More local production?
Study: China’s importance for German exports is falling
04/20/2023, 08:05 am
Many German companies are involved in the Chinese market. According to a study, the position of the People’s Republic as an export buyer could decline in the coming years. Accordingly, companies are toying with the idea of relocating production to China.
According to a study, China’s importance for German exports could decrease in the coming years. The Chinese market could therefore be increasingly served by German investors through local production – with possible consequences for jobs in Germany. There is also an increasing “system rivalry” with China, as the study by the Federation of German Industries (BDI), among others, shows.
There is a debate in the federal government about a new China strategy. The world’s second-largest economy has been criticized in the West for human rights violations, saber-rattling against Taiwan and a more outspoken foreign policy approach. Economics Minister Robert Habeck had made it clear that one-sided dependencies, for example with important raw materials, should be avoided, supply routes should be broadened and new markets outside of China opened up. The conservative SPD wing, on the other hand, warned against an “anti-China” strategy.
No economic dependency
In 2019, the BDI undertook a repositioning in relation to China. A policy paper spoke of “system competition” between the model of a liberal, open and social market economy and China’s state-controlled economy. The new study speaks of increasing “system rivalry”. It comes from the Bertelsmann Foundation, the German Economic Institute, the China Institute Merics and the BDI.
China has become significantly more important as an investment and production location for German companies in the past decade. However, there is no economic dependence on direct investments in China. According to the study, China accounted for just under seven percent of German direct investments abroad in 2020. Compared to the EU and Great Britain with 34 percent and the USA with 27 percent, China’s importance as an investment location for German companies is significantly lower. According to the analysis, between 2017 and 2021 profits of seven to eleven billion euros flowed back to Germany from the investments of German companies in China. Compared to the EU, China therefore continues to play a subordinate role for the German economy.
China wants to reduce dependency on Western technologies
From a macroeconomic point of view, the profit reflows from China did not create any critical dependency. China remains an important investment location for German companies – however, the framework conditions for German companies have changed significantly under President Xi Jinping. According to the study, China is pursuing the long-term economic policy goal of becoming the world’s leading industrial and technological nation by 2049. “To this end, Chinese dependencies on foreign and, in particular, western technologies are to be reduced.
In return, the global economy should become more dependent on Chinese technology and the Chinese sales market.” Concrete measures and approaches for this included targeted acquisitions abroad, more independent innovation by Chinese companies – but also more local production and research and development by foreign companies in China It is said that this should be achieved through a “mix of incentives, localization requirements and political pressure”.
The results of a non-representative survey of three dozen large companies with relevant China involvement show that a clear majority wants to replace exports from Germany with local production by 2030. China should also increasingly be used as a research location and for export to neighboring countries. China’s importance as a “growth driver” for German exports could decrease in the future. However, exports from Germany to China have strong positive effects on Germany as a location, for example in the form of jobs.
According to an analysis by the Institute of German Economics, in 2018 around 2.7 percent of Germany’s overall economic value added and 2.4 percent of total employment depended directly and indirectly on exports to China – in the meantime it should be around 3 percent each. According to data from the Federal Statistical Office, China was Germany’s most important trading partner last year. However, while the value of goods imported from China increased by 33.6 percent to 191.1 billion euros compared to the previous year, the value of goods exported to China rose by only around 3 percent to 106.8 billion euros. This resulted in a record trade deficit of 84.3 billion euros. Most German exports in 2022 went to the United States, followed by France and the Netherlands – and then China.