A turning point also in dealings with China: During the “inaugural visit” by Chancellor Olaf Scholz in Beijing on Friday, the German economy did not sign any contracts worth billions. But on the contrary. Today, everything revolves around how to reduce dependence on what is now the second-largest economy.
There is a radical change in how economic relations with China are evaluated. Ever since the Ukraine conflict made Russia’s dependency on energy all too painfully clear, Germany has decided not to expose itself to similar blackmail in its dealings with China.
The dispute over the participation of the Chinese logistics giant Cosco in a Hamburg port terminal shows the new sensitivities. The deal had been agreed more than a year ago without anyone noticing taking any notice. That changed abruptly with Vladimir Putin’s war of aggression. Economics Minister Robert Habeck argues that people have learned “that dependencies on countries, which may then play their own interests into these dependencies, and then want to blackmail us, are no longer just an abstract phenomenon.” And the Vice-Chancellor adds: “We shouldn’t repeat these mistakes.”
Close ties
But how big is Germany’s dependence on China? Whether trade, supply chains or the giant market: “In all three areas, the interdependence between China and Germany is strong,” says Jens Hildebrandt, executive board member of the German Chamber of Commerce (AHK) in Beijing. There is also a strong import dependency for strategically important products such as lithium batteries or raw materials such as rare earths. The corona lockdown in Shanghai in the spring, which severely disrupted supply chains worldwide, also made it clear how heavily the German economy is dependent on primary and intermediate products from China.
Around 5000 German companies are now active in China. According to the Chamber of Commerce, 1.1 million jobs in Germany depend on business with China. “The Chinese market is of paramount importance for many German companies, both as a sales and as a growth market,” says Hildebrandt. This applies in particular to German car manufacturers and chemical manufacturers. “What is often overlooked is China’s role as a driver of innovation,” emphasizes the AHK manager. “German companies are developing and testing the latest technologies in China for the global market.”
Until now, retail has followed a different model
After Russia, is the economically incomparably more powerful China now falling out of favor in a similar way? “So far, German foreign trade policy has been based primarily on the principle that trade and cross-border investments are welcome because they benefit everyone involved,” wrote the head of the Munich Ifo Institute, Clemens Fuest, in the “Wirtschaftswoche”. “After that, increasing prosperity in China is also good for Germany and Europe, because it increases export opportunities for German products.”
Chinese investments in Germany could also promote growth and employment in this country, said Fuest. In his view, cutting trade relations with China now would be premature. From his point of view, it is more about limiting critical dependencies that make Germany vulnerable to blackmail in the event of a crisis. “But it is also necessary to continue to make full use of the immense advantages of the international division of labor.”
According to a study by the EU Commission, a large number of raw materials that are needed for almost all important future technologies, including solar and wind energy, could become critical. “On the way to independence from Russian energy sources, Germany could become dependent on China again,” write the economist Melinda Fremerey and her colleague Thomas Obst from the German Economic Institute (IW).
unequal dependency
Meanwhile, the German economy is much more dependent on China than vice versa. The interdependencies in the first half of 2022 “developed at an enormous pace in the wrong direction,” judges IW economist Jürgen Matthes in a study. “German direct investment flows to China have never been so high.” Imports from China and the German trade deficit also reached an all-time high. By contrast, growth in German exports to China weakened sharply. China’s export share fell again. His interpretation: “The Chinese market is apparently increasingly being served by local production rather than exports.”
In figures: With 71.8 billion euros or 7.0 percent of all exports, according to the Federal Statistical Office, China slipped to fourth place among the most important recipient countries in the first eight months of 2022 – behind the USA, France and the Netherlands. With 125.7 billion euros or 12.8 percent of all imports, China is more than ever Germany’s most important supplier. “So the imbalance in trade with China is increasing more and more,” concludes Matthes.
“There are many indications that the pursuit of profit by German companies without state intervention will continue to lead to more and not less China in terms of direct investments and imports,” writes Matthes. “The dependency of the German economy on China as a sales market and supplier is thus increasing.” However, the opposite would be necessary because of the increasing geopolitical tensions – also in view of China’s threats to conquer Taiwan. Such an attack could result in a war with the US and, as with Russia, lead to massive economic sanctions.
A complete decoupling would be the worst case for German companies in China, which would also be painful for German consumers. “Due to the close integration of German companies in Chinese supply chains, economic decoupling would have a negative impact on the entire German economy,” warns AHK boss Hildebrandt. “From an economic point of view, a decoupling would be accompanied by considerable losses in prosperity.” However, German companies in China have already reacted by localizing more or diversifying in the East Asian region. “By taking these steps, companies are spreading their risk,” said Hildebrandt. “All in all, this should lead to a reduction in dependency.”
