Germany, the European Union’s economic powerhouse and most populous country, will soon have a new government. This opens a new political chapter after sixteen years of a centre-right-led coalition headed by the towering figure of Angela Merkel.
One can expect a lot of continuity on how Germany approaches EU trade policy with the outgoing Merkel government. But there will be some sharper edges on China, geo-strategic issues, and the already unfolding ‘greening’ of EU trade policy and of its bilateral trade agreements.
Since Wednesday evening, the three parties making up the new government also unveiled the definitive version of what they call their ‘coalition contract’. Said ‘contract’ is in fact a detailed 177-page government programme hashed out through lengthy negotiations led over the last two months.
The detailed composition of the new coalition government will be announced on 6 December, but we already have an idea of its contours.
Old and new faces
The new government will be headed by Olaf Scholz from the social-democratic SPD.
Scholz is a continuity figure. Scholz’s party was in a coalition with Merkel’s CDU throughout those 16 years and Scholz still is the outgoing government’s finance minister. The former Hamburg mayor’s views on public finances were perfectly aligned with those of the centre-right CDU: a commitment to the country’s debt brake and, at least pre-pandemic, a focus on producing budget surpluses. The finance ministry is expected to go to the free-market FDP – an equally orthodox player .
Overall, then, one better not expect spectacular U-turns coming out of Berlin in the coming years. However, there is a notable change in tone and outlook in some key policy areas that will shape the EU’s trade and investment policy in the coming years.
The green party Bündnis 90/Die Grünen has left an imprint on the coalition agreement. It will clearly continue to influence policy once the government is up-and-running.
The party’s co-leader Robert Habeck is expected oversee the environment and economic portfolios – yes the two together. The other co-leader and former candidate to become chancellor Annelena Baerbock is ligned up for the foreign affairs portfolio. Both politicians are charismatic figures in the German political landscape.
EU “strategic sovereignty” and green industrial policy
The new coalition contract focuses strongly on the EU and supports its reform and strengthening.
The text talks for “strategic sovereignty” – strategische Souveränität – of the EU. It goes as far as advocating for a switch to qualified majority voting in the EU on foreign affairs. The consensus rule prevailing in this policy area so far in the EU is seen as hampering coherent and decisive foreign policy.
This comes on top of the traditional German focus on seeking to promote multilateralism and rules-based international relations – including trade – which can be found in the coalition document.
On domestic policy, the programme has lengthy passages about investment in infrastructure, digital and innovation capacity with a strong eye on greening the economy. This of course will have ramifications for the EU trade policy.
There is a strong focus on industrial policy. The report is explicit in embedding it within the current rapidly evolving EU framework in areas such as electrical car batteries, green hydrogen, aerospace and semiconductors.
The industrial policy language even includes a commitment to green public procurement through a quota system for products deemed climate-friendly.
Quite predictably, the text includes full support for the EU’s carbon border adjustment measure. The new coalition government supports the full phase-out by 2030 of free industrial allowances under the EU Emissions Trading System to which the CBAM will tied.
Sharper on China? America first?
Asked about the implications of the new coalition deal on Germany’s approach to trade relations with China, the European Parliament’s international trade committee chair and SPD member Bernd Lange said: “There is a sharper focus on human rights and clear support for the anti-coercion instrument, the IPI and the foreign subsidies regulation”.
The three latter instruments are unilateral responses to what the EU perceives as predatory behaviour of governments or firms backed by governments and aims at preserving the EU’s strategic autonomy. The measures are implicitly targeted at China but are also a response to US Trump-era measures such as Section 301 investigations into local digital taxes that involved tariff threats.
There is a clear expectation that there will be slightly tougher line on China issues coming out of Berlin. The report also supports the EU’s soon-to-be unveiled human rights supply due diligence regulation and its accompanying bans on forced labour and modern slavery.
This comes with the usual nuances when it comes to China.
The coalition language on China is tucked away in page 157 in a section on bilateral relationships, and comes after other countries such as the US, Russia or even Israel in the pecking order of listed countries. This means China is either not a priority, or a divisive issue in the coalition which has been papered over but could bubble over at some point in future.
The coalition report calls for a “comprehensive China strategy in Germany in the framework of a common EU China policy”. The language echoes that of the EU which has called China a partner, a competitor and systemic rival – depending on the topic areas.
The report mentions CAI, the investment pact with China inked in the last days of 2020, but put on ice following sanctions resulting from a row over forced labour in Xingjiang. It states that current circumstances do not allow for its ratification.
But SPD sources are clear that should those circumstances improve – that would involve China lifting sanctions on MEPs – then Germany would be happy to talk. There have been rumours in Brussels about Olaf Scholz already sending appeasing messages to Beijing via Council president Charles Michel.
Overall, the text’s relevant paragraphs on China remain prudent, with ‘America first’ being the main motto.
“We aim for transatlantic coordination (Abstimmung) of the China policy and will seek cooperation with like-minded countries in order to reduce strategic dependencies,” says the report.
For Reinhard Bütikofer, a German MEP from the Greens group and a key figure in the international trade committee, the strategic orientation of the new government is clear. “The new government will prioritise strong transatlantic coordination and lining up with like minded countries,” he told Borderlex.
But what happens if the US demands that the EU decouple some of its economic sectors from China? Washington is doing this in the semiconductor area in a country such as South Korea: it insists on its ally restricting exports of critical semiconductor components to China.
Bernd Lange is clear: “We will not go on a principal route of confrontation with China”.
Taiwan test case
A not unretlated related question is what the German approach to Taiwan will be.
The coalition text on Taiwan remains cautious, reaffirming strongly the ‘One-China’ policy of Germany – and the EU. However it considers that Taiwan should be allowed to join international organisations that deal with technical issues (sachbezogen).
The European Commission recently initiated steps to establish stronger economic cooperation with Taiwan but those efforts were nipped in the bud in recent weeks following rising tensions between some member states in Central and Eastern Europe and China over their growing ties with Taiwan.
Reinhard Bütikofer told Borderlex: “Taiwan will play a growing role. The coalition agreement acknowledges that. Taiwan will increasingly be seen as a partner.”
If this happens, dynamics in the European Commission – strongly shaped by the president von der Leyen’s partisan and political ties with the Merkel government – could change in future too.
FTA agenda subject to further sustainability guarantees
Where does all that leave the bilateral free trade agenda of the EU?
That agenda has significantly gone down the priority list for the EU. Negotiations with Chile and New Zealand, which are in their final stages, are frozen de facto until the EU finalises its ongoing revision of its FTA labour and environmental chapters also known as TSD chapters.
The coalition text language talks of better enforcement of those chapters, eschewing the question of whether it expects environment and labour commitments to be sanctionable in a commercial sense as part of the FTA.
The Germans haven’t completely forgotten CETA, the 2017 trade accord with Canada, which still needs ratifying. “We will take a decision about the ratification of the Comprehensive Economic and Trade Agreement after examination by the constitutional court” – where indeed a case is pending.
The coalition text also commits to look at the ratification of the EU Mercosur trade agreement – currently on ice – “the moment the partner countries have taken on binding commitments on environmental, social and human rights and once practically enforceable extra agreements on the protection and preservation of existing forests are concluded” .
