Chinese Influence on the German Economy
Executive Summary
Consensus is lacking amongst German leadership concerning China.
The Scholz government wants to engage with China as a “partner, competitor and systemic rival,” leading to an unclear policy approach.
The likely next chancellor, Friedrich Merz of the Christian Democratic Union party, appears more hawkish on China than Scholz.
The German automotive industry maintains significant political leverage in Germany.
Germany has not fully absorbed the lessons from the fallout of its overdependence on Russian energy.
The traditional German “wait-and-see approach” is becoming increasingly unsuitable for a rapidly changing global order.
Sooner or later, Germany must choose between coordination with the EU on a China strategy or pursuing its short-term national interest.
The prospects of German leadership in the EU grow dimmer by the day.
On October 4, European Union (EU) member states voted to set tariffs on imports of Chinese electric vehicles, which a European Commission report found to be unfairly subsidised by the Chinese government in violation of World Trade Organization (WTO) statutes. Though the measure passed with 10 ‘yes’ votes and 12 abstentions, Germany was one of five countries to vote ‘no’ on the tariffs. As the largest economy in the EU, Germany’s vote carried extra symbolic weight. It showed that the country long thought to be the leading nation in the EU is unwilling to take up the mantle of leadership in crafting a long-term economic strategy for the bloc concerning China.
Economics Come First
There are multiple reasons for this German inaction, all of which are economic. The most fundamental piece of the puzzle is Germany’s economic model, which is heavily based on exports. Germany is the third-largest exporter of goods and services in the world, with the People’s Republic of China (PRC) and the United States taking first and second place, respectively. This means it is in Germany’s national interest to ensure that global markets are ready and willing to receive German exports. China is a market of particular importance to German auto manufacturers, given that German brands are the second most popular slate of cars in China, only behind domestic Chinese brands and well ahead of American, South Korean and Japanese vehicles. In response to the new EU tariffs, the Chinese Communist Party (CCP) has already proven willing to enact its retaliatory tariffs. German auto manufacturers fear being the target of such tariffs, as any Chinese retaliatory tariff levied against European vehicles in response to the European tariffs on Chinese electric vehicles, would significantly harm German auto exports to China.
Also important is the amount of German foreign direct investment (FDI) in China. Of the approximately €6 billion of EU investment in China in the first two quarters of the 2024 fiscal year, Germany’s share accounted for 57%. The German auto industry primarily drove this; about half of the EU’s total FDI in China since 2022 has been related to the auto industry. The vast majority of this FDI is greenfield investments, which are costly, risky and difficult to withdraw from once undertaken. Thus, in addition to fearing retaliatory Chinese tariffs, German auto manufacturers are reluctant to put their expensive investments in China at risk of burdensome regulations or demands the CCP might impose.
Outside of just the auto industry, the PRC is Germany’s largest trading partner in general. In 2023, the two countries exchanged €254.2 billion worth of goods, much of which flowed through Germany’s largest port: the Port of Hamburg. This fact led to the German government acquiescing to a deal that gave the state-owned Chinese company COSCO a minority stake in the Tollerort exchange terminal, classified as German critical infrastructure, in the Port of Hamburg. Notably, this deal met fierce opposition from the Greens Party and the Free Democrats Party (FDP), the minority parties in Germany's recently collapsed governing coalition.
Worst of Both Worlds
One German word that goes a long way in providing a summary of Germany’s traditional policy outlook towards the PRC is Sitzfleisch. Translating to ‘sitting meat,’ this word can describe someone as either having the necessary stamina to see a gruelling project through to the end or as a stolid yet unenergetic problem solver who prefers to wait and hope the situation resolves itself. While the architects of Germany’s China policy over the last decade likely prefer applying the former definition of the word to themselves, evidence suggests that the latter definition is more fitting.
This is best reflected in the German government’s strategy document on China released in 2023, which describes the PRC as a “partner, competitor and systemic rival.” While this characterisation of the PRC is accurate in that it reflects the complexity of Germany’s relationship with China, it does not provide a clear direction for German policy towards the country. How can German diplomats, business leaders and citizens be expected to believe that the PRC will work in good faith to cooperate on issues like curtailing greenhouse gas emissions when they are also told, rightfully, that the governance of the CCP is completely at odds with German values, making the PRC a systemic rival? Such cognitive dissonance has led and will continue to lead to a business-as-usual approach, particularly for German business leaders on track to double FDI in China this year.
The collapse of the Ampel coalition led by Chancellor Olaf Scholz, who exemplifies the German ‘wait-and-see’ approach to China, provides some hope for a revitalisation of German policy towards China. The snap elections set for February 23 to decide Germany’s next government will likely result in a victory for the Christian Democratic Union (CDU) and its sister party, the Christian Social Union (CSU). This parliamentary group is led by Friedrich Merz, who will become the next chancellor if the CDU/CSU performs as expected. Merz maintains a sharper view of China than any of his CDU predecessors, who were often conciliatory towards China. Following Chancellor Scholz’s visit to China in April 2024, which elicited a joyous reaction from Chinese state media, Merz issued a statement warning companies that do risky business in China that they should not count on the German government to bail them out should their investments turn sour.
Yet one must wonder: given that the German business community seems so bullish on China and the prospect of great economic returns, why should Germany bother developing a strategy for competition with China, particularly within the unwieldy institutions of the EU? Simply put, it is in Germany’s long-term interest to do so. As the 2023 strategy paper on China accurately points out, the PRC is a systemic rival to Germany, seeking to undermine the rules-based international order to its benefit. Should the CCP be successful in this endeavour, Germany can expect greater Chinese control over the destiny of Germany through means including, but not limited to, using the threat of tariffs and import controls to demand diplomatic support on positions contravening German values; a tighter grip over critical mineral markets that will become increasingly necessary to German manufacturing; and insisting that Germany trade more with the PRC at the expense of trading with the United States. The German auto industry in particular, should recognise that Chinese dumping of electric vehicles into Europe and countries across the world hurts their prospects of being competitive in these markets, especially considering that Germany, as the second largest electric vehicle manufacturer in the world, has a chance to profit greatly from such trade.
Looking Ahead
Suppose German policymakers change course and reorient their foreign policy towards the PRC away from a short-term, ‘wait-and-see’ outlook. In that case, they must also recognise the importance of developing a joint policy with the EU. As the largest economy in the bloc that occupies a key central geographic position in Europe, Germany’s participation in the EU, or lack thereof, serves as a metric for determining the institution's health. Therefore, should Germany try to chart a unilateral course in its relations with the PRC, particularly regarding economics, the EU’s China policy is likely to be much less effective, thereby neutering the potential that the bloc as a whole might stand as its geoeconomic pillar apart from China and the United States.
Such impotence would not only be detrimental to Europe but to Germany as well. Economists agree that Brexit set the British economy on a worse trajectory than it would have otherwise charted had the United Kingdom remained in the EU. Were Germany to take a similar course or allow the EU to decay through failing to provide adequate attention to the bloc, Germans can expect the economic fallout to be far worse than it was in Britain, given Germany’s inherently higher degree of connection to the affairs on the Continent.
Additionally, over the past few hundred years, the major European countries have become accustomed to their positions as the most formidable economic and political forces, behind only the United States and China of the last few decades, post-war Japan and temporarily the Soviet Union. As this century continues and the demographic outlook of Western European countries worsens, major developing nations with massive and growing populations like India, Nigeria and Indonesia will become powerful actors on the world stage. If the EU became inept or disintegrated, European countries would become overshadowed on the world stage and lose clout in international affairs in the wake of this shift. It is only through European integration that the individual European states can continue to exert a significant degree of influence, something which is particularly important in the face of a growing challenge to the liberal and democratic world order that European countries helped to establish after the Second World War and that European countries, Germany included, benefit greatly from.
Conclusion
As the largest economy in Europe, Germany carries significant weight in the EU's decision-making processes, particularly those concerning economic policy. As such, German opposition to the broadly supported measure to punish Chinese dumping in the electric vehicle market spells trouble for future EU measures to establish fair economic relations with China and craft a strategy for competition with the increasingly belligerent authoritarian country.
The German opposition reflects not only the political power of the German automotive industry, which values good relations with the CCP to avoid retaliatory tariffs on German auto exports, but also the unwillingness of the Scholz government to stomach the possibility of short-term losses in exchange for greater European unity and a coherent strategy to compete with China. While this might provide positive returns for the German automotive industry and economy in the short-term, such a strategy will only make German vehicle manufacturers less competitive in the long-run, decrease the effectiveness of the EU to stand on its own in a turbulent world, and thereby impose long-term economic and political costs on Germany as a whole.
However, the lame duck Scholz government will unlikely change direction before early next year's snap elections. Whether the next government, set to manifest in early 2025, recognises the shortcomings of its predecessor and likewise overcomes the traditional German tendency to “wait-and-see” remains to be seen. While Chancellor Scholz largely failed to set a new Deutschland-Tempo as he had hoped, perhaps his successor can achieve this feat.
About the Author
Connor Cowman, Programme Analyst - Europe
Connor joined London Politica as a Programme Analyst for its European Programme in 2024. He also works at the Alexander Hamilton Society (AHS), a non-partisan, non-profit organisation headquartered in Washington, DC focused on educating young leaders on the Hamiltonian principles of foreign policy and preparing them for careers. At AHS, Connor oversees the speaker events hosted by AHS students on college campuses across the United States, creates the weekly AHS newsletter, and researches current issues in world affairs. Connor graduated magna cum laude from the University of Texas, Austin, with a B.A. in history and government, minoring in global management.