HAMBURG, Germany -- Chancellor Angela Merkel's government faces a critical decision in the new year over what role Chinese tech titan Huawei Technologies should be allowed to play in the rollout of 5G in Europe's largest economy.
Merkel is under pressure from lawmakers in both ruling and opposition parties to ban the controversial Chinese company from the network. But that would risk Chinese retaliation such as a clampdown on German auto exports to a crucial market for the likes of BMW and Mercedes-Benz.
However, allowing Huawei to play even a minor part in the rollout raises the specter of a trade war with the U.S., the largest export market for German carmakers.
Washington insists that its allies ban Chinese equipment from their 5G networks over security concerns and has threatened to curtail intelligence-sharing over the matter. U.S. Secretary of Commerce Wilbur Ross in early December unsettled German automakers by clarifying that President Donald Trump's threat of slapping additional 25% tariffs on European car imports is still on the table.
Germany is also under strong pressure from Washington over Nord Stream 2, a nearly-completed undersea pipeline designed to bring more Russian gas exports into Germany. The U.S., however, considers this security risk to Europe.
On Dec. 21, Trump effectively suspended the multi-billion-euro project by signing a law that would impose sanctions on any company that helps Russia's state-owned gas company, Gazprom, complete it. German Finance Minister Olaf Scholz described this as serious interference in Germany and Europe's internal affairs.
"The German chancellor is fighting on two fronts on the Huawei issue. The U.S., her most important security partner, is arguing that the security risks posed by Chinese equipment are too great," said Kevin Allison, the Eurasia Group's Berlin-based director for Geo-technology, told the Nikkei Asian Review.
"But she is also constrained by her trading relationship with China, an important market for many German companies, including German automakers," he added.
The Merkel administration has hinted recently it will propose changes in early 2020 to the telecom law, which would not totally exclude Huawei. This triggered a revolt by cabinet ministers and lawmakers in both Merkel's ruling Christian Democratic Union and the Social Democratic Party, the junior coalition partner. In line with recommendations by Germany's intelligence agencies, the group demands a ban of suppliers that might be influenced by a foreign country -- under Chinese law, Huawei is obliged to share intelligence with Beijing.
In the recently ended legislative session in the Bundestag, all three opposition parties directly or indirectly called on the government to ban Huawei. And reflecting a rise in broader security suspicions over China, Germany's domestic intelligence service recently advised travelers to China to ditch their mobile phones after leaving the country because of concerns over the alleged cyber spying by Beijing on foreign tourists and business people.
The German business community is generally not supportive of restrictions against Huawei as many companies have major stakes in China's industrial modernization program. Telecom operators who took on heavy debts in the 5G frequency auction made their calculations based on Huawei' competitive prices.
Two recent statements underscore the squeeze on Germany.
China's ambassador to Berlin, Wu Ken, in a recent thinly veiled threat implied that German car manufacturers could run into regulatory trouble in China if Huawei were to be banned. Meanwhile, U.S. National Security Adviser Robert O'Brien, told the Financial Times in December that Germany's lenient stance on Huawei will make the country "a vassal of Beijing."
Germany's quest to attract more foreign investment hinges on staying on good terms with both Washington and Beijing, and the status quo appears to suit Berlin. For example, both California-based Tesla Inc. and China's Tencent Holdings recently announced plans for multi-billion-euro investments in the country.
In the week before Christmas, the Merkel administration reined in some leaders in her party's caucus with an agreement to separate the 5G network into two sections: a core portion for which a de facto Huawei ban would apply, while allowing the Chinese company take part in the peripheral radio access network (RAN).
The Eurasia Group, however, forecasts that the U.S. will stay company in arguing there is no meaningful distinction between the 5G core networks and RAN.
Germany's predicament is mirrored in the U.K., where several carriers have already begun to deploy Huawei 5G equipment. Prime Minister Boris Johnson is counting on the Trump administration's goodwill to offset any outfall from the Britain's divorce from the European Union, likely to happen at the end of January.
In an emailed note, Eurasia said full bans in Germany and the U.K. would risk retaliation from Beijing. This includes China adding companies from those countries to its in-development "unreliable entities list," postponing economic talks, or other non-tariff measures, such as antitrust cases, license and import delays.
"Nevertheless, the situation remains very fluid, as Merkel wants to communicate that Germany is open for business and will likely continue to resist a full ban even though the room for compromise is shrinking," Eurasia's Allison told Nikkei.
"Let's keep in mind that Merkel is a savvy politician who has managed to push through many last-minute compromises in her career."