The passion of German business for China has long since disappeared. Germany is rethinking its economic relations with the Middle Kingdom – albeit tentatively. However, experts rule out complete decoupling. What is Annalena Baerbock planning?
In recent years, MPs from all parties have pushed for a rethink of German China policy – without much success. Angela Merkel, who was Germany’s chancellor for 16 years until the end of last year, stuck to a course that placed increasingly intense trade ties before dealing with human rights or China’s geostrategic ambitions. This should change with the arrival of the new government under Olaf Scholz, whose coalition agreement had promised a new China strategy. But the war in Ukraine has heightened awareness of the dangers of close business ties with an autocracy.
At the heart of the new China strategy, the publication of which was recently delayed, is a vigorous effort to reduce China’s economic influence. Last year, China was Germany’s most important trading partner for the sixth time in a row: exports and imports together amounted to more than 245 billion euros (255 billion US dollars). The export business to China thus accounts for around 8% of total German exports.
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“Germany is unique in the dependence of its largest companies on the Chinese market,” says Noah Barkin, China expert at the research company Rhodium Group. The big three automakers Volkswagen, BMW and Daimler, and Infineon, a semiconductor maker, depend on the Chinese market for the lion’s share of their business. The automotive supplier Bosch employs 60,000 people in China. According to estimates by The Economist, ten of the top 15 listed companies in Germany generate at least a tenth of their sales in China.
The war in Ukraine is a stark reminder that even close business relationships can falter very quickly. Both VW and BMW announced in early March, a few days after the outbreak of war, that they would suspend production at their plants in Russia and stop all exports to Russia. However, it would be far more painful if the two industrial giants had to stop their much more lucrative business in China.
The European economy has put its new investments in China on hold, explains Jörg Wuttke, Chairman of the German Chamber of Commerce of the European Union in China. The reason for this is not so much the war in Ukraine, but rather the travel restrictions and China’s actions to contain the Covid 19 pandemic. The passion of the German economy for China has long since disappeared – the federal government has also restricted access for German companies.
In addition, the increasing evidence of human rights violations can no longer be overlooked. In view of this fact, the ministers around Chancellor Scholz are appealing to companies to diversify their markets and supply chains away from the Asian giant. The government recently refused to renew risk insurance to cover losses related to political unrest for VW’s Chinese operations, citing China’s brutal treatment of the Uyghurs, a Muslim ethnic minority.
Reshoring (relocating companies back to Germany), nearshoring (relocating companies to neighboring countries) and other forms of relocation are already taking place, explains Wolfgang Niedermark, board member of the Federation of German Industries (BDI) and until 2020 head of the German Chamber of Commerce in Germany Hong Kong.
But there are limits: Last year, the BDI published an essay on “Foreign trade policy cooperation with autocracies”. While it recommends that Western companies lead by example in protecting human rights and tackling climate change, cutting off trade ties with autocracies is not a realistic option. “We cannot better defend democratic values if we are significantly weakened economically,” it says.
The new government agrees. She is focused on reducing dependency on China in areas that could limit her options in a serious geopolitical crisis. However, a complete decoupling from China is ruled out. Like many other countries, Germany is largely dependent on China for essential commodities such as rare minerals, solar cells and computer chips. But while Germany reduces those dependencies, it must continue to work with the Chinese to help them cut their carbon emissions, say policymakers. China is responsible for up to 30% of global emissions.
The German Foreign Ministry is now announcing that it will present the government’s new China strategy at the end of the year – with a delay of six months. It will not shy away from mentioning the mistreatment of Uyghurs. But many critics fear that pragmatism will once again prevail.
The article first appeared in The Economist under the title “Germany is recalibrating its close economic ties with China – But only very cautiously” and was translated by Cornelia Zink.
The original of this article “Germany is caught in the China trap – and Baerbock is walking a tightrope” comes from The Economist.
