Risk of the Taiwan conflict: How dangerous is China for German companies?

China is particularly dependent on the West in the technology sector, which is also an important export market. But Beijing doesn’t even have to do that inevitably prevent them from attacking Taiwan, says economist Jürgen Matthes from the IW economic research institute. Mutual tough sanctions are then very likely – and the economic survival of Western companies with very strong China dependency is threatened. ntv.de talks to Matthes about mutual dependencies, a turning point in time, state capitalism and what combustion engines and semiconductors have in common.

ntv.de: The dependence of the German economy on China is big – but conversely, the People’s Republic is also heavily dependent on imports from the West. How big is this dependency?

Jürgen Matthes: It’s difficult to put an exact figure on that and it also depends on one’s perspective. You can look at it from a macroeconomic point of view, you can look at individual products – and then come to different conclusions. The IW published a study last spring according to which the EU and China as a whole are about equally dependent on each other. What we have now established: China is particularly dependent on technology products. This is also the case with some raw materials and foodstuffs. On the other hand, you have to realize that not everything is difficult to replace and some can also be obtained from other countries.

How do you assess the vulnerability of China’s economy?

When it comes to technology, China is still heavily dependent on the West, as Chinese experts also point out. Although the People’s Republic has already caught up a lot technologically in many areas, in some it is even a leader. But the country is still dependent on numerous Western technologies, also to ensure sufficient economic growth in the rapidly aging China.

How is China dealing with technological dependency?

The trade war instigated by former US President Donald Trump has made it clear to the Communist Party that China is vulnerable. Because the Biden administration is continuing on this course, China’s leadership wants to reduce this area of ​​attack and make China technologically independent of other countries as quickly and as far as possible.

How far have the Chinese progressed here?

This differs from sector to sector and from product to product. For example, in the electrical industry, in digitization and in electric cars, China is very far. In many areas, however, the country is still catching up. Especially when it comes to the production of state-of-the-art semiconductors, China is still well behind the West. This is where US sanctions come in, since the US also wants to curb China’s progress here for military reasons. China’s dependency on state-of-the-art semiconductors is already of great geopolitical relevance.

Why is China lagging behind in the semiconductor sector?

A key reason is how the sector is fundamentally structured. This can be seen, for example, in the combustion engine. German industry has really gotten its way into this technology – very much a division of labor with an innovative medium-sized company and a large number of suppliers. This means that the knowledge is distributed among many specialists. The supply and value chains are very complex. The situation with semiconductors is similar, only more international. This structure makes it difficult for China to become fully self-sufficient. It is a huge challenge for China to become independent in this area.

You just mentioned the German economic model, in which medium-sized companies and entrepreneurial freedom are the cornerstones. The Chinese economic model is completely different. Is the leadership of the Communist Party an advantage or a disadvantage when it comes to the desired race to catch up?

State capitalism and too much political control are usually a disadvantage. But China has developed remarkably successfully. The country has managed to build a combination of state-owned companies and dynamic private companies – even if the latter are not free from state dirigisme. But that worked better in China than a liberal, regulatory-oriented economist would have expected. That doesn’t mean that everything is going great there. A lot of money is wasted, state-owned companies are comparatively unproductive. But China’s pockets run deep. The system is not efficient – but quite effective in many areas.

The federal government is working on a new China strategy. Dependencies should be reduced, supply chains should be broadened. Do you think that’s a good idea?

Jürgen Matthes heads the International Economic System and Business Cycle competence field at the IW.

Yes. During the corona pandemic, companies realized that supply chains that they assumed would always work well suddenly no longer did. They realized how dependent and vulnerable they are. Production had to be shut down in places. Reorientation and diversification is primarily the task of the companies themselves. But politicians must support this.

In what way?

Politics can help when it comes to opening up new sales markets and finding new suppliers. Indonesia, India or Malaysia could be considered. These are dynamically growing, large economies. But on both sides there are high customs barriers that would disappear with free trade agreements. In addition, politics can support the detachment from China, for example through settlement and export promotion.

You mentioned the supply chains disrupted by the corona pandemic. Has the change in awareness called for with regard to China already started among German companies?

In surveys, companies indicate that they are stocking more and are in the process of expanding the number of suppliers. In a survey conducted by the Ifo Institute last year, almost half of the companies in the manufacturing sector in Germany emphasized that they are dependent on important inputs from China. At the same time, almost half of these companies are planning to reduce their import dependency on China. However, imports from China to Germany rose to a new record last year. There is a contradiction that we cannot resolve at the moment.

Do Western companies – including German ones – have to rethink their investment decisions in China and become more cautious, also for geopolitical reasons?

Every company has to decide that for itself and it also depends on the respective industry. As part of the geopolitical escalation of recent years and the hegemonic conflict between the USA and China, the People’s Republic is increasingly appearing as a system rival to the EU. After the fall of the Iron Curtain, geopolitics hardly affected the economy, globalization was able to spread largely undisturbed by politics. But that changed with the “turn of the era” – the war in Ukraine shows this very clearly. The People’s Republic is threatening to use military means to bring Taiwan into its own sphere of influence. The question no longer seems to be whether this will happen, but when it will happen.

And what does that mean for Western companies that are active in China?

If there was an attack, mutual tough sanctions would be very likely. In such a case, the business activities of Western companies in China would be threatened and, if they were very dependent on China, their economic survival might be threatened. That’s why they should think about what risks they want and are able to take, despite continued profits in China. If, for example, large corporations were to take excessive risks because they assume that the federal government would bail them out with tax money if necessary, that would be highly problematic, and politicians would have to think about how to deal with it.

For years, the mantra could be heard in the West: Mutual economic ties prevent geopolitical conflicts from escalating completely. Because the costs for both sides would be too high. Did the war in Ukraine show that this was an illusion?

Yes. The “turning point” also means that we can no longer rely on intensive economic ties as insurance against military conflicts. This is the crucial insight from which we must learn. Autocratic systems can accept economic damage for the population and suppress protests. So the calculus of such a political leadership can be to start a military conflict and accept the economic damage.

Does that also apply to China?

Last year we looked at how economically dependent Russia is on the EU. According to the data collected in 2018, before the war almost ten percent of Russian value added depended directly and indirectly on exports to the EU. And yet the attack on Ukraine took place. For China, the export dependency on the West is almost as high. That means the narrative that China is so dependent on the West that it won’t attack Taiwan could be a mistake.

Jan ganger spoke to Jürgen Matthes

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