German dependencies: Dare less China?

At least since the Ukraine war, Germany has been looking for a new China strategy. The goal: less dependency, more human rights. Not that easy.

No more trade with China? “That would probably be a huge problem,” says Ralf Stoffels. He is Managing Director of BIW, a medium-sized company with locations in North Rhine-Westphalia, Poland and China. Among other things, silicone hoses are manufactured there for cars, airplanes, ovens and medical purposes. The raw material for this, the silicon, comes to 85 percent from China. In terms of quantity, it cannot be replaced from another country, explains Managing Director Stoffels, and scarcity would lead to price increases.

Justus Kliss
ARD Capital Studio

He could possibly sell dialysis tubes at a higher price because medical products are important. But without China as a supplier and sales market, Stoffels believes his company would have to downsize – which would ultimately also mean layoffs.

Dependent on China

It is a company that, like many others, depends on supplies from China. According to a survey by the ifo Institute, 46 percent of companies that process raw materials or products are dependent on China. Every second wants to change that. After all, the corona pandemic has shown how vulnerable the supply chains are.

China is currently still Germany’s most important trading partner. In 2021 it was the second country to which German companies exported the most. But China is even more crucial for imports, which particularly affects the automotive, chemical and electrical industries. A critical dependency exists, for example, with rare earths, which are used, among other things, for the construction of electric motors or wind turbines. Rare earths could also be mined in Australia, South Africa or India, but capacities would have to be created first.

The economy would have to adapt

Germany is also dependent on China for medicines: more than 97 percent of chloramphenicol, a broad-spectrum antibiotic, is imported from China, as is vitamin B. The goal in the EU has been clear since the corona pandemic: to produce more important medicines locally again , so that there are no sudden bottlenecks.

It is estimated that around three percent of the added value depends directly or indirectly on trade with China, says the economist Jürgen Matthes. He researches at the Institute of German Economics in Cologne. This also affects the jobs, around 1.1 million are related to the China business. Not all would be lost in a trade boycott, emphasizes Jürgen Matthes, but economic losses would be unavoidable. However, there are models, such as those from the ifo Institute and the Institute for the World Economy, that include an adjustment: i.e. the possibility of replacing trade with China with other countries. The long-term economic loss, after about ten years, would therefore no longer be three but one percent.

Political pressure from a trade boycott?

Human rights organizations have been calling for more pressure on China for some time. Could a trade boycott persuade the authoritarian regime to rethink human rights violations and the treatment of minorities? Genia Kostka, a professor of Chinese politics at Freie Universität Berlin, doubts that. “In any case, the political relationship would suffer,” says you. Economic relations are often the basis for political compromises. And they are needed for global issues such as the fight against climate change and overcoming the corona pandemic. If China is isolated, Kostka believes that bloc formation is possible, and China could look for like-minded, authoritarian partners like Russia.

“The old strategy of ‘change through trade’ was naive and also a bit arrogant on the part of the West,” says Kostka. The expert on Chinese politics is calling for a new strategy: tough, direct negotiations and clear trade rules are needed. Such as the supply chain law, which will come into force next year: if Germany no longer buys products from forced labor, that would be a good adjustment.

Federal government working on China strategy

For weeks, politics has been about how far Chinese influence in Germany can go. In the end, the federal government allowed the Chinese company Cosco to buy a maximum of 24.9 percent of the shares in a terminal at the port of Hamburg in order to limit its influence. Two deals were completely banned, with the chip manufacturer Elmos and a semiconductor company. Critical areas of industry must be protected, Federal Economics Minister Robert Habeck justified the no.

Earlier this week he traveled to the Asia-Pacific Conference with Chancellor Olaf Scholz. In order to be less dependent on China, the goal is to increase economic exchanges with other Asian countries. Graduate economist Matthes sees some potential there: India, Indonesia, Malaysia and Thailand would develop comparatively well. However, free trade agreements are needed to remove mutual tariffs and other trade barriers.

What is certain is that the German economy should become more independent of China. The Russian war of aggression against Ukraine also showed how urgently necessary this is. Green foreign policy expert Agnieszka Brugger recently emphasized in the Bundestag: “This ignorance and naivety, as well as the mistakes of the old German Russia policy, must be a clear lesson for all of us.”

The federal government is currently working on a new China strategy. It should be presented next year. A draft from the Foreign Ministry is already circulating. Accordingly, dependency on China should be reduced, human rights should play a greater role and relations with Taiwan should be expanded, as “Der Spiegel” and “Handelsblatt” reported from the confidential paper. Dependencies – similar to those with Russia – are to be reduced “quickly and at a cost that is reasonable for the German economy”.

There has already been a reaction from Beijing, where sharp criticism was leveled at the draft.