Why Germany has a hard time breaking up with China

European officials are now speaking openly about the need for Germany to get rid of its unilateral economic dependence on China. The German government recently refused to give carmaker Volkswagen guarantees for new investments in China while intensifying its review of the entire spectrum of interaction with the Asian power. 

According to Franziska Brantner, State Secretary to the Minister of Economic Affairs and Climate Protection, Germany's intent to move toward greater strategic autonomy on the economic front has a Russian aspect on the one hand and a Chinese one on the other.

 "For too long we have acted on the principle: buy where it is cheaper," she stressed. Now the European country, she said, is working on a new raw materials strategy and supply chain diversification.

Germany is one hundred percent dependent on Chinese products for imports of rare-earth elements. "Because of the exponential growth in demand, there is a risk that this existing dependence will become even stronger," warns Bernd Schafer, head of the world's largest consortium in the raw materials sector, EIT Raw Materials.

But Berlin's past dealings with countries that are accused of human rights violations have always ensured that profits prevailed over principles. Berlin has repeatedly shown itself to be a calculating pragmatist rather than an advocate of equal rights and justice.

And the idea of forming a strategic autonomy is not to everyone's liking in Germany: some 300 companies from Saxony that trade with China would like to expand their contacts with Chinese companies.

And this is despite all the political risks.

 "It should not be forgotten that nowhere else in the world is there a market or supply market that even comes close to the scale of China," says Lars Fieler, Managing Director of the Dresden Chamber of Industry and Commerce.

The biggest partner

Over the past decade, China has been Germany's second and first-choice recipient of foreign direct investments outside of Europe. The trend started to pick up after the financial crisis of 2008.

German investments in China showed a decline at the beginning of 2020, at the dawn of the pandemic, but then showed some growth again: By the end of 2021, according to data from the German Federal Bank, net FDI in mainland China and Hong Kong rose to 6.4 billion euros. This is almost double the pre-pandemic figures.

The situation has benefited Berlin and helped increase employment. Jorg Wuttke, head of the EU Chamber of Commerce in the PRC, cites the millions of jobs created in Germany through interaction with Beijing as an example. Another element of the big picture is trade. Every day we export 600 million euros worth of goods to China. The Chinese export €1.3 billion worth of goods to Europe every day.

However, calls to "break free" from overdependence were heard in Germany as early as 2020, when supply chains began to falter after the first quarantine measures. Beijing's current steps in implementing its "zero-tolerance" policy on Covid-19 have only strengthened European phobias. The disorderly functioning of the bilateral investment treaty between China and Europe has played a separate role.

Experts make pessimistic predictions.

"China's borders, which have been closed to passenger traffic for 2.5 years, and the current quarantines in several major Chinese cities are likely to reinforce this trend as far as European-Chinese and German-Chinese economic relations are concerned," says the Saxon Ministry of Economics.

On the import needle

The European bureaucracy is already actively working on a common program to reduce dependence on foreign suppliers for raw materials. This involves increased investment in the circular economy as well as unlocking the potential of European fields. 

"We prefer to import from third countries and turn a blind eye to the environmental and social consequences that arise there, not to mention the carbon footprint of our imports," lamented Thierry Breton, European Commissioner for the Internal Market.

The paradigm shift cannot but affect the partnership with China.

A policy change vis-a-vis China is also underway at the national level. In its coalition agreement, the German government, represented by the Social Democrats, Liberals and Greens, noted the need to develop a comprehensive approach to Beijing. 

The authors of the document noted that relations with Beijing should be based not only on the partnership but also on competition and systemic rivalry. The German Foreign Ministry is currently working on the details of this "Chinese" strategy.

The war in Ukraine cannot but have an impact on the fundamental principles of this policy. Thus, in one of his publications, Mikko Huotari, executive director of the MERICS think tank, noted that engagement with China should be regulated according to the degree of its support for the Kremlin. 

"Beijing risks creating serious cracks or even ruptures in the basis of European-Chinese cooperation if it systematically opposes European sanctions policies," the researcher explained.

But  away from China means exposing Germany to serious strategic contradictions especially on the issue of energy security. For example, it could affect its intention to move away from fossil fuels.

In order to reduce dependence on oil and gas, Berlin plans to accustom the population to the use of solar panels on roofs, but one of the most important materials used in the manufacture of such batteries is polysilicon. Ironically, 40 percent of global production is localized in China.