Can Germany cope with Xi and Trump at the same time? | Berlin Briefing Podcast

Key Concepts

Germany-China economic relationship, China shock, de-risking, decoupling, axis of autocracies, systemic rivalry, trade war, EU-China summit, overcapacities, defensive measures, supply chains, Taiwan, one China policy, US-Europe relations.

Germany's Geopolitical Squeeze: China, Russia, and the US

The Intertwined Economies of Germany and China

• Historical Context: Germany benefited from China's entry into the WTO in 2001, unlike the US and Southern Europe. German industries (automotive, chemicals, machine tools) complemented China's economic takeoff, leading to booming exports and increased production facilities in China.
• Eurozone Crisis: The German-China relationship sustained German economic growth during the Eurozone crisis.
• Shift in Dynamics: China has learned to produce machines previously imported from Germany, becoming a more affordable alternative for manufacturers globally.
• Automotive Industry: Chinese electric vehicle (EV) companies like BYD are challenging German automakers, whose market share in China is shrinking. Chinese consumers have turned to domestic alternatives.
• Triple Hit: German companies face declining market share in China, pressure in the European market from Chinese competitors, and pressure in third markets.
• Government Support: The Chinese government provides substantial subsidies (land pricing, excluding foreign competitors) to build up its industries, accelerating China's push for domination in advanced sectors.

The "China Shock" and the Rise of De-risking

• Growing Risk Perception: There's a shift in Germany and Europe towards seeing China as more of a risk due to economic factors and geopolitics (threat to Taiwan, struggle between democracies and autocracies).
• De-risking vs. Decoupling: De-risking aims to avoid a complete rupture between the US and Chinese economies, focusing on managing risk and dependencies.
• Pandemic and Russia Shock: The pandemic exposed Germany's dependence on imports from China, compounded by the "Russia shock," highlighting the risks of relying on potentially hostile powers.
• Coercive Measures: China has shown a willingness to cut off supplies (e.g., rare earths) for coercive purposes.
• Rebalancing: De-risking involves identifying sectors with excessive dependencies and implementing policies to rebalance them.
• Government vs. Business: The outgoing German government believed de-risking should be left to businesses, but many companies increased investment in China ("re-risked").
• Cluster Risk: Major companies (automotive, chemical) increased their presence in China, leading to concerns about potential bailouts in case of crises like a Taiwan invasion.
• Analena Baerbock's Message: Companies are largely "on their own" regarding these risks.

Germany's New Government and China

• Fredrich Merz's Stance: Merz signals a tougher stance on China, viewing it as part of an "axis of autocracies" and highlighting the "systemic rivalry."
• Coalition Agreement: The coalition agreement emphasizes the systemic rivalry with China and the need for stronger de-risking policies.
• Investment Warnings: Merz warns German businesses about the "huge risk" of investing in China, stating that the government won't bail them out if problems arise (e.g., Taiwan invasion).
• New Reality: Germany faces a China shock threatening its major industries, and China's backing of Russia is expected to deepen.
• Defensive Measures: The key question is whether the new government will take defensive measures in sectors like automotive, potentially joining the rest of Europe in addressing Chinese subsidies and overcapacities.
• Technological De-risking: The government needs to consider the risks of exposures in telecom and digital sectors to China, especially in a potential conflict scenario with Russia.

The US Factor and Trade Wars

• Trump's Hostility: Donald Trump's hostile stance towards Europe and China, including trade wars, complicates the situation.
• Chinese Reaction: Chinese state media censors critical comments about China, promoting a nationalistic narrative.
• Economic Impact: Despite suppressed information, Chinese manufacturers are concerned about the trade war's impact, with some halting production or seeking alternative markets.
• EU Concerns: The EU and Southeast Asia worry about Chinese products flooding their markets due to trade diversion.
• Lack of Winners: The trade war is seen as a lose-lose situation, impacting both American consumers and Chinese citizens.
• Limited Cooperation: The Trump administration has been uninterested in serious discussions with Europe about China, leaving Europe to fend for itself.
• Currency Devaluation: China's currency devaluation further pressures the European market.
• Potential Pivot: There are hints of a potential US pivot towards a coalition-based approach to dealing with China, but this is not yet concrete.
• EU's Defensive Measures: Europe is likely to focus on its own defensive measures to protect its industries.

EU-China Relations and the Upcoming Summit

• Potential Softening: Some voices in Europe suggest a softer approach towards China due to uncertainty about the US-Europe relationship.
• Conditioning Factors: China's backing for Russia and the structure of the economic relationship limit the scope for significant improvement.
• Modest Political Gestures: Some modest political gestures are possible, but substantial progress is unlikely.
• EU-China Summit Focus: The summit will focus on potential movement on the economic front, including a possible "mini deal."
• Key Issues: The main issues remain China's backing for Russia and the impact of Chinese overcapacities on European industry.
• Potential Areas for Agreement:
  • Direct measures to restrict the impact of Chinese exports to Europe.
  • Investment in sectors that benefit Europe (excluding final assembly plants with Chinese supply chains).
  • China addressing trade measures it has put in place on the EU.
• Low Expectations: Expectations for significant progress remain low.

China's Perspective

• Unwinding the Trade War: China would prefer to unwind the trade war, as it's not beneficial for its economy.
• Engaging with Europe: China will try to engage more with the Europeans and build better bridges in trade and politics.

Germany's Position and the Path Forward

• Germany's Special Case: Germany's economic ties with China often lead to divisions within the EU on how to deal with China.
• Constitutional Reform: Germany's constitutional reform to increase infrastructure and military investment is seen as a transformative step for Europe.
• Merz's Realistic View: Merz's view of the relationship is closer to the reality Europe faces, marking an important start.
• Messaging China: Merz is expected to message China harder, especially regarding its relationship with Russia.
• Economic Question: The economic question remains crucial, requiring Germany and Europe to be tough and show that they are not prey to predatory powers.
• Domestic Resilience: The answer to dependency on China may lie in building up Germany and Europe's domestic economy and resilience.

Taiwan's Perspective

• Concerns about US Reliability: Taiwan is concerned about the US's reliability, especially given Trump's negative views on Taiwan and its semiconductor industry.
• Ukraine Parallel: The US's approach to Russia and Ukraine raises concerns in Taiwan.
• Mitigation Efforts: Taiwan is trying to mitigate potential threats, given the increased military activity and intimidation from China.

Conclusion

Germany faces a complex geopolitical squeeze, navigating its relationship with an aggressive Russia, a potentially hostile US, and a China that poses both economic opportunities and threats. The new German government, while signaling a tougher stance on China, faces the difficult task of balancing economic interests with security concerns and maintaining European unity in the face of external pressures. Building domestic resilience and pursuing a robust set of policies towards all major powers simultaneously will be crucial for Germany's success.