing and the way you are supporting Russia is having a crucial impact on Europe's security and on the future of Ukraine and if you don't stop then we will have to sanction Chinese companies that are involved in this and this is now being very openly played and the second item that is on the agenda is the massive amount of overcapacities and the trade imbalances that are just growing Europe and China now have a larger trade trade Europe has a larger trade deficit with China than it ever had in history and this is something that is just the speed with which this is happening is alerting a lot of people in Europe we can see particularly on electric vehicles the surge of production in China we can see the surge in ferries roll on roll off ferries that are able to transport and export these massive amounts of capacities to global markets Europe is a very open market in that regard and all of that falls into an unregulated space when it comes to for example data cyber security questions and the question of you know what are these cars going to do with local car industry but also with the question of kind of privacy and data security of European citizens in all of this the German role will be absolutely crucial and it's a it's a role that is not as clear cut as one would think so while the tougher voices in the German system in the economics ministry in the foreign ministry but also in the interior ministry are very kind of clear and are very loud as well the caution cautious ones particularly in the chancellery are still very audible as well and this doesn't cut nicely across party lines but actually through parties as well and it doesn't actually it doesn't always align the way you would expect it to align what we see is that the group of supporters for the current approach of very cautious and very limited engagement is getting smaller and smaller and I do think that the latest moves particularly with regard to the support for Russia are having an effect on the de-risking strategy but so far I would say not all illusions in Germany are shed when it comes to the potential that China still could potentially have for German industry it's really hard to rejig an approach that has been taken for more than three decades and while doing that while you're actually trying to also rejig your approach to energy security at the same time and while you're handling a situation across the Atlantic where you're not sure what's going to happen next year so Germans find themselves in a bit of a bind and are worried that their economic outlook is going to look more dim the problem with that is one could say that the rest of the Europeans particularly from Greece and other places could have a degree of Schadenfreude and say ha ha finally you guys are hit too the problem with this is though that if the German economy goes down the European economy will not look well as well and therefore this is not just the German problem when it comes to its China dependency but it's a European problem maybe I'll leave it at that I've thrown a lot out and then we can discuss more