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05:56 am | 10. June 2020

How Dependent is Germany on China?

The importance of the trade relationship with China has encouraged the view in Germany that economic dependencies limit its choices in areas like human rights. But closer scrutiny suggests this might not be the case.

By Zhu Yi

In the midst of the Covid-19 epidemic, Germany's dependence on China has been a topic of interest and discussion among the German public. Dependence on China, particularly in the production and supply of essential medical products, has been cause for widespread consternation.

Even before the crisis, however, the phrase "Germany's dependence on China" and related terms had become familiar expressions playing an important role in framing the bilateral relationship in the German discourse. This report evaluates media articles published in Germany since 2017 and compares them with publicly accessible data and sources (German, Chinese and English), answering the following questions:

  • How did the China dependency narrative emerge, and how has it developed?
  • What do we mean when we talk about dependency? What are the central key elements?
  • How these elements correspond to complex issues in the bilateral relationship?
  • What important aspects have been omitted from consideration in the development of the narrative?
  • What new dynamics did the Covid-19 pandemic introduce to the discussion?

Key Points: 

Germany’s trade volume with China overtook that with the US for the first time in 2016. When Trump imposed tariffs on Germany in early 2017, the German public was delighted to have China replacing the US.
 
The importance of trade with China is framed as a one-sided dependency of Germany on China, which does not match the complexity of the bilateral trading relationship.
 
The most-used example for this dependence is that Volkswagen sells four million cars in China per year. However, as the capital is highly globalized today, the question is whether these transnational companies can still be viewed as “national champions.”
 
Instead of fearing or blaming China, Germany needs critical self-reflection in terms of environmental and other standards in the supply chain, investment in domestic education, and seeking a European answer to the China question.

The Story of a Narrative

In the preliminary search, it was clear early on that a supposed causality had been established across the German media, based on the unquestioned belief that China is Germany's most important trading partner. According to this logic, China’s top trading status results in Germany’s economic dependence on China, and the most frequently mentioned example of this dependence is that Volkswagen sells more than four million cars to the Chinese market every year (out of ten million deliveries worldwide). The dependence in turn makes it difficult for the German government to take clear positions on issues like human rights, or restrictions on Chinese FDI.

For this study, articles from six influential media outlets were evaluated for the period from January 1, 2017, to April 18, 2020: Frankfurter Allgemeine Zeitung (FAZ, including FAZ.net), Handelsblatt, Der Spiegel (including Spiegel Online), Die Welt (including Welt Online), Süddeutsche Zeitung (SZ), and Die Zeit (including Zeit Online). Two German key words were used: "abhängig*" (dependent*) and "Handelspartner" (trading partner). Programs from the German television station ARD are cited, but are not included in the quantitative data. The total data range includes 661 articles. The following graph shows total articles in the media set since 2017, with a notable increase since the outbreak of the corona pandemic.

China Takes the Top Spot

In 2016, Germany's trade volume (imports and exports together) with China overtook that between Germany and the United States for the first time, making China Germany's largest trading partner. The figures were first announced in late January 2017 by the German Chamber of Commerce and Industry (DIHK), and again in late February by the Federal Statistical Office of Germany (Statistisches Bundesamt), and the change in the rankings ignited enthusiasm in the German press.

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On January 27, 2017, the headline in Spiegel Online read: "China is Germany's new number one." The report argued that while Donald Trump was closing off the US market, China was rising up to become a new trading superpower. Spiegel Online stated that, "In relation to Germany, the People's Republic has now already reached the top position." On February 24, 2017, Spiegel Online gleefully reported, in an article with the headline, "America Third," that the German economy had "shifted its priorities" and that the US was "no longer the first destination" for trade.

SZ also used the term "number one" to frame China's new position. In this regard, too, the article emphasized that, for Germany, the importance of the US was declining. On February 24, 2017, both FAZ and Zeit Online published articles with nearly identical headlines, including the statement, "China is replacing the US as the most important trade partner." In addition to two reports about China as Germany’s most important trading partner published in January and February, Die Welt also published a guest article in late January written by then Chinese Ambassador Shi Mingde, in which he wrote that for the two economies "win-win is the solution."

The importance of the new ranking of trade partners will be discussed in the second part of this article. But the psychological impact of the change was enormous. Following Donald Trump’s inauguration on January 20, 2017, threats of punitive tariffs against important US trading partners such as Germany and China became a reality. For German economic and political decision-makers, this was deeply unsettling. At the World Economic Forum in Davos on January 17, 2017, Chinese President Xi Jinping presented himself before more than 1,000 influential global economic elites as a "guarantor of globalization and free trade" (Handelsblatt), in sharp contrast to Trump.

Beijing used this opportunity to launch a "charm offensive towards Europe and Germany," which was well-received. In February 2017, China announced that it would postpone a statutory sales quota for electric cars by one year, following intervention by the German government and in favor of the German carmakers Volkswagen, Daimler and BMW, which all have production facilities in China. Almost euphorically, Handelsblatt commented:

Since Donald Trump has set the US administration on a more protectionist course at the White House, China and Germany have sought to join forces. Both Beijing and Berlin have a strong interest in advancing globalization and free global trade [...] The two countries are highly interdependent.  China became Germany's most important trading partner for the first time in 2016.

In this context, it is perhaps not surprising how quickly the notion of China as the most important trading partner established itself among the German public. The Federal Statistical Office of Germany publishes trade data every February. For this reason, the phrase “the most important trade partner” makes a regular appearance in the German media each year between the arrivals of Santa Claus and the Easter Bunny. The phrase is also used frequently during state visits between the two countries. Xi Jinping is one of the most prominent advocates of the notion of a trading partnership, and in July 2017, Die Welt published his guest article, "For a better world," on the occasion of the G20 summit in Hamburg.  

President Xi Jinping presented himself before more than 1,000 influential global economic elites as a "guarantor of globalization and free trade."

 

Fearing the Middle Kingdom

While the term "partner" tends to convey a positive impression of trustworthiness and mutual benefit, the term "dependence" often bears more menacing connotations. As the following graph shows, in 2017 the phrase "the dependence of the German economy on China" was rarely the topic of discussion between Germany and China. But in 2018, the topic continued to grow.

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When Angela Merkel visited China to negotiate the reciprocity of bilateral economic relations in May 2018, media reports focused on her "delicate mission in Beijing" (Die Welt). On the one hand, German companies complained about market obstacles and forced technology transfer in China. On the other hand, Chinese direct investments in Germany had risen sharply (from 80 billion in 2013 to 180 billion in 2017). The focus of Chinese purchases on Germany’s high-tech sector aroused concern. "Beware of fast money from China," warned Die Welt. Der Spiegel, meanwhile, characterized Merkel's mission as “negotiation with the Leviathan." Since then, "fear of the Middle Kingdom" (FAZ) has prevailed among German business elites. Words like "fear," "anxiety," “worry,” "danger" or "threat" occur in over 60 percent of the articles examined in this study, conveying the dominant mood within the narrative of German dependence on China.

Due to fear of losing out in the "systemic competition" against "China's state-dominated economy," the Federation of German Industries (BDI) warned against "too much dependence on the Chinese market" in a position paper at the end of 2018. Meanwhile, Germany’s other leading organization of the economy, the German Chambers of Commerce and Industry (DIHK), continued to advocate "change through trade" in its own China action plan. Nevertheless, a statement by Volker Treier, DIHK head of foreign trade, conveyed a sense of fear, not a sense of confident partnership: "We must always remember that China is our most important trading partner. We have to weigh every word on the gold scale," he said.

From September 2019 until the end of the year, the debate on Germany’s dependence on China remained intense, further triggered by the protests in Hong Kong. Both the German government and large German companies came under public pressure, facing criticism for not taking clear positions against police violence on the ground out of an urge to protect their economic interests with China.

From October, another domestic political issue was added to the dependency debate – the role of the Chinese telecommunications giant Huawei in the development and construction of the German 5G network. The German government released a rule book for the 5G network security, but despite the efforts of the US government to press for a ban on the Chinese company, Huawei was not explicitly excluded. This decision sparked fierce debate among political and economic decision-makers. While critics mainly argued the dangers of "technology dependence” on a company they said could not be trusted geopolitically, counter-arguments often turned again to the narrative of German economic dependence on China. According to Der Spiegel, the German Chancellor Angela Merkel feared that "an all too harsh course could provoke retaliatory measures by the Chinese against German companies investing in or exporting to China."

The German discussion in the media on relations with China gives the distinct impression that Germany is helpless and incapable of action. Media reports spoke of Germany facing a "Huawei dilemma," a "Hong Kong dilemma," or a "China dilemma." Or Germany was in a “trap,” or “quandary,” squeezed “between the fronts” of the US and China, and "crushed" by the two superpowers.

In the period leading up to the Covid-19 crisis, one issue of concern was particularly salient, with strong calls for action. This was about Germany’s struggle against dependence in the electric-vehicle battery (EVB) sector. At present, EVB production is dominated by companies from East Asia, including Chinese ones. Media coverage has suggested this is a matter of life or death for the German economy. Up to the end of 2019, half of the articles in Handelsblatt using the keyword "dependent" (abhängig) dealt with this topic. "I find it frightening that we have fallen into such great dependence," said Volkswagen CEO Herbert Diess. However, one report from FAZ commented that the course suggested by Diess would in fact make the group even more dependent on the Chinese market.

Volkwagen's decision in 2019 to produce its own batteries in Germany was welcomed by various parties. Volkswagen made demands to the politicians to be exempted from the renewable energy levy (imposed by the German Renewables Act). Trade unions also supported the idea of domestic battery production. FAZ tersely summed up this determination with the statement, "My car, my battery, my factory." Only one article, in Die Zeit, criticized a promise by Federal Minister for Economic Affairs Peter Altmaier of one billion euros of public money to the automobile industry. The article called instead for investment in materials research.

The Covid-19 Domino Effect

The graph below might seem somewhat ironic if it were not for the extremely tragic nature of the Covid-19 epidemic. Since the virus outbreak in Europe, there is very little interest in the issue of German manufacturing of EVBs. The discussion has turned sharply to shortages in pharmaceutical production, which is strongly dependent on China and suffered severe disruptions at the end of January due to nationwide quarantines imposed in China, which paralyzed production across industries.

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On April 4, 2020, a Der Spiegel cover story – "The Corona Domino” – raised a “new” question about dependency on China. Why, the story asked, were medicines so vital to survival, including antibiotics, produced in China and not in Germany? FAZ praised Federal Minister of Health Jens Spahn, dubbed the "Corona Minister," for "openly expressing the weak points." "We need to discuss the strong dependence that Germany has on China," the magazine quoted Spahn as saying.

In fact, this question about dependency in the healthcare sector is not at all new. Since 2017, media reports in Germany have occasionally addressed supply bottlenecks for pharmaceuticals, and the danger this poses for patients. Zeit Online reported that year, for example, that organ transplant surgeries had been postponed as a result of antibiotic shortages.

In the discussion about supply chains, it was often argued early on that the call to relocate production was tantamount to protectionism and anti-globalization. In early April  this year, however, the first critical reflection on the current form of globalization emerged in the German media, a sign that the economic interdependence between China and Germany needs to be reviewed in a larger context, with a view to the future. Before discussing these newly emerging perspectives, however, the question of previous China dependency narratives should first be analyzed.

In early April this year, the first critical reflection on the current form of globalization emerged in the German media, a sign that the economic interdependence between China and Germany needs to be reviewed in a larger context.

 

Facts and Distortions

"Danger is not a number." In the beginning of March this year, it was with these words that well-known virologist Christian Drosten appeared to the German public explaining the complex effects stemming from an epidemic. In the globalized economy, we might adapt Drosten’s words to the very complex interdependence that exists between Germany and China: "Importance or dependence is not a number." Numbers must be examined and interpreted in complex contexts, as scientists are doing in the case of the present crisis – otherwise we can quickly end up with distortions or even errors.

Who is Germany’s Biggest Partner?

Let us start with figures for the total volume of trade. The question of who is Germany’s largest trading partner can be answered differently depending on which statistics are used. If the Visegrad states, V4 for short, referring to the political union of Poland, the Czech Republic, Hungary and Slovakia, are taken together, we can conclude that Germany’s largest trading partner for many years has not been in Asia but right next-door. The volume of trade between Germany and the V4 is currently one and a half times that of Germany’s trade with China, its so-called "largest trading partner" based on a focus on individual states. But never before have German business representatives claimed that the German government should be cautious in its criticism of these neighboring countries in Central Europe on refugees or other issues simply because the German economy depends on these most important partners.

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It could be argued that these states are also dependent on trade with Germany. To clarify which side is more dependent, one would need to examine the different sectors of imported and exported goods more closely. It is striking, however, how one-sided the emphasis on Germany's dependence on China can be in the public discourse. The predominant representation in the media is captured by the phrase, "When China's economy coughs, Germany catches a cold." Even articles criticizing the attitude of the German government and German companies towards China on the issue of human rights predominantly present Germany's one-sided dependence as a dilemma, as a fact with no way out. For example, an SZ article  reports: "China is Germany's largest trading partner. But the country uses this dependence to put pressure on Berlin."

A study of German-Chinese trade relations conducted by the Bertelsmann Foundation in 2015, however, came to a different conclusion: "Germany is not, as sometimes assumed, much more dependent on China than China is on Germany." The study found that while China imports mostly capital goods from Germany, especially machinery used for production in China's strong export industries, for most product categories, "Germany's direct dependence on China is low, as the products are easily replaced by imports from other countries."

It would be helpful for the current debate to examine the interdependence with new data. Additionally, the Covid-19 crisis shows that dependence on imports can be quite dangerous if the patterns of division of labor mean supply chains are concentrated in individual countries and even with individual suppliers. Overall, however, the structure of product groups in bilateral trade has not changed much. According to the Bertelsmann Foundation study, capital goods have accounted for 35 to 40 percent of German exports to China since the late 1990s. In 2019, the machine and equipment industry again accounted for 37.7 percent of total exports.  

The Covid-19 crisis has provided a current and important example of interdependence between the two countries. While Germany is dependent on face masks from China, a large Chinese company manufacturing machines for the production of non-wovens reported at the end of February that production capacity there could not be expanded quickly because a core component depended on imports from Germany. This core component was a spinneret manufactured by Enka Tecnica, a family business from Heinsberg, a small town located within Germany’s Covid-19 epicenter.

It must be recognized, moreover, that the simple addition of import and export volumes produces statistical data from which the dependency of the German economy on any particular country or region cannot be inferred. Germany proudly calls itself an "export nation," as more than 40 percent of German GDP depends on exports. Where the export of goods is concerned, China has never been able to surpass the US as a sales market for German products. France is also, in this respect, more important than China.

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Value-added Exports to China

When it comes to German economic dependency on export sales to China, the question of value-added exports to China within the economy as a whole and their contribution to economic growth is of key importance. In late 2019, the German Economic Institute (IW) published a study shedding light on this question. The author, Jürgen Matthes, examined data from the OECD Trade in Value Added database (TiVA)(between 2005 and 2015. According to Matthes’  findings, German value-added exports to China accounted for around 2.8 percent of Germany´s gross total value in 2015. Their growth contribution to the increase in the total economic nominal gross value added in Germany between 2005 and 2015 is of the same order, around 2.8 percent (of a total of 33 percent). Based on these numbers, Matthes concluded that "more than 97 percent of the total economic value added does not depend on exports to China and nominal economic growth would also have been around 30 percent in this period without exports to China. Therefore, the export dependence on China appears limited in general."

Moreover, as the author explains, the 2005-2015 period was marked by special circumstances that are unlikely to continue in the same pattern. After joining the World Trade Organization (WTO) in December 2001, China's economy grew at enormous rates, but growth has already declined in recent years. During the phase of progressive industrialization, China offered a fast-growing market in particular for German capital goods manufacturers. In the medium term, however, it can be assumed that China will become increasingly independent from foreign countries in the production of such goods, and growth in German exports will slow as a result.

By reviewing the foreign trade data, the IW study examined China’s significance for Germany as a location for production and employment. Apart from some indirect repercussions on the domestic location, sales by German companies with their own production in China are not explicitly covered in the data. Regarding the production of German companies in China, the author notes that, "The focus on the high percentage of turnover for some large German companies in China distorts the picture.”

Volkswagen Becomes (More) Chinese

What about the four million cars Volkswagen sells on the Chinese market every year? When figures sound impressive and seem to correspond to the sentiment of dependence, people often do not look closely enough. Some articles in the German media mention that 40 percent of Volkwagen's annual deliveries are dependent on China.  Others claim that 40 percent is the China share of total revenue. Still others even talk about China accounting for 40 percent of the group’s profits.

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Workers inspect a new vehicle at a Volkswagen plant in China. Image courtesy of Volkswagen Group

 

Statements from the Volkswagen group often add to the ambiguity. According to the group’s press release on the 2018 annual balance, "Earnings before taxes rose to 15.6 (13.7) billion euros, while the pro rata operating profit of the Chinese joint ventures was roughly on par with the previous year, at 4.6 (4.7) billion euros." On this basis, Handelsblatt reported the assumption that "of the group’s operating profit of 17.1 billion euros [before deduction of the penalties for diesel cheating], around 4.6 billion came from China.”

Take the trouble to go through Volkswagen’s 300-page annual report, however, and you find the following statement: “The sales revenue and operating profits of the joint venture companies in China are not included in the figures for the Group as they are accounted for using the equity method”.

Unpacking the statement above, this means that the 4.6 billion euro derived from the Chinese business is irrelevant to the overall operating result of the Volkswagen Group. The reason for this is that of the 4.2 million cars delivered in the Chinese market, over 4.1 million were produced locally by the two joint ventures,  SAIC Volkswagen Automotive (in which the group has a 50 percent  share) and FAW-Volkswagen Automobile (in which the group has a 40 percent share). In view of this joint-venture structure, it is understandable that the Chinese partners generate the majority of the profits from the sale of the 4.1 million cars, as the diagram in the group’s annual report shows – 4.6 billion euro for Volkswagen Group, 6.8 billion for the Chinese partners.

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Source: Volkswagen Annual Report 2018

How much of this 4.6 billion flows to Volkswagen’s headquarters in Wolfsburg is not readily revealed. Chinese lobbyists for local car brands, along with more nationalist voices, have long alleged that foreign car manufacturers draw excessively high profits from the Chinese market but do not transfer sufficient technologies to Chinese partners. This is why senior management at Volkswagen have been insisting to the Chinese public for years that the profits are reinvested in China.

"The money we have earned is just on paper," said Volkswagen Group China vice-president Zhang Suxin to a Chinese audience in 2012, responding to the profits question. What really counts, Zhang suggested, is dividends after the distribution of profits. But Volkswagen, said Zhang, has completely renounced dividends for many years, instead re-investing all profits in China. Volkswagen was also financing its investment plan in China of four billion euros per year for the future through profits from its Chinese business, he said.

In his presentation, Zhang also assured the Chinese audience that despite public pressure, the CEOs of Volkswagen in Germany have always placed their faith in the Chinese market and have “achieved ample rewards [for VW) thanks to this foresight." Zhang cited several examples of how Volkswagen had withstood political pressure in Germany to make Chinese commitments. Despite pressure from the trade unions over job losses back in Germany, for example, the group had continued to expand capacity in China. In 2008, as much of the world criticized China over the Tibet issue, said Zhang, Volkswagen had remained a sponsor of the Beijing Olympic Games. And in 2012, despite political sensitivities, the group’s headquarters made a “political decision” to build a plant in Xinjiang.

In 2008, as much of the world criticized China over the Tibet issue, said Zhang, Volkswagen had remained a sponsor of the Beijing Olympic Games.

 

In 2016, Volkswagen Group China board member Jochem Heizmann also claimed that "the annual investment of 4 billion euros comes entirely from the China business, and we need this capital for sustainable [business] development." In 2019, Heizmann’s successor, Stephan Wöllenstein, announced at the Guangzhou International Automobile Exhibition that he would also dedicate an investment of four billion for 2020. Chinese media estimate that this amount has remained constant since 2015.

In summary, we can assume that a considerable proportion of the annual profits of Volkwagen in China is reinvested locally, which is legitimate for a transnational company. It is problematic, however, to assume on the basis of high sales figures of Volkswagen cars and the profits derived in China that German business and German society will benefit equally.

First of all, the Chinese state-owned partners have a bigger share of the revenue from these car sales. Secondly, since both the production location and the sales market of these four million cars is China, not Germany, the sales are not included in the bilateral foreign trade data on which is based the claim that "China is Germany's most important trading partner." Finally, the claim by CEO Herbert Diess in 2019 that "Volkswagen is becoming more Chinese," and that given the immense size of the Chinese sales market (four times that of Germany), “the future of Volkswagen will be decided in China,” raises a new question. Do the huge investments in target countries like China rather than in Germany point to a complex competition of interests? In other words, do the activities of German multinational companies have limited benefit for Germany as a business location?

A paper published by the Chinese Ministry of Commerce (Mofcom) at the end of 2019 discusses strategies to promote the export of Chinese cars, and notes that joint ventures are now able to export to both Europe and the US. The paper suggested that foreign companies should "accelerate the transfer of modern technologies and localization even more" to establish China as "the global base for automotive development, purchases, production and exports." It also lists plans of foreign car manufacturers which will produce various brands and models in China in the future and sell them globally. At the top of this list, we can find German companies such as BMW, Daimler and Volkswagen – the very same names that Altmaier, the German minister of economic affairs, counts on as Germany’s "national champions."

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Ironically, in the midst of the current crisis, Volkswagen once again demanded financial incentives from the German state for car purchases -- and not just for environmentally friendly cars. "Germany is the car country," Diess argued.

This month, Germany unveiled a 130 billion economic stimulus package. Sidestepping car industry requests, the state limited financial incentives to electric cars, and through cuts in VAT it rendered assistance to more business sectors than just the car industry. This decision was a big surprise for the German society. The SZ praised the government for “emancipating itself from the car lobby,” not entirely bending to the demands of major car companies. The current crisis shows, however, that there are still other old concepts and perceptions from which Germany need to emancipate itself.

Old Ailments Meet a New Virus

Since the Covid-19 epidemic has dragged the world into crisis, Chinese and American analysts have rapidly reached a consensus that the world order of the past 40 years has come to an end. "This pandemic is reshaping the geopolitics of globalization,” wrote two scholars recently in Foreign Affairs. Professor Wang Jisi, an advisor to China’s Foreign Ministry, has said  that the US-China relationship will not improve regardless of who wins the upcoming presidential election. "Both sides are reducing interdependence in all areas, whether in economics, technology or cultural exchanges,” Wang said, adding that the decoupling will be "more painful than during the Cold War."

While the US has already weakened as a pole of power, and transatlantic cohesion has diminished significantly under the Trump administration, it has also proven difficult for China to find willing partners in confronting the US. Professor Sun Liping, a sociology professor from Beijing, also believes there is no longer any doubt that confrontation will dominate the relationship between the two major powers. "Both countries have sufficient resources and sufficiently large populations to become [again) self-sufficient,” says Sun. De-globalization and the formation of new alliances are picking up momentum.

The big question now, according to Sun: "What will happen to the old Europe?"

By the "old Europe," Sun refers to original EU members, in particular Germany and France, who disagree on many geopolitical issues with the "new Europe" of the continent’s east. "The worst-case scenario," warns Sun, "is that the old Europe will fall apart as a result of the tug-of-war between different powers, leading to the fragmentation of Europe.”

The European dimension is one of several important aspects that have been overlooked in previous discussions of interdependence between Germany and China.

While the US has already weakened as a pole of power, and transatlantic cohesion has diminished significantly under the Trump administration, it has also proven difficult for China to find willing partners in confronting the US.

 

Glass Houses

In 2017, the Handelsblatt quoted the Hungarian ambassador referring to the Visegrad Four as "Germany's largest trading partner." "The contribution of the V4 is often ignored," the ambassador complained. But how is the relationship depicted in the German media? Generally, even when trade volume figures are mentioned in the media, there is an immediate emphasis on the idea, at Welt Online once reported, that "politically speaking, the V4 are a thorn in the flesh of the German Chancellor's side.” The SZ wrote in 2017 that as far as the EU’s China policy was concerned, whether the issue is human rights or the South China Sea, "with states like Hungary, China is now practically sitting at the table in Brussels on these issues.”

The SZ also quotes Reinhard Bütikofer, foreign policy spokesperson for the European  Green Party, as saying: "You can only split what can be split." The point is that when it comes to divisions within the EU, China cannot ultimately be blamed for this. Large EU member states such as Germany must also take a close look at themselves. They have relied too selfishly on strong bilateral relations with China, says Bütikofer, neglecting to think of the other EU countries. "In so doing, they present to China opportunities on a silver platter to act as a divider."

Germany has not yet taken a sufficiently hard look at its own understanding of the China relationship. A compilation of programs from the broadcaster ARD quoting German politicians might produce a comic effect illustrating Germany's double standards on the China issue at both the national and European levels. German Minister for Economic Affairs Peter Altmaier, for example, in justifying Germany's economic interdependence with China, said that, "If we only traded with democracies, there would be very few countries in the world [to trade with]." On the other hand, In March 2019, when Italy became the first G7 country to sign a bilateral memorandum of understanding with China on the Belt and Road Initiative, he commented firmly that: "We must be careful that no dependence of individual countries in the EU is created by Chinese investments.”

In general, there is a lack of self-critical reflection on this German double standard. When a FAZ article reports on the self-censorship of the car manufacturer Daimler, which apologized to the Chinese embassy because of a Dalai Lama quote in its advertising on Instagram, the paper suggests in passing that Beijing invests in financially weak states like Greece, "whereupon Athens undermines a common EU policy towards China." On several occasions, the Greek Embassy in Berlin has protested against this characterization, referring to the oft-used phrase "China is Germany's most important trading partner" to point out that Germany is throwing stones in a glass house.

SZ was critical of the Sino-Italy memorandum on BRI: "The solo efforts of Italy and other European countries, which have recently, with an eye on fast money, ingratiated themselves with the Chinese, is painful, but nothing new." Here again, the finger-pointing is directed at Central and Eastern European states and not at Germany itself. In some cases, Germany's narcissistic attitude toward its bilateral relationship with China has generated mistrust among old partners. An example of this can be seen in FAZ’s reporting of the skepticism in Paris surrounding Merkel's visit to China in September 2019, in which it remarked: "In France, more than elsewhere, there has been a perception of how reluctant the German government has been to comment on the protests in Hong Kong.”

To sum up, one can conclude that the belief in Germany’s dependence on China has been firmly established in the German public mind. But there is no corresponding narrative about Germany's dependence on Europe. On the one hand, from a geographical distance, Germany looks at the East Asian giant with fear, alienation, and fascination (especially with its huge sales market). As Chancellor Merkel once voiced the sentiment: “China is so much bigger, [...] even if we are as hard-working and exceptional, if China decides that it no longer wants to have a good relationship with Germany, with only 80 million people, we will not be able to compete."

On the other hand, Germany perceives itself as the giant in Europe. Rather unlike the Southern Europeans, it did everything right in the economic crisis of 2008. And unlike the countries of Central and Eastern Europe, it represents the backbone of Western values. "Germany has always advocated a Europe that is strong to the outside," the Chancellor said in her announcement of the EU-China summit in 2020, where 27 EU states are invited to Leipzig. Germany's stated goal is for Europe to speak with one voice – on such issues, for example, as climate protection and investment. It is questionable whether this goal can be achieved, however, apart from the postponement due to Covid-19, if Germany remains stuck in its self-perceptions.

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In Brussels in October 2019, German Chancellor Angela Merkel announces the EU-China Summit for 2020. 

In current German discussions about “corona bonds,” a new debt instrument to deal with the current crisis, the main argument has become solidarity versus the national interest. The latest paper published by the National Academy of Sciences Leopoldina on measures to deal with the Covid-19 crisis, emphasizes in its the recommendations for action at the outset: "The crisis requires European solidarity action of the highest degree." Only later does the paper argue: "At the same time, a long-term weakening of the economies of our most important partner countries is harmful to Germany as an exporting country." Unlike the narrative of China dependency, the argument here lacks what is necessary to successfully shape a frame: figures, emotions, and causal interpretations. German exports to the countries of the European Union, for example, amounted to around 777 billion euros in 2018, almost seven times as much as the export of goods to China.

Lack of Investment in the Future

In the debate over Huawei, critics and supporters alike agree that there is already an undeniable dependence in Germany on the Chinese network operator, which has managed through low prices and good quality to reach geopolitical dimensions. "Germany has long since missed that boat,” said one expert in The Spiegel. According to the news magazine, the founder of Huawei, Ren Zhengfei, said to Peter Altmaier, the economic affairs minister, during his visit to the group: "From a technical point of view, Germany is dependent on Huawei."

One explanation for Huawei's market dominance is that is has been able to extend favorable and unbeatable offers owing to the generous financing it receives from Chinese state-owned banks. Another reason has been the German government’s "culpable neglect,” as Margarete Bause, a MP of Green party put it, of the security of the telecommunications network as the "main artery of society.”

But there is another reason for dependence on Huawei that has hardly been addressed: The neglect in local school education and the relocation of ICT work to China. The rise of Huawei and other Chinese technology companies such as Alibaba and Tencent as global giants  is due in large part to the fact that masses of young Chinese are willing to learn and work hard in these industries because of the inventive of relatively high income – though the work conditions in the industry are poor, violating even Chinese labor standards.

There is another reason for dependence on Huawei that has hardly been addressed: The neglect in local school education and the relocation of ICT work to China.

 

By contrast, according to a new OECD study, many OECD countries have a major problem in preparing teenagers for future-oriented professions. In general, young people’s ideas focus on a limited set of traditional professional roles, most of which will be at risk from automation in the foreseeable future. As regards Germany, a study in November 2019 examining the current situation of digitalization of learning in 27 EU countries came to the sobering conclusion that Germany ranks lowest in the EU overall, and also for category of institutions and policies for digital learning. The study stated that “investment in digital infrastructure and programs is sorely lacking,” and that therefore “German schools and educators are not ready to prepare students with the necessary digital skills and competencies.” Unfortunately, such warnings went unheeded until the Covid-19 crisis struck, presenting huge challenges for Germany’s education system.

This acute crisis shows once again the consequences of technology dependence in the digital sector. While the home office has become a daily work routine for many, the US video conferencing service Zoom is conquering the German market. However, several serious security vulnerabilities of Zoom have been identified  –  for example, the company has been routing the data of some conferences via servers in China. What remained unnoticed in the German discussion was that, in addition to servers, Zoom operates a huge research and development center in China. In 2019, Zoom stated in its IPO prospectus that, "Our product development team is largely based in China, where personnel costs are less expensive than in many other jurisdictions."

According to Zoom’s most recent SEC filling, it employs over 700 IT engineers in China, which makes the company’s spending on the research and development among the lowest in its peer group.

However, the objective in building up research and development in China is not only about cost reduction. It has become a trend among transnational companies to invest heavily in China for local research and development for the Chinese market. There are now over 400 foreign research and development institutes in Shanghai. Siemens, the Munich-based industrial manufacturer, has over 20 research centers in China, including its global research center for industrial robots. Volkswagen also proudly states in its 2019 annual report that it has strengthened local development of technologies. More than 4,500 so-called "engineers for future technologies" have been hired by Volkswagen in China and for China.

These developments are likely promising for the future of transnational companies and transnational capital. At the same time, however, if schools across Germany find themselves lacking the capacity and competence to switch teaching over to digital in the midst of a crisis, the result is that investments must be scrambled in an effort to catch up  quickly. This is not unlike the problems we have seen with dependency where lack of medicines is concerned.

White Deal, Green Deal, Old Deal

The head of the EU Commission, Ursula von der Leyen, explained in an interview with Die Zeit this April that she would respond to the Covid-19 crisis by adding a "white deal" (white being the color of medicine) to the "green deal" for the climate, saying that health is just as much a public good as a sustainable climate.

At the same time, many people in the public debate still adhere to the mantra of maximizing efficiency and profit, suggesting these ideas are cosmopolitan and anti-protectionist. There is the suggestion, too, that a re-regionalization of supply chains will necessarily mean price increases. The title of one recent FAZ article read: "We don't need a new economic order." The question remains as to how seriously white deals or green deals can be taken so long as there is no fundamental, comprehensive re-thinking of the previous economic order as an “old deal.”

One problem for the re-regionalization of medicines is that the industry has long had a green component in Germany in the form of high environmental standards. In 2017, the consulting firm Roland Berger investigated whether relocating antibiotic production back to Europe would make economic sense. According to a Welt Online report: "The answer was clear: Up to now, domestic production has not been worthwhile owing to operating and investment costs and higher environmental and safety standards."

According to several media reports, an important antibiotic, Tazobac, was missing everywhere in German pharmacies in 2016 following an explosion at a Chinese manufacturing plant. At the time, however, no one questioned what was happening in terms of the "environmental and safety standards" of the Chinese manufacturer.

Qilu Pharmaceutical, China’s largest producer of Tazobac and one of the most important sources of tax revenue for Shandong province, was and continues to be a repeat offender in terms of environmental pollution and safety incidents. Although a stricter environmental law came into force in China in 2015, the government often turns a blind eye when it comes to companies making huge GDP contributions – so accidents and pollution have become an integral part of business in the Chinese pharmaceutical industry. More recently, in September 2019, another explosion occurred at a Qilu plant, killing 10 people. The good news for Europe, so long as its concern is medicine supply over safety, is that 95 percent of Qilu’s production capacity is now online again after disruptions in the midst of the epidemic.

china class 2.png

Screenshot from Chinese media reporting in 2016 that local students had to wear masks in class due to pollutants emitted by Qilu Pharmaceutical.

A new study by the Leibniz Institute for Economic Research (Ifo) states that the import value of pharmaceuticals from China and India in 2019 was 409 million euros, which is just 0.8 percent of total German pharmaceutical imports. According to the institute, "This refutes the claim that Germany is fundamentally dependent on imports from Asian countries." Not reflected in this seemingly insignificant number is the fact that it accounts still for a massive amount of essential supplies of medicines and basic medical supplies that are low-cost owing to their manufacture in Asia.  For example, as the Roland Berger study found, more than 80 percent of intermediates and antibiotic ingredients processed in Germany come from non-EU countries. Unfortunately, the conclusion of the Ifo study shows that the logic of purely economic calculations continues to dominate, and that the awareness of public goods has not yet developed.

The fact is that the pharmaceutical industry, in order to keep costs to a minimum, has made the supply chain dependent on China, disregarding the environment in China and public health in both China and Germany.

The Covid-19 pandemic offers a rare opportunity to fully diagnose old problems in past globalization practices, and to discuss public goods, public values and the public interest. It is not enough to craft new deals on a point-by-point basis – for example, by designating cheap face masks as "systemically relevant."

In this light, it is astonishing to see a new fairy tale of dependence developing as several media in Germany report that thanks to Merkel's "personal contacts" with Xi Jinping, Germany has managed to gain direct access to a state-owned Chinese supplier of face masks, who promises "a higher level of quality and delivery reliability,” even while there is "strong competition from other states and large international buyers." Many media resorted to historical allusions, voicing happiness about  the new "airlift” between Beijing to Berlin. In German history, the term "airlift" conjures up strong emotions. After the Soviet occupation forces blocked land routes into West Berlin in 1948, Western Allies organized the Berlin Airlift, supplying the people of West Berlin with essential supplies, including food, drugs and coal. This new “airlift” means, however, that Germany is now fighting against its old partners. The question raised by the Chinese sociologist Sun Liping is unanswered: "What will happen to old Europe?"

 

Rebalancing EU-China Relations

This series explores the shifting strategic debate in the European Union and various member states over the economic and political relationship with China. 

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How Dependent is Germany on China?

10. June 2020
Author
Zhu Yi

Currently a researcher at the Institute of China Studies at the University of Heidelberg, Ms. Zhu has her research focus on political communication, media perceptions and China’s social changes.