Rethinking Germany’s dependence on China
Over the last several days, the world has been marking the first anniversary of Russia’s invasion of Ukraine and Chancellor Scholz’s Zeitenwende speech to the German Parliament. Germany has made some big changes during the past year that previously would have been unthinkable (e.g., shutting down the Nord Stream pipeline, abruptly weaning itself off Russian fossil fuels and delivering tanks to a war zone). Meanwhile, the debate over Germany’s dependence on China continues. A new economic policy brief from the Kiel Institute for the World Economy (IfW) lays out a strategic approach that Germany could take toward China.
Russia's invasion of Ukraine forced a sudden shift in German policy toward Russia. It has also led many to question Germany's dependence on other autocratic countries—of which China is the most obvious. But rethinking Germany's relationship with China is no small issue given the size of China's economy, its geopolitical role in the world and its importance to the German economy—China is Germany's most important trading partner measured in terms of imports and exports.
Of course, this debate is not limited to Germany. The European Union also recently altered its strategic cooperation policy toward China based on global economic and political developments. The EU no longer views its relationship with China as primarily one of cooperation. Rather, China is now seen as a systemic rival.
A new economic policy brief from the Kiel Institute for the World Economy (IfW) entitled, "Germany's planned China strategy is the wrong approach," attempts to help shape the ongoing debate about how best to deal with China. In this brief, IfW lays out a 5-pronged strategy for dealing with China and other autocratic states. Here is a summary of the recommendations.
Develop a long-term strategic vision: Rather than adopting politically-motivated ad-hoc measures, Germany should develop a long-term strategy based on a careful analysis of its relationship with China or other autocratic countries. This could include investigating interdependencies of trade and investment, import dependencies and substitution possibilities, future German economic challenges, etc.
Make German policy part of wider EU policy: Germany does not have enough political or economic weight on its own. Size matters. New policies have a better chance of succeeding if taken within the framework of the EU.
Understand China's development policies and strategies: China wants to become more of an economic, scientific and technological powerhouse. It aims to achieve breakthroughs in key technologies. The better Germany can understand China's policy goals and challenges, the better it can respond with strategies of its own.
Pay attention to China's overseas activities: Germany should watch where China is deploying its capital (e.g., Belt and Road Initiative). China is already a major player in Africa and Latin America, developing and buying important raw materials that will be critical for transitioning to a greener economy. This can benefit German companies (use of infrastructure developed by China) while also becoming a source of potential problems (bans on German companies being able to receive those raw materials).
Avoid rigid rules, set broad frameworks instead: Germany should avoid becoming too prescriptive with its policies, opting instead to leave important decisions to the market, i.e., businesses and consumers. And they should lay out basic guidelines as well as "red lines." This could include demanding reciprocity in terms of values, norms or rules. Or setting clear conditions, instead of blanket prohibitions, for Chinese firms investing in Germany.
This approach, argues IfW, could help bring clarity to the relationship with China and other autocratic countries while identifying dependencies, weaknesses and risks that need to be addressed. The ad-hoc measures the government has taken so far are inadequate in the view of IfW. Instead, Germany should work together with its democratic partners to clarify a long-term strategy that could be applied to relationships with all autocratic countries.
And finally, IfW argues, Germany should strive to become a more attractive place to do business: "An important goal of a forward-looking German foreign trade strategy, undertaken in cooperation with other democratic countries, should be to clearly position Germany as an attractive place to invest and innovate—particularly in competition with autocratically-led countries. This would eliminate the need for a narrow, country-specific response."
[Text in blue above has been translated from German by Randal Gernaat.]
The Kiel Institute for the World Economy’s economic policy brief is available here (in German).
