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Chancellor Scholz’s trip to China is a difficult mission: On the one hand, the EU wants to defend itself against a Chinese export glut. On the other hand, the German economy is still heavily dependent on China.
Shortly before Chancellor Olaf Scholz’s trip to China, a study by the employer-oriented Institute of the German Economy (IW) was published: According to this, the German economy is and will remain dependent on China; What’s more, the study shows that for some products – including some important raw materials and basic ingredients for medicines – dependence has even increased. According to Jürgen Matthes from the IW, the often called for de-risking – i.e. the reduction of import dependency – is not evident, at least on a broad scale.
One problem: It’s not that easy to get the products you need, for example for the chemical and electronics industries, from alternative providers. And the price of many raw materials in China is so cheap that raw material deposits that exist in other regions of the world are not even mined. In the current study, the researchers propose forming a state task force. It is intended to confidentially clarify with particularly dependent companies how dependencies can be reduced.
The Chinese economy is limping
At the same time, as Germany is trying, rather poorly, to become more independent of China, the gigantic empire is in a dilemma: the policy of stimulating the economy by expanding infrastructure and housing construction is no longer working. Growth is becoming weaker. As a result, the country is flooding global markets with cheap goods to support its economy through greater exports. Economists are already talking about China as a “manufacturing superpower.”
Chinese solar systems have dominated the global market for years, and now it’s also about electric cars, wind turbines and machines. The export glut from China also and particularly affects sectors in which German industry is also strong.
China relies on qualitative growth
China’s government is planning for the long term. Economic development should not be left to chance either. Since taking office as head of the Communist Party of China in 2012, Xi Jinping has invoked the “Chinese Dream” and set the goal of being the world leader in key economic areas by 2049 – just in time for the 100th anniversary of the People’s Republic of China.
That is why the Chinese government is focusing on qualitative growth in strategically important sectors; These include, among other things, chip manufacturing, robotics and artificial intelligence, energy generation and mobility. China should become the world market leader in these sectors and be as independent as possible from foreign suppliers. In order to achieve the goal, research will be promoted, the appropriate infrastructure will be built, and productivity will also be increased.
Specific government measures to support Chinese companies include cheap government loans, access to cheap energy and critical raw materials, and preferential treatment in government tenders. According to a study by the Kiel Institute for the World Economy (IfW), almost all listed companies received direct government subsidies in 2022. The manufacturers of electric cars, especially the manufacturer BYD, and the manufacturers of wind turbines will receive particularly high levels of support.
Scholz: “No dumping, no overproduction”
There is already backlash: The USA imposed punitive tariffs on numerous industrial products from China. The government has made it clear that it wants to protect the US auto industry from Chinese imports. The EU Commission is also critical of the growing import of cheap electric cars from China. Commission President Ursula von der Leyen has been warning for months that subsidized Chinese overproduction could drive out European manufacturers.
However, EU import restrictions would lead to Chinese countermeasures, under which German industry would suffer more than producers in other countries because German industry’s China business is particularly large. This is especially true for the automotive industry. Germany therefore has a special role among China’s international trading partners.
Chancellor Scholz addressed the issue of dumping in Shanghai today. “The only thing that always has to be clear is that the competition has to be fair,” said Scholz during a discussion with students. “So that there is no dumping, that there is no overproduction, that no copyright is being violated.”
China’s current Economic development
The Chinese government is also counting on growth for 2024. Around five percent increase in economic output should be achieved. But the Chinese economy is currently weakening. The uncertain future prospects and the real estate crisis are spoiling the mood for many Chinese people to buy. In addition, national debt is expected to rise to 87 percent of GDP this year, estimates the economic development agency GTAI. That is significantly higher than the German national debt of around 64 percent. The main reasons are the high level of state economic aid and continued high investments in infrastructure.
Trade with Germany is also weakening. If you look at total sales, China was only just Germany’s number one trading partner in 2023, only around two billion euros ahead of the USA. Imports from China fell by around 19 percent and exports by around nine percent.
However, steady economic development is the promise to the Chinese population and a guarantee of the continued existence of the rule of the Communist Party. In the current economic situation, the Chinese government is therefore very interested in approaching foreign companies and making at least small concessions. However, no major, systematic reforms are planned.
China’s Charm offensive
Many countries find government subsidies for Chinese companies, which can then sell their products at low prices on the global market, a thorn in the side. The Chinese government is therefore currently launching a charm offensive and emphasizing the good cooperation with Germany.
Max Zenglein from the Mercator Institute for China Studies sees this as an opportunity: “Since countries like the USA and Japan are positioning themselves much more sharply towards China, Germany has an important function when it comes to access to technology and capital. Germany is definitely here in a position of strength.”