Germany ain’t decoupling from China anytime soon

This week’s biggest geopolitical business event is Germany to China. As the Biden administration imposes new export controls on semiconductor technology to China and Republicans suggest that, upon taking control of the House of Representatives, as expected, they plan to review everything from Chinese military threats and COVID-19 to intellectual property theft, German Chancellor Olaf Scholz is visiting Beijing with a delegation of business leaders.

Setting expectations for the first EU leader to visit China since the start of the pandemic, Scholz’s spokesman Steffen Hebestreit said the chancellor is not in favor of “decoupling” from China. Examining the numbers, you can see why.

The German and Chinese economies remain deeply intertwined. According to a study by the Rhodium Group, the four German industrial giants — carmakers VW, BMW and Mercedes and chemical company BASF — alone account for a third of European direct investment in China. It is not a stretch to say that many thousands of German jobs depend directly on the relationship.

Consider Volkswagen in China. VW sells over 3 million cars annually in China. The Volkswagen Group China website states that the company’s efforts in China “is one of the earliest and most successful international partners of China’s automobile industry. The Group has grown together with China’s auto industry, overcoming many challenges and achieving significant growth during the 30 years’ partnership with China.”

So established is VW in China that, as part of my China immersion coursework for my EMBA degree from UNC’s Kenan-Flagler Business School, when in Shanghai, we visited and toured one of the joint-venture SAIC Volkswagen plants. We could have visited a VW plant every day for a month and not have seen them all. Volkswagen Group China has 33 plants across the country — all to manufacture vehicles and components for the China market.

Last week, BASF CEO Martin Brudermueller, who will accompany Scholz, urged an end to “China bashing.” Instead, BASF sees expansion in China as the best path forward. The company is building a $10 billion chemical complex in Guangdong province. Expected to come online in 2030, the world-class facility will be a “role model of sustainable production both in China and around the world,” according to a BASF statement.

The Financial Times reports that since the turn of the millennium, China has gone from accounting for just over 1 percent of German exports to commanding a 7.5 percent share of sales abroad, putting it second to the U.S. In 2021, more than $100 billion worth of German goods were sold there. Plus, the tactics outlined in the 1989 classic global business book, “Beijing Jeep: A Case Study of Western Business in China,” are still in play today. 

China long has played a divide-and-defuse strategy. Dividing nations to dampen a united front while defusing focus allows China to enjoy economic concessions. This strategy is happening daily across world capitals under the guise that Western businesses will have a chance to sell their goods and services to one of the world’s most dynamic marketplaces.

To ensure a smooth visit and a red-carpet welcome in Beijing, Scholz overrode controversy and negativity towards China’s desire to invest in Europe’s third-busiest port. Scholz pressed German ministries to back investment from Cosco, a Chinese state-owned enterprise focused on shipping and logistics services, in a container terminal at the Port of Hamburg. The Hamburg port deal was approved last week. And though Cosco took a smaller-than-planned equity amount, the German government’s agreement to sell a stake of 24.9 percent in one of Hamburg’s port terminals is an undisputed globalization win for Beijing.

For democratic governments, nearly all foreign policy is driven by domestic policy. Germany’s export-driven economy can’t escape increased geopolitical tensions in the Indo-Pacific, China’s stifling zero-COVID policy, and a growing weariness of an overreliance on China’s market for revenue and economic growth. Politely whispered in the past, this sentiment is now driving the dialogue with leading German economic thinkers. “The German economy is much more dependent on China than the other way round,” according to Juergen Matthes of the German Economic Institute. 

Germany’s Mittelstand companies, which represent 99 percent of all German companies, increasingly realize that they cannot rely on Chinese profits as they once did. Quoted in the Financial Times, Jörg Wuttke, president of the influential trade lobby EU Chamber of Commerce in China, said of the state of the economic relationship, “It’s a lost love affair.”

In Berlin, there will be more talks, white papers, conference panels, and legislative hearings on the need for Germany to reduce dependencies on China and do more to diversify supply chains and foster new trading partners, but that will take time — time that Scholz does not have. 

A good rule of thumb for governing in a democracy is that good economics makes bad politics. Scholz appears committed to the economics, regardless of the politics. His Germany-to-China moment has four goals: shoring up the German-Chinese commercial relationship; pressuring ministries to overlook Chinese investment in Germany; keeping the big multinational German companies happy at the expense of small and medium-sized enterprises; and reminding the U.S. elected officials that nations will do what is best for their economic security.

So, no, Germany ain’t decoupling from China anytime soon.

Marc Ross is the founder of Caracal, a global political communications firm. He was communications director for the U.S.-China Business Council. Follow him on Twitter @cfolmarcaross.