Germany’s economy is too dependent on China in 2022: Here’s why

German Economy Minister and Vice-Chancellor, Robert Habeck from the Green Party has announced a more robust trade policy against China. Habeck declared in mid-September after a meeting of G7 economy ministers stating that the time of naivety toward China has ended. 

In May, Habeck denied the VW Group guarantees for investments in China. The news came as a shock to China.

German companies’ businesses had been backed up by guarantees on both investments and exports for many decades.

Shortly, if German companies want to engage in trade or invest in China, they are likely to do so at their own risk and will no longer be backed by the German government and are likely to do so at their own risk. This has been stated by Chinese expert Tim Ruhlig of the German Council on Foreign Relations (DGAP).

He has seen a change in the German government. The government no longer wants to provide incentives to German companies to expand their businesses in China. Ruhling disclosed the information to DW in an interview.

But that does not prevent the companies from expanding their business in China. A study conducted by Jurgen Matthews, an economist associated with the Germany Economic Institute, it was revealed the German industry in China has invested around 10 billion euros in the first half of the year. The data has been extracted based on a recent figure.

Car manufacturers and chemist companies, in particular, have continued to seek a foothold in the Chinese market. Rhodium group conducted a study in mid-September that disclosed that the four giant German industries, including the biggest carmakers like VW, BMW, Mercedes, and chemical company BASF account for a total of investment that represents a third of direct investments in China.

Is the dominance of the German industry in China overestimated?

The ten largest European companies contribute 80 percent of the European investments. The data has been revealed by Jorg Wuttke, president of the European Chamber of Commerce in China. 

The other companies are not leaving China but are looking for alternate investments to increase their diversification.

However, Europe’s ten companies are heavily dependent on China. He warns the companies are highly dependent on the imports of rare-earth elements, preliminary products for the pharmaceutical industry, and even photovoltaic systems. 

He has further added that the dependence on China for the preliminary materials is different from the reliance on the Russian oil supply.

He said that they have a pipeline connected with Russia for the supply of oil and gas but, with China, they have a pipeline for toys, types of equipment, and other essential pieces of commodities. Ninety percent of such products are easily replicable elsewhere.

Around 3 percent of the jobs are dependent on exports to China which, accounts for 1 million jobs. That is a significant number but, over 45 million people are employed in Germany today. 

He further said that the dependence on China as an export market is relevant but, it is not as huge as media reports often make it out to be on a macroeconomic level.

Nevertheless, many parties are putting pressure upon the government to rethink its ties with China. This includes Germany’s new center-left coalition Government of Social Democrats, neoliberal free democrats, and environmental greens.

Foreign Minister, Annalena Baerbock told business leaders that the country can not afford to hope that the situation would not be worsened after all these autocratic regimes. 

The Green Party politician, which has the main objective of being a values-based and feminist foreign policy announced the development of a new Chinese strategy as part of a new National Security Strategy.

He declared that the country must adopt what they have learned from Russia regarding the energy crisis.

The Economy Minister is looking for alternate options to satisfy the needs of preliminary products, instead of China. 

Government investment and export guarantees are being reappraised. 

The German-government-owned bank KfW is seeking to examine if it could cut back its Chinese program and provide loans for businesses in other Asian countries, including Indonesia.

The Federation of German Industries (BDI) has already debated rules to deal with the foreign trade policies of autocracies. The organization came up with a concept of responsible coexistence in foreign economic policy and clear boundaries for any cooperation.

Government support and protection of German Companies’ business in China must remain and the Chinese investments should be welcomed in Germany and Europe. This has been forced by the chief executive of the Asia-pacific Committee of German Business.