Reducing Germany’s Risky Trade Dependence on China – Financial Times | Jewelry Dukan

There is a cynical old saying in Brussels: EU trade policy is determined by Germany, whose trade policy is determined by German export manufacturers, whose trade policy is determined by the German auto industry, whose trade policy is determined by Volkswagen. A bit of caricature, of course, but not the worst basis for analysis.

The country’s manufacturing export model is now in jeopardy. Voices in government argue that Germany, having already suffered from a ruthless dependence on Russian gas, has been dangerously exposed by its economic dependence on another belligerent autocracy in the form of China.

As German and international media reports, the Ministry of Economic Affairs, which is led by the Greens, is considering reducing support such as state investments and export guarantees for German companies operating in China. It is said to be about diversification rather than reducing exports or investment overall. However, since a reduction in activity in an economy the size of China is unlikely to be offset by foreign markets elsewhere, it could well be part of a long-term reorientation away from manufacturing mercantilism.

If so, that would be a good result. The dangers for the German and the entire EU economy from the export-oriented Berlin model have long been clear. From the early 2000s, by suppressing domestic wages and demand and prioritizing current account surpluses, Germany shifted manufacturing home and unemployment to the rest of the eurozone, increasingly angering the US.

This model is also increasingly at odds with the EU’s declared trade policy approach. Traditionally, the German export lobby (and its supply chain satellites in Central and Eastern Europe) has been important in driving free trade deals — though nowadays it is often more interested in investing in consumer markets like China than exporting there. Former Chancellor Angela Merkel regularly undertook trips to China with a horde of German corporate leaders in tow.

The Greens, which have intriguingly become Germany’s main foreign policy hawks for Russia and China, have pointed out the difficulties and contradictions of this position. For example, a draft EU deal signed in 2019 with South America’s Mercosur trading bloc is widely known as “cars for beef”. It gives European automakers access to Brazil’s vast consumer market and overcomes protests by French and Irish ranchers against Brazilian imports. In the final days of its six-month EU Council Presidency in 2020, Germany also pushed through the bilateral Comprehensive Agreement on Investment (CAI) with China, largely aimed at protecting German operations there.

For a trading bloc that claims to uphold the multilateral order and protect the environment and labor rights, the model increasingly bogs the EU down in contradiction. The Mercosur deal has now stalled over concerns over the destruction of the Amazon. CAI was rightly blocked by opposition in the European Parliament, which dismissed Commission President Ursula von der Leyen’s ridiculous claim that the deal would significantly advance human rights in China.

You can think that the EU shouldn’t mess around with side issues like the environment and human rights in trade deals, but you can’t seriously argue that deals like CAI do much to move them forward.

A large part of the German industrial elite does not seem to lie awake and worry about trading with morally questionable partners. Herbert Diess, the now-sacked CEO of Volkswagen, famously denied knowledge of Uyghur re-education camps in China’s Xinjiang province, where VW has a plant, in 2019 and this year called for an end to the war in Ukraine and a rapprochement with Russia.

In the run-up to a similar EU initiative, Germany passed a law holding companies responsible for human rights violations in their supply chains. Brussels has also issued a ban on products made using forced labour. But the German industry rejected such steps. German legislation does not create new civil liability for companies, and their obligations to detect and remedy abuses are significantly weaker further down their supply chains. In another triumph of German corporate communications, Roland Busch, CEO of Siemens, said last December that import bans were a bad idea and that the problem of forced labor could not be solved by confronting China.

Germany is in enough trouble right now with its hasty attempt to give up Russian gas. The fundamental structural change in the country’s economy and national economy will take much longer. However, if the EU is serious about realigning its trade policy and Germany is serious about realigning its economy towards domestic demand, ending export orientation is an important step. Meanwhile, removing artificial incentives for companies to become dependent on China is a good development in itself.

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