CHINA CASE STUDY: IF YOU WANT SOMETHING DONE IN BRUSSELS, GO TO BERLIN

Europe’s future relationship with China one of its most important “strategic partners”  will be determined to a large extent by Germany’s rapidly evolving bilateral relationship with China. Germany is China’s number-one trade partner in the EU: nearly half of all EU exports to China come from Germany; nearly a quarter of EU imports from China go to Germany. The increase in trade between China and Germany during the last decade and, in particular, in German exports to China  has exceeded all expectations. In fact, China is now the second-largest market for German exports outside the EU  and has overtaken the United States.

The burgeoning economic interdependence between China and Germany, based on a technology-for-markets swap, is the basis for an increasingly close political relationship. Since 2004, Sino-German relations have been described as a “strategic partnership in global responsibility”. Relations were upgraded to a “comprehensive strategic partnership” during President Xi Jinping’s official visit to Germany at the end of March 2014. Intergovernmental consultations have been held since 2011. So far, the intergovernmental consultations have resulted in a total of more than 40 concrete agreements.There are now a total of more than 60 dialogue mechanisms in place, many of them at senior government level: between line ministers, state secretaries and the heads of government authorities. In short Germany is now by far the biggest European player in China.

The Chinese are increasingly dealing with Europe through Germany rather than through the foreign-policy institutions created by the Lisbon Treaty.

At present, there is an almost perfect symbiosis between the Chinese and German economies: China needs technology and Germany needs markets. Chinese consumers want high-end German products such as cars (China is now the biggest market for the Mercedes S-Class) and Chinese companies want German machinery. Chinese officials see Germany as having a stronger “real economy” and therefore see it as more useful to them than other member states such as the United Kingdom that have largely abandoned manufacturing.  In particular, Germany is involved in industries that China regards as strategically important such as automobiles, renewables and high-technology.

However, this overlap between the sectors of the economy in which Germany excels and the sectors in which China wants to excel in the future also means that there is potential for conflict as well as co-operation between China and Germany. In particular, as its companies move up the value chain, China will increasingly provide competition as well as a market for German exporters, both in China itself and in third markets. Germany is providing emerging economies with exactly the type of products that they need in order to build up the capacity to compete with German companies around the world.

Competition is likely to be particularly fierce in business to-business sectors.  But there is also likely to be competition in mass market business-to consumer sectors such as the automobile industry where brands such as Volkswagen are strong but will in the next 10 years face increasing competition from Chinese companies that are either state-owned or state-supported, for example, on electric cars, where there are particularly stringent criteria for technology transfer as a requirement for producing in China. In the medium term, German companies could as a result be pushed further into luxury niches.

Despite this likelihood of greater competition and the potential for conflict over access to raw materials, German companies are surprisingly optimistic about their future in China. They think the market is growing enough to accommodate Chinese competitors. They continue to complain about involuntary technology transfer through enforced joint ventures and about the lack of market access but say there have been improvements in intellectual property rights in China and that there will be further improvements in the future as China increasingly needs to protect its own companies.

China’s approach to Germany

Germany is viewed remarkably positively in China, where it is associated above all with high-quality products such as automobiles. Above all, the Chinese see Germany as the country that can help them move to the next stage of their economic development. The Chinese see the German economy in general and its manufacturing industry in particular as especially useful to them. Chinese officials like to talk about a “win-win” relationship between two countries whose economies are “complementary” and there is much talk of even closer co-operation in the future around green technologies such as electric cars. China also wants to invest in German companies as part of the next phase of its “going-out” strategy. They are buying the backbone of German innovative capability. China has focused its attention on member states rather than the EU institutions while paying lip service to the new institutions created by the Lisbon Treaty.

China’s increased focus on Germany may also be a pragmatic response to a perceived shift in the balance of power within Europe as a result of the crisis, which some Chinese analysts say they see as a “new start” for relations between China and Europe. Against the background of the crisis, Chinese officials and analysts see a Germany that is increasingly powerful, a France that is weakened, and a UK that is marginalised. They therefore see Germany playing an increasingly decisive role in EU decision-making and therefore feel they have little choice but to approach Europe through Germany. “If you want something done in Brussels you go to Berlin,” says one Chinese official.

However, China could also be increasingly focusing on Germany in part because it sees Germany as being increasingly dependent on it for economic growth. Thus, when they look at Germany, the Chinese see two long-term developments: increased German power within the EU and increased German dependence on China. This makes Germany a particularly attractive partner for China.

Germany has tried to develop a strategic European approach to China, but its efforts have failed to bear fruit.

Statistics

• In 2013, German exports to China were worth EUR 67.03 billion, an increase of 0.6 per cent compared with the previous year. German imports from China were worth EUR 73.38 billion, 5 per cent less than in the previous year. Bilateral bilateral trade is worth more than EUR 140 billion in 2013.
• In January 2014, China opened its first European chamber of commerce in Berlin with a view to further promoting economic relations and investment.
• China is the fifth biggest buyer of German exports, after France, the United States, the United Kingdom and the Netherlands. The main German exports to China are motor vehicles and vehicle parts (accounting for 29 per cent of exports), machinery (27 per cent), data-processing equipment, electrical and optical goods (9 per cent), electrical equipment (9 per cent) and chemical products (9 per cent). In 2013, Germany’s capital goods industry and automotive manufacturing sector again derived above-average benefits from China’s investment-driven growth model.
• China is also the second largest supplier of German imports, after the Netherlands. In 2013, the principal German imports from China were data-processing equipment electrical and optical goods (accounting for 36 per cent of imports), clothing (11 per cent), electrical equipment (10 per cent), machinery (8 per cent) and metal goods (4 per cent). German companies import more goods from China than China does from Germany, which has resulted in a German trade deficit since 1989, though this has declined sharply (by EUR 26.8 billion) since 2008. In 2013, it stood at just EUR 6.35 billion.
• Overall, investments by German companies in China have so far been many times higher than the other way around. There is, however, evidence of a significant increase in Chinese business activities in Germany, due in part to the Chinese government’s Going Global Strategy, which encourages and supports investment by Chinese companies abroad. In 2014, German direct investment in China was worth nearly EUR 39 billion. Conversely, Chinese companies have so far invested approximately USD 3.1 billion in Germany. Chinese investment in Germany has so far focused on the mechanical engineering, electronics and consumer goods sectors as well as on information and communication technologies. There are currently some 900 Chinese companies active in Germany. By contrast, there are already more than 5,000 German companies operating in China.