Will Germany-China Ties Hurt the U.S.?

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Markus Schreiber / AP

The chummy pow wow between Chinese Prime Minister Wen Jiabao and German Chancellor Angela Merkel in Germany this week seemed like all peas and gravy. Fourteen economic deals?  Great. Twenty-two cooperation agreements?  Even better. Any business is good business in a fragile global economy, right? Not so much. Growing ties between Beijing and Berlin don’t all bode well for the U.S., not to mention greater Europe.

For their part, Europeans fear China is taking over their continent by buying its way in. China’s recent purchases of Spanish and Greek bonds, for instance, have made it the flailing eurozone’s lender of last resort. China’s interests are clear: a surviving euro fuels demand for Chinese goods and allows China to diversify its massive dollar holdings. All the better for Germany. China’s “bond diplomacy” toward Greece is a godsend for Greek-debt-laden German banks that fear a Greek default.

As Europe’s ringleader, Germany could express its gratitude by softening its stance towards China on trade, the environment, and human rights. For example, China wants the EU to designate it a “market economy” within the WTO, which would make trade disputes against China more difficult, a demand the EU has so far resisted. Germany is also vying for the EU to drop its long-held arms embargo with China, a move the U.S. has long opposed.

Ultimately, growing trade ties to China could pull Berlin away from the West. As Marcus Walker argues in the Wall Street Journal this week: “When you’ve carved out a lucrative niche selling precision machinery and luxury cars to fast-growing emerging economies such as China, who needs stodgy old Europe?” There are already small signs of Germany peeling away. Germany sided with China and Russia in abstaining from NATO’s Libya intervention, and it has walked away from the ailing eurozone on numerous occasions.

Then there’s the issue of economic “rebalancing.” Germany and China’s economies made out better during the downturn by relying heavily on exports, fueled by cheap currencies and low labor costs. The export-starved U.S., along with debt-heavy European countries like Greece and Portugal, have argued those dynamics killed their export markets and made the global recovery too reliant on their underwater consumers. Since then, the U.S. has pressured the world’s top two exporters to boost domestic consumption by paying higher wages or cutting taxes. But China and Germany teamed up to kill those proposals at last year’s G20 meeting in Seoul, South Korea. The more inroads the two countries make on trade, the less reliant they’ll be on Western consumer demand.
(Read How Germany Became the China of Europe)

But the risk cuts both ways. The more Germany and China rely on each other to fuel their export-led growth, the more their consumers become their only hope. And the weaker consumers in the U.S. and peripheral Europe become. In an interview with the Financial Times‘s Martin Wolf, Goldman Sachs economist Jim O’Neill says that’s the biggest threat to the global economic recovery.

“The single biggest risk is that I prove wrong on China,” [says O’Neill]. The danger is that its post-crisis recovery “has all been based on its own easy money and so it cannot adjust away from export-dependence as much as I think it is doing already. If this were to be the case, the recovery of many other economies will end up being more fragile than optimists realize, including that of Germany.

For now, Germany and China think they’re in the clear. It may take another crisis to temper their love affair.
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