It’s a difficult balancing act: The federal government wants to reduce economic dependence on China, but not decouple itself from the world’s second largest economy. This is the core of the China strategy that the traffic light coalition decided on last summer. What has become of it?

Chancellor Olaf Scholz (SPD) will also have to ask himself this question when he sets off on the second trip to China of his term in office this Saturday. Is the German economy really trying to free itself from Chinese dependence? Or will everything continue as before?

Starting point: Painful lessons from the Ukraine war

With the Russian attack on Ukraine, Germany has become painfully aware of what excessive economic dependence on just one country can mean. The energy supply, which for a long time was largely based on cheap Russian gas, had to be radically changed within a short period of time. Something like this should not happen again with China if, for example, the conflict over Taiwan escalates. It is “urgently necessary” to reduce the risks of close economic ties, according to the China strategy. The German economy should “concretely deal with relevant China-related developments, figures and risks within the framework of the existing risk management processes.”

Sales market: China’s importance is declining

China is still Germany’s most important trading partner. Last year, however, imports from China fell by 19.2 percent and exports fell by 8.8 percent. With a foreign trade volume of 253.1 billion euros, the “Middle Kingdom” was only just ahead of the USA (252.3 billion euros). China’s share of total German goods exports has fallen from just under 8 percent to just over 6 percent since 2020.

“The export opportunities are also subdued in the medium term, especially because China wants to become more independent from foreign countries and because German companies increasingly want to serve the local market with local production instead of with exports from Germany,” says Jürgen Matthes from the German Economic Institute (IW). in Cologne. “In any case, only around 3 percent of German jobs depend directly and indirectly on exports to China. This proportion is likely to stagnate at best in the future.”

Direct investment: new high for China

Things look different when it comes to German direct investments. According to the German Bundesbank, they rose to 11.9 billion euros last year – a new high. China’s share of all foreign direct investment in the German economy has exceeded the 10 percent mark for the first time since 2014 and is now 10.3 percent. In the years 2018 to 2020 it was less than 3 percent.

According to IW, there is still no sign of a movement towards other Asian countries. The share of the rest of Asia in total direct investment is stagnating at around 8 percent. Large companies in particular are making little effort to change their China strategy and focus more on other sales markets – especially car manufacturers, for whom China is an irreplaceable market. VW and Mercedes each sell a third of their cars there.

Raw materials: The most dangerous dependency

The most dangerous thing is the dependence on China for certain raw materials. “China has planned strategically here and made itself indispensable in the short term in the extraction and, above all, in the further processing of raw materials,” says IW expert Matthes. With subsidies and without much consideration for the environment, it was offered so cheaply that many competitors were forced out of the market in Europe. “We recognized the geopolitical explosiveness of it far too late.”

An example: According to a current study by the auditing firm Deloitte, German imports of lithium from China, which is so important for battery production, have increased from one to 24 percent since 2013. China’s share of imported lithium batteries even grew from 27 to 41 percent during this period.

When it comes to magnesium, German importers rely on Chinese suppliers for 90 percent of their products, and 85 percent for rare earths. The Ministry of Economic Affairs has been desperately trying to find other cooperation partners for some time and is sending Parliamentary State Secretary Franziska Brantner (Greens) around the world, who will also accompany Scholz to China.

Raw materials partnerships are now being established with countries such as Australia, Chile and Canada. In order to reduce dependencies, cooperation will be expanded with those countries and regions that are considered “value partners” for the federal government, according to the Ministry of Economic Affairs. “High environmental and social standards, combined with the use of the most modern extraction and processing processes, are seen as a competitive advantage in many partner countries.” But developing new sources of supply will take a long time, says IW expert Matthes. “And it’s going to cost a lot of money.”

Horror scenario: What happens if there is an abrupt break?

And what if things go like they did with Russia and there is a break with China overnight because of a Chinese invasion of Taiwan? An international research group investigated this at the end of last year under the leadership of the Kiel Institute for the World Economy (IfW). In their scenario, the experts assumed that the global economy would collapse into two trading blocs that were disconnected from each other: the EU, USA, Canada and Japan on the one hand, and China and Russia with their allies on the other.

The result: In the event of an abrupt break, German economic output would collapse by five percent and after four to five years the loss of prosperity would level off at 1.5 percent per year. According to the researchers, even such a scenario would be bearable for the German economy. “A break would have high costs for Germany, but our country has enough overall economic resilience to survive even such an extreme scenario,” was the conclusion of IfW President Moritz Schularick.