After a 16-year reign at the helm of Berlin’s foreign policy, German Chancellor Angela Merkel is finally retiring. Her likely successor is Olaf Scholz, who will inherit Merkel’s foreign policy portfolio—and along with it the challenge of Germany’s China policy and balancing competing interests across the Taiwan Strait, especially in terms of economic relations with both Taiwan and the People’s Republic of China (PRC).
While most observers expect that Scholz will continue with Merkel’s pragmatic policy towards Beijing, there is a new dilemma surrounding Hamburg (Europe’s third largest port after Rotterdam and Antwerp). According to a recent Bloomberg article, this port city’s strong economic ties to China may now be “exposed to the vagaries of great power politics as tensions between the US and China spill into global supply chains.” As a result, Berlin’s interest in Taiwan as a partner for strengthening its semiconductor supply chain appears to be growing. How Scholz, who hails from Hamburg, balances these competing interests is one of the main questions that Germany’s incoming government will have to face.
Hamburg-China Supply Chain
Hamburg is often marketed as China’s gateway to Europe, and is the continent’s number one rail port with over 200 freight train connections to China each week. It is a key node of China’s “New Silk Road,” and according to Bloomberg, half of Germany-China trade worth €213 billion (USD $244 billion) passes through Hamburg. The port city has street names like “Shanghaiallee” and “Hongkongstrasse,” and Chinese companies have a large presence here. China’s shipping giant COSCO is one of more than 550 Chinese companies with offices in Hamburg, which is now Germany’s richest state and home to about 100 consulates. As such, there is little talk of Germany dislodging trade ties with its largest export market, even as Sino-US rivalry intensifies.
Nonetheless, according to Mareike Ohlberg, a senior fellow at the German Marshall Fund’s Asia Program, while Beijing has no immediate interest in decoupling, its gradual aim is to become more independent trade-wise while keeping foreign dependency on the Chinese market, so “Germany would be well served by recognizing that and act[ing] accordingly.” To that end, Berlin and Brussels have begun to address specific issues such as market access and intellectual property protection by establishing trade defense mechanisms and investment screening. Additionally, Germany has enacted a supply chain law that will be introduced at the EU level. Its main purpose is to bolster resilience while also addressing human rights and environmental risks in the supply chain. Although not exclusively aimed towards China, the legislation nonetheless bears Beijing in mind.
In terms of German domestic politics as Scholz tries to form a coalition government, human rights issues are especially important for the Greens and Liberals, and they “both have a strong critical approach on China,” according to Ariane Reimers at the Mercator Institute for China Studies (MERICS). “But no matter who governs Germany, no political party has an interest to subscribe to an overly confrontational China policy since any cold-war or close-to-cold-war situation could harm German economic interests,” Reimers added.
Hans Kundnani, director of Chatham House’s Europe Program, agrees that the incoming government would likely continue Merkel’s legacy of balancing Berlin’s relationship with China and the United States. Regardless of Social Democratic Party (SDP), Christian Democratic Union (CDU), or Greens’ views towards China (and which ministries they control), Kundnani believes that China policy will be determined by the chancellery.
This puts Scholz in position as the key decision-maker for policy towards China—as well as towards Taiwan, which has the coveted semiconductor chips that Berlin needs for its automotive industry.
Dresden-Taiwan Supply Chain?
Germany’s biggest industrial sector is the automotive industry, which had a turnover of €379.3 billion (USD $434 billion) in 2020, accounting for 20 percent of total German industry revenues. In the same year, Germany was the global top exporter of cars with exports worth USD $122.3 billion (19 percent of total exported cars globally), followed by Japan at USD $80.9 billion (12.8 percent of total car exports) and the United States at USD $45.6 billion (7.2 percent of total car exports). In 2019, Germany’s top car export markets were the US, followed by China and the United Kingdom, with 40 percent of Volkswagen’s vehicles being sold in China.
With one in three German cars sold in China, some observers worry whether German carmakers are too dependent on China’s market, especially after Berlin became even more reliant on this market in 2020 due to US and European markets being hit much harder by the pandemic. However, Ferdinand Dundenhöffer from the Center for Automotive Research (CAR) foresees that China will play a key role as “the locomotive of the automotive industry,” especially given forecasts of significant growth in the next ten years, according to Daimler CEO Ola Källenius.
This is where Taiwan enters the picture. While China may be a large export market for German auto makers, these vehicles depend on critical semiconductor input mainly from Taiwan—without which German auto production would largely come to a halt. In April 2020, due to the pandemic and semiconductor supply chain distortions, nearly the entire production of passenger cars came to a standstill in Germany. This prompted Economic Minister Peter Altmaier to write a letter in January 2021 to his Taiwanese counterpart, Minister of Economic Affairs Wang Mei-hua (王美花), requesting a priority shipment of semiconductor chips from Taiwan Semiconductor Manufacturing Company (TSMC, 台灣積體電路製造股份有限公司). Subsequently, to reduce dependencies from Asian suppliers in the future, Berlin is also planning to ramp up semiconductor production capacities, and in June 2021, Robert Bosch opened a USD $1.2 billion chip plant in Dresden, Saxony.
In August, a Reuters article reported that TSMC has been in talks with Infineon, Robert Bosch, and NXP to build a semiconductor plant—possibly in Dresden, which is Europe’s largest semiconductor hub. This was followed in September by a news briefing wherein German Institute Taipei Director-General Jörg Polster again invited TSMC to establish a new fab in Saxony. Polster has met with Minister of Economic Affairs Wang Mei-hua (王美花) and Minister of Foreign Affairs Joseph Wu (吳釗燮), but not yet with TSMC representatives. According to Ray Yang (楊瑞臨) from Industrial Technology Research Institute’s (ITRI) Industrial Economics and Knowledge Center, TSMC’s investments in Germany and Japan will likely differ from its US investments—which will use the 5nm process—while Tokyo and Berlin plants are expected to use specialty processes to cater to the requirements of auto manufacturing clients.
Back in January, when Berlin requested semiconductor chips from TSMC, Taipei brought up the possibility of exchanging TSMC chips for German BioNTech vaccines, given the low vaccination rate in Taiwan at the time. However, according to Taiwan’s representative in Germany, the talks broke down in February, likely due to Beijing’s intervention. In light of this incident, some scholars in Berlin are now calling for Germany to re-evaluate its approach towards Taiwan and to have better relations based on economic cooperation, not bartering.
Berlin Needs Better Relations with Taiwan
According to Angelo Kruger from the Berlin-based Global Public Policy Institute (GPPI), Germany should apply the US model of greater economic cooperation with Taiwan to streamline its information and communication supply chains. He recommended deeper cooperation in other areas such as software development and joint research. Given the strategic and political significance of semiconductors as an intermediate input for high-tech industries, the EU’s de-facto Ambassador to Taiwan, Filip Grzegorzewski, has suggested that Taiwan should make better use of this asset. This view is shared by Taiwan’s top trade official John Deng (鄧振中), who sees the semiconductor chip shortage as an opportunity to strengthen economic relations with the West.
As the German government is now committed to bolstering its semiconductor industry and building a resilient supply chain, it is looking to Taiwan as an important partner in that endeavor. The incoming government, which will likely be led by Olaf Scholz, will need to balance its Hamburg and Dresden supply chains with those on both sides of the Taiwan Strait. Given that the auto industry cannot survive without critical semiconductor inputs, Berlin also needs to be a credible partner to Taiwan—and to have a new approach towards Taipei not based on ad hoc bartering, but on better overall economic cooperation.
The main point: Germany’s incoming government, likely led by Olaf Scholz, faces the dilemma of balancing auto exports to China with semiconductor chip inputs from Taiwan. In order to effectively partner with Taiwan to build resilience in its semiconductor supply chain, Berlin will need to build better relations with Taipei and upgrade overall economic cooperation.