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China – a partner and systemic competitor

For many German companies, China is one of the most important markets worldwide. Conversely, Germany is the rising Asian superpower’s biggest trading partner in Europe and an important technology supplier. Relations between the two countries with their very different economic systems are marked by the push-and-pull of partnership and systemic competition.

China is surging to the top. Since 2010, it has been the second largest economy in the world after the United States. Chinese foreign trade volume has risen more than tenfold in the last 20 years, with economic output now doubling that of 2010. According to World Bank figures, China is now in the upper middle field in terms of income levels, with GDP per capita at around 8,700 euros (2020). The economic structure of the People’s Republic of China has changed rapidly and fundamentally since economic reforms first began around 45 years ago.  While China’s agricultural sector still accounted for almost 70 percent of jobs in 1980, the country is aiming for world leadership in emerging fields including artificial intelligence, electromobility and automated driving.

Today, global economic growth is as dependent on China’s party-state-controlled hybrid economy with free market elements as it is on the major traditional liberal market economies like the United States, the EU and Japan. At the same time, China is claiming a say in shaping the global order, as is shown by mega projects such as the Belt and Road Initiative.

Germany’s largest trading partner

After years of collaboration, the economies of China and the EU have become closely intertwined. Along with end products, Germany also imports many of its commodities, intermediates and tools from China. These imports help German industry to produce at low cost. However, China is not only an import market but also an export market for German companies. High demand from China was certainly a key factor in Germany’s swift recovery from the global financial and economic crisis.

That said, in the last few years China’s economic growth has levelled out to a comparatively moderate rate. Double-digit growth has long become a thing of the past. In the years prior to the Covid-19-pandemic, China’s GDP grew by around 6 percent. While Western economies struggled, China was able to avoid a recession in 2020. In 2021 its economy grew by 8 percent. However, signs are increasingly pointing towards an economic slowdown. Recovery from the Covid-19-induced economic shock in 2020 is overshadowed by structural problems. Chinas growth model with its reliance on infrastructure investment and high export volume is increasingly unsustainable. A new growth model driven by innovation and domestic consumption is still in development.

China’s demand for innovative and high-quality products and services from Germany remains high. New market potential is opening up in areas such as environmental protection, mobility and consumption.

A look at the imports and exports shows the importance of the two economies for one another. Since 2016, China has been Germany’s most important trading partner worldwide. The trading volume between the two countries in 2021 amounted to over 245 billion euros – 15 percent more than in 2020. And Germany, in turn, is China’s most important European market. In 2021, Germany imported goods and services worth over 142 billion euros from China.

China’s quest for global market leadership

The Covid-19-Pandemic is also affecting relations with China. Since March of 2020, a number of travel restrictions for foreign citizens have been put in place by the Chinese government. Due to visa restrictions and long durations of quarantines, it has become difficult to enter the country. These restrictions place a heavy burden on German companies. Especially SMEs have been struggling to get back to their regular business activities. There is a lack of technical specialists and managers. Investments could not be pursued, and equipment could not be installed because of missing expertise on the ground.

Political tensions are rising as well. US-China relations have deteriorated and there has been a shift in the EU’s China policy. In 2019, the European Commission stated that China is a cooperation partner, an economic competitor and – for the first time – a systemic rival. In its coalition agreement from 2021, the current German government formulated a more strategic approach towards China.

On the key issue of fair competition, major progress was expected for 2021. In December 2020, an agreement in principle on the EU-China Comprehensive Agreement on Investment (CAI) had been reached. The German industry had attached a lot of expectations to the agreement. These expectations were only partially met. But in early 2021, ratification of the agreement was stopped by political realities. The EU imposed sanctions on China because of human rights violations in Xinjiang. In return, the Chinese leadership imposed countermeasures targeting among others Members of the European Parliament. The European Commission and Parliament agree that ratification of CAI under these conditions is impossible.

China does not shy away from conflict elsewhere, too. In 2021, after Lithuania allowed Taiwan to open a de-facto embassy in Vilnius, China imposed an unofficial trade boycott of Lithuanian goods as punishment. These unofficial measures by China do not just target Lithuanian exports, but also EU-exports with Lithuanian parts. These politically motivated actions violate both the integrity of the EU internal market and the international rules-based trade system.

Therefore, a shift in strategy towards China is among the most pressing and important challenges for Germany and Europe in the coming years. A great deal of cooperation among EU member states and a high level of determination by the German government are necessary.

Between partnership and systemic competition

The BDI had already called for such a strategic realignment in a policy paper on China at the beginning of 2019. In the paper, we outline the major challenges presented to Germany and Europe by the rise of China as a new economic power. Expectations that the Chinese economic system would gradually and increasingly align itself with the free market system of Western countries in due course will not be met in the foreseeable future. On the contrary, the Chinese government is ever more boldly presenting its own model of a state-controlled economy, not only within its domestic borders but also across the world.

While remaining one of Germany’s most important trading partners, it is becoming increasingly clear that China is also a systemic competitor. German industry must prepare itself for this new reality. The market economy system in Germany and Europe must be made more resilient. The focus must be on creating fair and equal terms of competition and establishing the principle of reciprocity. The BDI is working to achieve this both in Berlin and Brussels.

Looking ahead

China is set to remain a driving force of the global economy and a key import and export market for German industry. German industry wants to cooperate with China on a level playing field. German companies want to advance economic growth and technological development in both countries within a framework of fair competition. In cooperation with the German government, the BDI is striving to improve the business environment for German companies operating in China. Key topics are dismantling market access restrictions and protecting intellectual property. The BDI calls for fair competition and voluntary technology transfer – in China, the EU and other markets. Forced data localization and the simultaneous obligation to grant Chinese authorities access to stored data are a burden on the expansion of industrial activity and future technologies. New “Buy Chinese” regulations make it difficult to sell non-Chinese products and technologies. These regulations are in violation of WTO-rules.

Through the Asia Pacific Committee of German Industry (APA), the BDI participates in organizing high-level economic delegations to accompany the visits of German government representatives to China. This helps ensure that the main concerns of German industry are addressed in talks on economic policy.