BASF Playing China Matchmaker Should Worry U.S.

(Bloomberg Opinion) -- If you want a look at how China is playing the economic diplomacy of its simmering trade war with the U.S., consider BASF SE.

The world's most profitable listed chemical company  agreed Monday to spend as much as $10 billion on a giant plant –  in Guangdong province, at a ceremony in Berlin attended by Chinese Premier Li Keqiang and German Chancellor Angela Merkel.

The announcement was the centerpiece of a series of paper partnerships between Chinese companies and pillars of German industry this week, encompassing BMW AG, Siemens AG and Volkswagen AG collaborating on electric vehicles, gas turbines and cloud computing. To top it off, the widow of Nobel Prize-winning dissident Liu Xiaobo was allowed to leave house arrest in China and fly to Berlin, where she arrived Tuesday.

Behind the blatant stage-management, it's not hard to see the purpose of this gift exchange: Europe could be a valuable ally to China in its rapidly escalating trade fight with the U.S., especially as President Donald Trump's tariffs on metals and automobiles, renewed sanctions on Iran, and trash-talking of the North Atlantic Treaty Organization drive the region's capitals out of Washington's orbit.

To date, the EU-China relationship has tended toward the frosty, marked by periodic blow-ups whenever European leaders mention human rights (and embarrassment at home when they fail to do so), and trade ties that, with the exception of Germany, are mostly anemic.

That's where BASF comes in. The company has often played a prominent role in Germany's relations with trading partners. In 1990, on the first anniversary of the fall of the Berlin Wall, it established a joint venture with Russia's Gazprom OAO that's since become one of its strongest partnerships. As with its current plans in Guangdong, the firm was a pioneer foreign investor in the former Soviet Union, becoming the first outsider to produce Siberian gas alongside Gazprom and developing a shared network of pipelines to connect Russian gas fields with European users.

Its latest project has a similar fall-of-the-wall feel about it. The unit will be 100 percent-owned by the German company, which would have been impossible without the gradual loosening of Beijing's foreign-investment restrictions in recent years. That shows the possibility of movement on reciprocity, a persistent irritant in China's trading relations with the world.

For all that we've scoffed at China's recent revisions of its foreign investment “negative list,” BASF's move shows the changes are real. That should in theory allow many of the most powerful European businesses in sectors such as fuel retailing, utilities, aerospace, finance and car manufacturing to follow in its footsteps and break into China's immense market.

There's still a long way to go before ties could be considered warm. Although China is already one of the biggest markets for such businesses such as Airbus SE, Volkswagen and Unilever NV, a strong flavor of distrust remains. That was demonstrated by the dismissive response of Daimler AG to the arrival of Zhejiang Geely Holding Group Co. as a major shareholder last year, not to mention Germany's moves last year to expand government powers to block foreign takeovers.

It's worth considering, too, that the Gazprom model of influence hasn't been a resounding success for Moscow. If anything, the pressure has flowed as much in the other direction, with the Russian company gradually accepting market-style mechanisms as the price for its participation in the EU energy sector.

Nor has it stopped views of Russia in European capitals from gradually hardening over the past decade, as Moscow's rejection of democracy and the post-Cold War order became more blatant. If China is hoping that deepening economic ties will lead European leaders to give up the human rights talk, Russia's experience suggests otherwise.

Even so, the areas of common interest could be potent. At a time when the U.S. government is looking to stymie China's move into advanced technologies, European companies – —like those from Japan, another target of Beijing's recent diplomatic love-bombing — represent an attractive alternative source of intellectual property. Midea Group Co.'s recent purchase of a controlling stake in German industrial robots business Kuka AG could be taken as a model. China National Chemical Corp.'s takeover and relisting of Pirelli & C. SpA and, outside the European Union, of Switzerland's Syngenta AG suggest the same path. 

Don't underestimate the ability of Washington to shoot itself in the foot, either. Before it imposed a penalty of as much as $1.2 billion on ZTE Corp., the most prominent cases of companies falling foul of sanctions on Iran have been European banks such as BNP Paribas SA, HSBC Holdings Plc and Standard Chartered Plc. The more aggressive enforcement of such secondary sanctions has alarmed European governments used to getting a pass on such matters, but the U.S. shows little sign of backing off from their use.

That's all the more reason for President Donald Trump to keep a lid on his appetite for disruption at this week's NATO summit in Brussels. Right now, the U.S. appears to be looking for battles on the world stage. It should watch its step: China is busy seeking out allies.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

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