Why Germany finds it so hard to handle China | Berlin Briefing Podcast

Germany’s Triple Addiction: A Deep Dive into Economic Dependencies

Key Concepts:

• De-risking: Reducing economic dependencies on potentially adversarial nations, particularly concerning critical supplies and markets.
• Industrial Policy: Government intervention in the economy to promote specific industries or achieve strategic goals.
• Weaponization of Dependencies: Utilizing economic leverage, such as control over critical resources, for political or strategic gain.
• Extraterritorial Control: Applying a country’s laws and regulations beyond its borders, impacting foreign entities.
• Salami Slicing: A gradual, incremental approach to achieving a strategic objective, designed to avoid triggering a strong response.
• Autoliberalism: A German political approach emphasizing minimal state intervention in the economy.

I. The Three Addictions: A Historical Overview

Germany’s recent economic prosperity has been underpinned by three key dependencies: cheap energy from Russia, guaranteed defense from the US, and the rapid growth of the Chinese economy. This reliance, described as an “addiction,” has created vulnerabilities now coming to the forefront. The initial engagement with China began in the 1990s, with companies like Volkswagen establishing a strong presence through joint ventures, effectively creating a German-influenced car market for government officials. This early access, coupled with a willingness to compartmentalize ethical concerns regarding human rights, allowed German businesses to flourish.

II. The Rise of China as a Market and a Supplier (2000s – 2010s)

The early 2000s marked a turning point, with China becoming a crucial market for German goods, particularly during the European financial crisis (2008 onwards). China’s economic growth and support for the Eurozone, including purchasing Greek bonds, were seen as a lifeline. Angela Merkel’s government viewed China as a potential “savior,” as German companies profited immensely. By the last five to seven years, China became Germany’s largest trading partner, a position it continues to hold.

Simultaneously, China developed an industrial policy focused on securing control over critical raw materials, particularly rare earth elements. Unlike many nations, China’s centrally planned economy allowed for strategic investment in resource extraction, often disregarding environmental concerns. This resulted in China becoming a dominant supplier of these essential materials for industries like automotive, electronics, and defense.

III. China’s Assertiveness and the Weaponization of Dependencies (2024)

In April 2024, China implemented export controls on seven rare earth elements and magnets, ostensibly in response to the US-China trade war initiated under Donald Trump. These controls required Chinese companies, and even European companies operating in China, to obtain licenses for export, creating significant bureaucratic hurdles. This move was interpreted as a demonstration of China’s leverage and a willingness to “weaponize” dependencies.

Further escalation occurred in October 2024, with China announcing more aggressive extraterritorial export controls, extending its reach to refining technologies for rare earths. While temporarily suspended following a meeting between Trump and Xi Jinping, the threat remains. This prompted the US to secure alternative sources of critical minerals from Latin America and Africa, while Europe struggled to diversify, often relying on US assistance.

IV. The Shifting Economic Landscape: From Market to Production Base

The dynamic between Germany and China is evolving. While German exports to China are declining, Chinese companies are increasingly exporting competitive products, such as electric vehicles (EVs), to global markets. Volkswagen, for example, is now exploring the possibility of producing EVs entirely in China for export to other regions, potentially leading to job losses in Germany and a shift in production centers. This raises concerns about “deindustrialization” in Germany and the potential for German companies to become mere “consultants” in a Chinese-dominated industrial landscape.

V. Government Response and Challenges

The current German government recognizes the need to address these dependencies and has initiated a “Maßnamenkatalog” (action plan) focused on economic security, de-risking, and diversification. However, implementation is hampered by internal contradictions, with the Economy Ministry advocating for a more hands-off, “autoliberal” approach.

The EU is also attempting to develop tools to counter unfair trade practices, including potential tariffs, but faces challenges in achieving consensus among member states. The recent purchase of 700 electric buses from BYD (a Chinese state-backed company) by Deutsche Bahn, despite potential cybersecurity vulnerabilities, highlights the difficulties in translating rhetoric into action.

VI. Taiwan Contingency: A Stress Test for German and European Policy

A potential crisis involving Taiwan, such as a blockade or quarantine, would serve as a critical test for Germany and Europe. While the US would likely take the lead, Europe would be pressured to impose economic sanctions on China. This would be immensely challenging given Germany’s economic ties and the potential for significant disruption.

The key lies in proactive planning and the ability to respond swiftly to “salami slicing” tactics by China. The German government is urging companies to avoid becoming overly reliant on China, emphasizing the need for the ability to divest investments quickly if necessary.

VII. The Path Forward: Diversification and Strategic Partnerships

The discussion highlighted the potential for strengthening economic ties with India as a diversification strategy. However, the complexities of the India-China relationship and the existing dependencies on China present significant hurdles.

Notable Quotes:

• “You could look at the car industry in China as a German invention.” – Clifford Coonan, on the early influence of Volkswagen in the Chinese market.
• “Europe was genuinely shocked, I think, when China weaponized this against them.” – Clifford Coonan, on the impact of China’s export controls.
• “Don't get so stuck into China that you couldn't walk away from your investments overnight if something really big happened.” – Friedrich Merz, urging German companies to reduce their reliance on China.

Data & Statistics:

• China has been Germany’s number one trading partner for the last five to seven years.
• China’s trade surplus exceeds $1 trillion.
• Germany is losing approximately 10,000 industrial jobs per month.

Conclusion:

Germany faces a complex challenge in navigating its economic dependencies on China. While the benefits of engagement have been substantial, the risks of over-reliance are becoming increasingly apparent. A successful strategy requires a concerted effort to diversify supply chains, reduce vulnerabilities, and develop a more assertive approach to protecting economic security, even if it means confronting difficult trade-offs and potentially disrupting established business models. The situation demands a shift from wishful thinking to proactive planning and a willingness to prioritize long-term strategic interests over short-term economic gains.