BIARRITZ, FRANCE – AUGUST 25: US President Donald Trump kisses Germany’s Chancellor Angela Merkel as G7 leaders and guests gather for a family picture in front of the Biarritz lighthouse on the second day of the annual G7 summit on August 25, 2019.

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German Chancellor Angela Merkel‘s famously pragmatic approach to foreign affairs is currently being tested to its fullest as the country — and the wider European region — contemplates whether to bar Chinese 5G equipment at the direction of the United States.

“Germany faces a difficult choice: allow Huawei in, and alienate the U.S., its most important security partner. Or keep Huawei out, and alienate China, an important trading partner that some German companies, including the country’s influential auto industry, depend on for a significant chunk of their sales,” Kevin Allison, director of Geo-technology at the research firm Eurasia, told CNBC Wednesday.

In May, President Donald Trump took steps to ban Huawei from selling its technology in the United States. U.S. officials have expressed concern over the company’s links to the Chinese government and the security threat it could pose, something which the Shenzhen-based tech firm has denied. However, the German chancellor has put forward a different view.

She’s decided not to outright block Huawei from participating in the development of 5G in Germany — a controversial option for some German lawmakers who also believe this could put the country at risk of surveillance by Beijing. Huawei has welcomed Merkel’s “fact and standards-based approach.”

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The alliance between Berlin and Washington has been historically important and secure but has waned in recent years, even before Trump’s arrival in the White House. In 2013, allegations emerged that the U.S. National Security Agency had tapped Merkel’s phone.

More recently, the two countries have been at odds over defense spending under NATO, as well as on trade and climate change. This tense relationship hit a new low earlier this week when the U.S. ambassador to Germany criticized “senior German officials” for comparing the U.S. to China.

Ambassador Richard Grenell said in a statement Monday that “recent claims by senior German officials that the United States is equivalent to the Chinese Communist Party (CCP) are an insult to the thousands of American troops who help ensure Germany’s security and the millions of Americans committed to a strong Western alliance.” “These claims are likewise an insult to the millions of Chinese citizens denied basic freedoms and unjustly imprisoned by the CCP,” Grenell also said.

Germany’s political classes are still coming to terms with the country’s reluctant acquisition of a geopolitical role, its reduced ability to rely on the U.S. and the necessity of juggling commercial and strategic interests.

Constantine Fraser

Analyst at TS Lombard

During a TV show on Sunday, Germany’s minister for economic affairs, Peter Altmaier, got asked about Germany’s position on 5G. He made the point that Berlin did not impose a boycott on U.S. tech firms when it was revealed that American authorities had tapped Merkel’s phone.

Altmaier told Politico Monday that “in no way did I put countries that do not respect the rule of law on the same level as democracies that respect the rule of law such as the United States — quite the opposite.” However, he also made the point that it “is important to note” that regulation forcing companies to hand over data to governments exist in different countries. The U.S. CLOUD Act, for example, allows national authorities to compel U.S.-based firms to provide requested data stored on their servers.

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Constantine Fraser, an analyst at the research firm TS Lombard, told CNBC Wednesday that the 5G quarrel is “only the latest episode in the deterioration of Germany’s relationship with the U.S.”

Andrew Bishop, a partner at advisory firm Signum Global, meanwhile told CNBC Wednesday that the disagreement is a “perfect encapsulation” of the challenge with the trans-Atlantic relationship.

“Both parties share the same interest on substance, i.e. protecting against Chinese intrusion, but they disagree quite fundamentally on the how,” eh said via email.

While Merkel will be careful not to cause a worsening of relations with Washington, snubbing Beijing could be just as problematic for the German leader. China, the world’s second largest economy, was Germany’s most important trading partner for a third consecutive year in 2018.

Bilateral trade between both economies reached 199.3 billion euros ($219.46 billion) in 2018, according to Germany’s foreign office. In 2018, China was the largest importer of German goods, followed by the Netherlands, France and the United States.

“Germany’s political classes are still coming to terms with the country’s reluctant acquisition of a geopolitical role, its reduced ability to rely on the U.S. and the necessity of juggling commercial and strategic interests,” Fraser from TS Lombard said.

“That’s why this issue is also being fought out within the German government: the intelligence services, the foreign ministry and much of the CDU want Merkel to reverse the decision on 5G, while other factions, notably the economy ministry, support it,” he added.