The discussions about the Port of Hamburg, about Huawei in the mobile network and the dependencies on China in general show: Something is happening in Germany’s relationship with the People’s Republic. Politicians take a closer look, companies suddenly justify their investments locally and the sword of Damocles hovers over everything:
What if China attacks Taiwan?
In this context, there is repeated talk of the “China trap”, of Germany’s susceptibility to blackmail and the devastating consequences that a sudden isolation would have for the economy. It’s worth taking a closer look.
What is changing in relation to China
For a long time, the German economy saw China primarily as a profitable growth market and driver of innovation. However, as Jürgen Matthes observes, things have changed fundamentally in relation to the People’s Republic not just since the Russian invasion of Ukraine and China’s threatening gestures towards Taiwan. The hope of democratization associated with China’s admission to the World Trade Organization has not been fulfilled for the West. “China has become increasingly autocratic under Xi Jinping.”
In addition, the People’s Republic has massively squeezed out other exporters on the world market in the past and played by unfair rules. Alexander Sandkamp from the Institute for the World Economy (IfW) in Kiel assesses this in a similar way. For example, China has already invested in Germany in the past. “But due to the developments, it is of course viewed more critically.”
What the dependencies really are
Imported
Experts like Sandkamp see Germany’s greatest vulnerability in imports. Whether raw materials for mobile phones or solar systems, chemical products or some foods – imports from China clearly dominate for some products. In the case of laptops, for example, 80 percent come from the People’s Republic, and in the case of rare earths and raw materials such as scandium or antimony, which are classified as critical by the EU, the figure is 85 percent, as a recent IfW study showed. Apart from these individual product groups, however, import dependency is lower than classic trade statistics suggest.
“The fundamental question is: Where can we really not replace China in the short term, and where has it not been done so far because it currently seems too expensive?” says Matthes. But even if individual products could be obtained elsewhere – if, apart from Germany, the entire western world suddenly stopped trading with China, there would be bottlenecks on the global markets again, Sandkamp warns. “Then there will be competition.” And if Germany were to decouple on its own and import batteries from India in the future, which in turn were built with Chinese raw materials, the question would be to what extent dependency would really be reduced.
Export
On the export side, China has lost importance for German companies since 2020. In 2022, according to the Federal Statistical Office, the People’s Republic slipped from second to fourth place among the most important customer countries. “In terms of export dependency, the situation has calmed down in recent years,” says Sandkamp. However, it remains to be seen whether this is a general reversal of the trend or whether it is initially due to the strict Covid lockdowns and the economic difficulties in the People’s Republic.
With such statistics, one must always remember that Germany trades far more with the EU as a whole than with China, he continues. However, it is clear that the Chinese market is of paramount importance for many German companies, both as a sales and growth market, emphasizes Jens Hildebrandt, Executive Board Member of the German Chamber of Commerce (AHK) in Beijing. This applies in particular to German car manufacturers and chemical manufacturers.
Technology
“What is often overlooked is China’s role as an innovation driver. German companies develop and test the latest technologies for the global market here,” Hildebrandt continues. So withdrawing would also mean falling behind when it comes to innovations. German automakers are already concerned that Chinese manufacturers are threatening to pull away in the electric car market. Not only in terms of e-mobility, but also in autonomous driving, the pace of development in China is rapid.
What would be the impact of decoupling?
“Decoupling” is an absolute “worst-case scenario” for German companies in China, says Hildebrandt. Due to the close integration of German companies in Chinese supply chains, economic decoupling would have a negative impact on the entire German economy. “From an economic point of view, a decoupling would be accompanied by considerable losses in prosperity,” he warns.
IfW economist Sandkamp assesses the situation a little less drastically: “We simulated it and came to the conclusion that at first glance such a decoupling would not be that expensive in the long term.” Germany would therefore lose about one percent of its economic output in the long term – that is almost 40 billion euros less every year.
In the short and medium term, this is much more difficult: There would be bottlenecks, individual companies would certainly go bankrupt and the lack of availability of individual preliminary products would massively delay the energy transition or the electrification of the automotive industry. In addition, investment flows are not included in these calculations.
How companies are currently positioning themselves
There is not yet much evidence that companies are turning their backs on China. Bosch, Schäffler and BASF recently announced an expansion of their presence there. The car manufacturers also continue to rely on business in China and the connection to the technological development there. What was recently noticeable, however, was that the companies almost always also emphasized the regions of the world in which they were also investing.
“I don’t find it problematic that investments are still being made in China,” says Sandkamp. If, at some point, a new bloc with high tariffs should really come about, this strategy even makes a lot of sense from the company’s point of view – one can then continue to produce in China for China. At the same time, however, it is absolutely necessary to intensify relations with other countries.
How dependent China is on Germany
In all the discussions about dependence on China, the question is often ignored: how is it actually the other way around? Around eight percent of Chinese jobs depend on exports to the West, says Matthes. And when it comes to imports, according to his calculations, almost all airplanes, cars or medicines come from the West.
The West also has high import shares for some foods. He classifies China’s dependence on western semiconductors and machines as critical. If there really were a conflict with Taiwan, sanctions would be possible here.
