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TAICANG, China — German and Chinese flags flutter along tree-lined avenues. Workers are erecting a shopping-and-hotel project with the half-timbered style of architecture more typically found in places like Bavaria or the Black Forest. A nearby restaurant serves Thuringia grilled sausages, fried pork sausages and lots of sauerkraut.
And in Erwin Gerber’s bakery nearby in Taicang, an industrial city a little more than an hour’s drive northwest of Shanghai, hungry customers can buy a loaf of country sourdough bread or a pretzel baked the way they are made in Baden-Württemberg.
“Everything you find in Germany,” Mr. Gerber said, “you will find in my bakery.”
Taicang epitomizes the deep ties between the world’s second- and fourth-largest economies. The Chinese city is so tightly knit with Germany’s industrial machine that some people call it “Little Swabia,” after the German region that the owners of many of its factories call home.
But the relationship has also raised concerns that Germany has become overly dependent on China. That could be a particularly thorny problem for President Biden, who has made isolating Beijing on trade and geopolitical issues a major part of his overall China strategy.
In December, Germany played a dominant role in hammering out an initial European Union investment protection deal with China, despite objections from the incoming Biden administration. Angela Merkel, the German chancellor, has defended the agreement as necessary to help European companies make further gains in China. She signaled in January that she does not want Germany to take sides in a new Cold War, telling the World Economic Forum, “I’m not in favor of the formation of blocs.”
Her stance could have broad sway throughout Europe, given Germany’s position as its largest economy. “It’s a swing state in terms of influence,” said Theresa Fallon, director of the Center for Russia Europe Asia Studies in Brussels.
Germany will be under growing pressure in the months ahead to pick a side. The deal with China still requires approval from the European Parliament, where many are hostile to it.
It could also face pressure during the early June summit of the Group of 7 industrialized nations, which also includes France, Italy, the United States, Canada, Britain and Japan. Mr. Biden wants to strengthen that institution after Donald J. Trump, the former president, gave it short shrift over the past four years.
Some European politicians, voters and rights groups want Germany to take a tougher stance on human rights abuses. They cite China’s crackdown on the democracy movement in Hong Kong and its detention of as many as a million members of predominantly Muslim ethnic minorities in Xinjiang, in China’s far west.
“We are not happy about vague promises made in regard to the brutal suppression of the minorities,” said Reinhard Bütikofer, a member of the European Parliament who is the Green Party’s spokesman on foreign policy issues.
Even Germany’s leading business groups, while generally backing Ms. Merkel’s stance, have called on China to answer the criticism.
“The human rights situation in Xinjiang, as well as the political situation in Hong Kong, strain our political and economic relations,” said Joachim Lang, the director general of the powerful German Federation of Industries. “It should be in China’s own best interest to provide greater clarity to the international community regarding conditions on the ground and respond to the allegations.”
China rejects the criticisms as interference in its internal affairs. European companies in China have said they avoid the use of forced labor in Xinjiang.
Germany has benefited from its ties with China, particularly during the pandemic. China has overtaken the United States as Germany’s biggest trading partner and become the major market for many of its companies. Mercedes-Benz sold three times as many cars in China last year as it did in the United States.
Yet some in Germany fear that the Chinese bonanza is coming to an end. China has stepped up its efforts to compete with German companies in precision machinery or acquire them outright. Executives at some German companies in Taicang said local managers they trained had left to form competitors.
German-owned factories make the precision machinery that many Chinese manufacturers need to keep running. If Beijing succeeds in its bid for industrial self-reliance, a recent study by the Bertelsmann Foundation warned, China will no longer need them.
“It won’t be a win-win situation anymore,” said Ulrich Ackermann, director of foreign markets for the Mechanical Engineering Industry Association, known by its German initials, V.D.M.A., which financed the study by the foundation.
Most of the German companies in Taicang are small and midsize manufacturers that make niche industrial products, or the “Mittelstand” companies that underpin the German economy.
Germany’s first roots in Taicang were planted in 1985, when Hans-Jochem Steim, the managing director of a German manufacturer of wire springs, went looking for a place to build a factory. Taicang, little more than a collection of villages then, was a short drive north from Shanghai’s only commercial airport at the time and had a small-town atmosphere that reminded him of the company’s hometown, Schramberg in Swabia.
Kern-Liebers, Mr. Steim’s manufacturer, was the first of what turned out to be over 350 German companies that set up operations in Taicang, drawn by cheap real estate, a nearby airport and cooperative local officials. Mr. Steim encouraged his longtime suppliers to follow him.
“The first 20 German investors were more or less his friends,” said Richard Zhang, the chief executive of Kern-Liebers’s China operations.
Among those early investors was TOX Pressotechnik, which makes machines that join pieces of metal and are used to construct car roofs, chassis and other components. While big companies tended to set up in major population centers, “as a small company, you went to Taicang,” said Susanne Eberhardt, a member of the family that owns the company, which is based in Weingarten in southern Germany.
Chinese employees hired by TOX meshed well with the Germans. “The Chinese people exuded energy and optimism,” Ms. Eberhardt said. “You could feel that China was on the verge of a breakthrough, and they were unbelievably proud to be part of it.”
The Germans taught local managers so well that, these days, Taicang has everything German except a large number of Germans themselves. The vast majority of the customers at Mr. Gerber’s bakery are Chinese. The few expatriates tend to live in Shanghai, which has a German-language school for their children.
German companies in Taicang were usually not big enough to attract a lot of attention from the central government. Several said they did not feel pressure to share technology and trade secrets, a common complaint by larger foreign investors.
“If you don’t touch politically sensitive issues, it’s a very friendly environment,” said Matthias Müller, the managing director of the German Center for Industry and Trade in Taicang.
German investors helped transform Taicang into a city with almost one million people. Workers who once rode bicycles now drive cars.
In 2004, when Klaus Gerlach was setting up operations for Krones, a German maker of machinery for the food and beverage industry, “we had one car in the parking lot, and it was mine,” he said. “Today, the parking lot is full of cars.”
The downside of that growth is that Taicang, like factory towns all over China, is suffering from a shortage of blue-collar labor. Workers tend to job hop frequently unless they receive pay raises and other benefits.
Kern-Liebers has set 5,000 renminbi, or $775, as the monthly pay for entry-level workers, a more than sixteenfold increase from the 1990s. “At that time,” Mr. Zhang said, “we paid 300 and everyone was very happy. Now we pay 5,000 and they are not so happy.”
German companies say they still see room for growth in China. They say the government is not targeting them, because they produce in China and employ predominantly Chinese people.
Vanessa Hellwing, chief financial officer of Chiron, a maker of machine tools used by automakers and the aerospace industry that has a factory in Taicang, said the Chinese economy’s fast recovery from the pandemic had helped compensate for declining sales elsewhere.
Europe remains Chiron’s biggest market, Ms. Hellwing said, but “the most important growth market is China.”
Keith Bradsher reported from Taicang, and Jack Ewing from Frankfurt.
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