As the United States aims to restrict economic connections with Beijing, two influential powerhouses of the German economy, Volkswagen and the chemical firm BASF, are expanding their extensive investments in China. Numerous other companies from diverse sectors share a similar mindset. Let’s tap into the research of the Brokerschart professionals to discuss this.
China Is Important for Germany & Europe
China has maintained its position as Germany’s largest trading partner for seven consecutive years, with foreign trade sales reaching 297.9 billion euros last year. However, Germany’s trade deficit with China has become increasingly imbalanced, a trend exacerbated by the disruptions in the supply chain caused by the coronavirus pandemic.
Throughout Germany, corporate leaders acknowledge that such investments contradict the United States’ efforts to isolate China economically. They argue that the income generated from China is crucial for their companies to prosper and expand within Europe.
German business experts believe that the profits obtained from China enable their companies to effectively counterbalance the losses resulting from Europe’s costly energy and stringent environmental regulations, particularly in the chemical industry.
Brudermüller of BASF explained to journalists at the company’s annual earnings conference in February that the restructuring in Europe would be considerably more challenging without their business in China.
Privately, Volkswagen executives acknowledge that the automaker faces a similar dilemma. The combination of high energy and labor expenses has made the company heavily dependent on Chinese sales to support its European operations.
Germany-China Business Ties Are Under Check
Currently, Berlin is examining the increasingly close business connections with great scrutiny. Chancellor Olaf Scholz has been advocating for a policy proposal circulating among German ministries for months.
This policy is being developed in response to a challenging year when Russia halted natural gas shipments to Germany, which served as a reminder of the risks associated with relying on autocratic nations for crucial materials that support Germany’s industrial foundation. Regarding China, one major concern is Germany’s dependence on Chinese imports.
Germany relies on China to supply essential technological goods like mobile phones, LEDs, and raw materials such as lithium and rare earth elements. These resources are vital for Germany’s transition towards cleaner energy and transportation.
Katrin Kamin, the director of the Kiel Initiative in Geopolitics and Economics, emphasized the need for Germany to carefully consider such dependence when strategizing its future interactions with China. Reducing ties in the near term is not a viable option.
Germany-China: The Future
Severing ties with China would have significant financial implications for Europe as a whole, particularly for Germany, due to the strong economic connections between the two countries.
Based on the 2019 gross domestic product, the institute’s calculations indicate that Germany could suffer a loss of income exceeding 131 billion euros. Moreover, this figure could escalate further if China were to retaliate.
Berlin is keen to avoid a repeat of the upheaval it experienced when Russia launched a full-scale invasion of Ukraine, which resulted in an energy conflict and the loss of Germany’s affordable natural gas supply.
Consequently, Jörg Kukies, an economic adviser to Scholz, emphasized the need to balance economic interests and security concerns during a meeting with German and U.S. trade leaders.
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