What happened.
Germany's economic minister is reviewing "a raft of measures" intended "to make business with China" less desirable as the government looks for ways to "reduce [Germany’s] dependence on Asia's economic superpower," Reuters reported in an exclusive.
Reuters:
The measures could include reducing or even scrapping investment and export guarantees for China and no longer promoting trade fairs and manager training there, those people said. Loans from state lender KfW could be re-directed to projects in other Asian countries, such as Indonesia, in line with attempts to diversify trade and increase business with democracies.
The ministry is also considering screening not just Chinese investments in Germany but also German investments in China, one of the sources told Reuters.
Earlier in the week, Deutsche Bank CEO Christian Sewing also "urged the country's leaders to accelerate its decoupling from China" after "warn[ing]" in a speech at a banking industry conference that "a recession in Germany is inevitable,” CNBC said.
Why it matters.
Late in the game
After recognizing Japan’s economic vulnerabilities laid bare by the pandemic during the first Covid outbreak in 2020, Tokyo kickstarted the drive to diversify production. By the end of that same year, “[a]lmost half of Japan’s technology firms” were, either, relocating or considering moving their supply chains away from China,” the Associated Press reported citing a Kyodo News survey.
The U.S., for its part, has been passing China legislation to boost competitiveness and strengthen its own national security at remarkable speed.
But Europe’s economic engine seemed mired in politically sensitive questions as the German economy became even more dependent on China. Former German Chancellor Angela Merkel had for years pursued a policy of pragmatism that rewarded Beijing’s increasing assertiveness in the South China Sea and human rights abuses in Xinjiang and Tibet with deepening commercial ties. While some analysts say she used engagement with China to help German industry recover from the financial crisis, others think she catered too long to local automakers, who are “very dependent” on China, to the detriment of German and European values.
A sign that change was on the horizon, however, emerged in late 2021 when, for the first time in history, German voters refused to back a leading party, and Merkel’s pragmatists were forced to create a coalition with China hawks in the Greens to govern. If you’re interested in German politics, China Boss uploaded a short news-doc, “No More Status Quo: Germany and China after the Bundestag Elections,” on YouTube (click below) to explain what happened.
Europe “needs to be ready for a crisis in relations with Beijing,” MERICS says
“Following Russia’s invasion of Ukraine, Europe was utterly unprepared, as its energy dependence quickly became an economic weapon for President Vladimir Putin," Max J. Zenglein wrote in Politico last week. But “[c]ompared to what’s at stake if relations with China soured, however, this looks like child’s play,” and “recent events in the Taiwan Strait should be taken as a warning,” he said.
Zenglein, Politico:
Deeply integrated value chains could disintegrate, and supply chains could break down. GDP growth would collapse, and with companies losing China as a production base and market, inflation and unemployment would increase. In the longer term, wealth and living standards would drop dramatically, as Europe’s economy faced scarcity of supply.
Europe’s complex global value chains, ranging from intermediary products — such as metals or active pharmaceutical ingredients — to more complex assemblies, would break down without Chinese inputs. For example, around 70 percent of printed circuit boards and over 90 percent of some types of antibiotics are imported from China.
On top of that, a new form of dependence would undermine the Continent’s energy transition, as China dominates the global production of solar panels, batteries, as well as the processing of critical metals needed for cleaner energy production, including cobalt, lithium or rare earths.
Any major disruption to the €473-billion worth of goods the EU imported from China in 2021 wouldn’t only affect companies with direct links to Beijing, but it would also have ripple effects throughout the economy. Due to its unrivaled price competitiveness, the vast majority of Europe’s consumer goods are produced in China, and its manufacturing prowess has made the country a major sourcing hub for large retailers: 95 percent of imported laptops and 70 percent of mobile phones originated from China; nearly 98 percent of baby carriages and 75 percent of paper cups that the EU imports are made in China.
Zenglein is chief economist at the Mercator Institute for China Studies (MERICS), a highly influential German think-tank based in Berlin. He calls for Europe to issue a “mandatory stress test” that can be used “to identify the bloc’s economic vulnerabilities and set priorities to improve resilience.” He also insists that companies be prepared for the “economic shock of their operations being partially or totally, cut off from China,” with a “focus on both financial and supply chain resilience to ensure that risk management includes the company’s ability to absorb the loss of revenue and profits, written-off investment, as well as its ability to keep its business up and running” in the event of disruption.
Watch on YouTube
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Have a great weekend.