The awakening is difficult for Germany. The Russian war in Ukraine highlights the fragility of its economy. Although the dependence on Russian coal, oil and gas has been mentioned many times by Berlin to oppose any ban on importing gas from Russia to the European Union, another dependence, also linked to its export-based model, raises fears of the across the Rhine: that with regard to China. This Wednesday, in an interview with the Die Zeit newspaper, German Finance Minister Christian Lindner (also leader of the liberal FDP party) expressed concern about Germany’s “strong economic dependence” on China, calling for “diversification ” of the country’s trading partners, in a context of international tensions exacerbated by the war in Ukraine.
Very strong economic ties between China and Germany
“We need to diversify our international relationships, including for our exports,” he said. The war has raised the question of trade links that Germany, an exporting nation, has with other countries accused of violating human rights, such as China.
An exporting nation, Germany is in fact China’s main economic partner. In 2021, more than 245,000 million euros were exchanged between the two countries, a figure 15.1% higher than that of the previous year, marked by Covid-19. Many German industries have transferred part of their production to China, and therefore massively import essential elements for their activity from this country. In addition, China is one of the main customers of the German automobile sector.
“Perhaps now is the time to preferentially do business with those who are not only business partners, but also want to be partners from a value point of view,” commented Christian Lindner. The war in Ukraine has raised the question of Berlin’s business ties with other countries accused of violating human rights, such as China.
German industrialists plan to reduce their presence in China
These comments come as, according to a study by the IFO economic institute published in late March, many manufacturers are already considering reducing their presence in China. According to this work, “almost one in two companies” that says they depend on Chinese inputs plans to reduce these imports. In the German manufacturing sector, “46% of companies say they source their production components from China” and among these companies “nearly one in two plans to reduce these imports in the future,” says Lisandra Flach, director of international economics of the IFO. and co-author of the study.
The fall of the Iron Curtain at the end of the 1980s opened up important business opportunities for many German companies with China and the possibility of relocating production there at lower cost. But against a backdrop of rising geopolitical tensions, 41% of those surveyed now cite “political uncertainty” as a reason for reducing their Chinese input purchases.
The war in Ukraine and the sanctions imposed on Russia “shed new light on the geopolitical importance of economic interdependencies with China”, according to the IFO study carried out in February among 4,000 companies and published on the eve of a virtual summit between EU and Chinese leaders.
Already bathed by the Covid-19
German bosses’ ardor for supplies from the Middle Kingdom has already been clouded since the Covid-19 pandemic, with factory and port lockdowns in China and mounting delays and freight costs keeping track. Added to this are the human rights violations in China, particularly in the Xinjiang region, and the effects of state capitalism since the presidency of Xi Jinping in China, which are increasingly the subject of debate.
Proof of this is the recent blockade of Lithuanian imports imposed by Beijing in a context of diplomatic tensions with Taiwan.
In fact, the dependence on imports from China is expressed mainly in raw materials and less in industrial products, according to the study. About 65% of the raw materials used in the manufacture of electric motors come from China, in particular rare earths, which are also essential for the construction of wind turbines.
The “biggest challenge for Germany and Europe is the diversification of the countries where the raw materials come from, which is much more difficult to do than with the final products,” according to the IFO.
The study’s authors distance themselves from calls for “decoupling” that are “on the rise in Germany,” cutting itself off sharply from the Chinese economy because it “would disrupt specific key supply chains.”
On the other hand, they call for the conclusion of “free trade agreements” with emerging countries to help companies diversify their supply chains, citing the case of stalled negotiations with India or Malaysia.