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Germany is reshaping the strategy with its biggest trading partner

Autor: Article based upon analysis from Reuters Breakingviews
2 min

German company bosses like Martin Brudermueller of chemical giant BASF and Thomas Schaefer of automaker Volkswagen have one less thing to worry about when it comes to China. That goes for their shareholders, too.

Germany’s ruling coalition, long at odds over how far Berlin should go to cut itself off from its biggest trading partner, has finally published its first strategy for the People’s Republic.

Europe’s largest economy has made it clear that it is aligning itself more closely with Brussels and Washington on everything from supply chain risks to technology export controls to human rights issues, after years of seeing China primarily as a lucrative market.

The final document does not shy away from issues previously considered taboo, such as positions on self-governing Taiwan, which China claims as its own.

Still, it has been trimmed and watered down from a confidential draft prepared in November by the foreign ministry led by Annalena Baerbock (Greens).

At the time, one idea was to aggressively push companies to disclose details of their China deals and even conduct a stress test, according to the draft obtained by Reuters.

That could have included nonpublic details about profits and joint ventures with local partners, a person familiar with the situation told Reuters Breakingviews.

Some feared that would lead to forced divestment. Now, such discussions can be held privately with the government without drawing specific red lines.

The compromise is likely based on the realisation that China is simply too strategic to exit quickly without doing significant damage.

China, for example, is the world’s largest chemical market, which prompted Brudermueller to emphasise in the 2022 annual report that „it would be a great risk for BASF not to be present in large growth markets such as China„.

The People’s Republic is also Volkswagen’s largest market, accounting for about 40 percent of global sales in 2022. A survey by the ifo Institute found that half of German manufacturing companies currently rely on key inputs from China.

When Germany rolled out the red carpet for Li Qiang in Berlin last month, China’s new premier was likely well informed about this direction.

A weaker domestic economy limits Beijing’s scope for aggressive responses anyway. Such action would only diminish the country’s renewed commitment to greater market openness and jeopardise its goal of stabilising foreign investment.

It has also been recognised that the days when the government could shape its relations with the European Union through close ties with Berlin are over.

Companies like VW and BASF still face difficult times ahead. If the EU tries to impose tariffs on Chinese electric vehicles, for example, German automakers could still find themselves caught between the fronts.

Still, executives will be relieved to know that they can reduce most of the China risk at their own pace.

Germany

Germany’s exports to China rose under Merkel. Note: Annual figures, in billions Source: Refinitiv | A.F. Alias & Y. Chen | Breakingviews | 14 July, 2023