If there is one thing that German, American and other Western politicians can agree on these days without any debate, it is the demand that their countries urgently reduce their dramatic economic dependence on system rival China. The only problem is that in the case of Germany, this dependency is not decreasing, it actually rose to its highest level ever in the past year. Or as the Cologne-based Institute of the German Economy (IW) put it on Thursday: “In 2022, German foreign trade with China went in the wrong direction at full speed.”
According to the Federal Statistical Office, German goods imports from the People’s Republic rose by more than a third to 191 billion euros compared to 2021, which was already high. Exports to China, on the other hand, increased by just three percent to 107 billion euros. The bottom line is that there was a record trade deficit of 84 billion euros – six times as much as in the pre-Corona year 2019. The question is “whether it is just temporary effects of the crisis or ongoing Chinese distortions of competition,” says IW economist Jürgen Matthes .
The trend contradicts all the political declarations of intent that Berlin government officials have been formulating for months. Federal Chancellor Olaf Scholz and Economics Minister Robert Habeck, for example, traveled to Southeast Asia in the autumn to promote greater diversification in the German economy and the development of new supplier and sales markets. Habeck also ordered a reorganization of foreign trade promotion with the aim of preventing local companies from concentrating too heavily on the Chinese market.
Every eighth import of goods now comes from China
The topic also played a role in his most recent meetings with US government officials in Washington. Habeck envisages founding a European-American “commodities club” that will promote the development of new production and purchasing sources for important metals such as lithium and silicon. So far, 99 percent of the raw materials that are essential for the production of chips and power storage come from China. The Beijing leadership thus has a massive potential leverage that it can abuse for political purposes at any time.
If you look at the total German imports, on average every eighth product now comes from the People’s Republic. In 2019 it was still every tenth. It is unclear whether the massive increase in imports will last. According to Matthes, China’s high exports to Germany could also have something to do with the back and forth in Beijing’s corona policy. This has paralyzed domestic demand and prompted Chinese companies to sell many goods in world markets instead of at home.
Conversely, there are also long-term structural factors: Chinese companies can offer low prices because many companies are supported by the state. “If the competitive pressure increases in this country because of the persistently high energy prices and the margins of German companies shrink, the incentives to buy cheaper Chinese pre-products instead of more expensive European or German ones grow,” explained the IW economist.
Individual company examples also indicate that Chinese suppliers also got a chance over German ones because they were less affected by delivery problems. According to Matthes, the bottlenecks should not last forever. “But once the supplier has changed and their performance is right, it will be difficult for the German company to win back the German customer.”