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De-risking trade with China is intrinsically political

It’s absurd to suggest that companies alone can manage economic relations between Beijing and the west

By Alan Beattie

July 6, 2023

Chipmaker Nvidia warned recently about the cost of decoupling from China © I-Hwa Cheng/Bloomberg

It must have caused some rolling of eyes in European board rooms when Germany’s chancellor Olaf Scholz last week told companies it was up to them to manage de-risking from China. Multinationals have been deafened for years by a cacophony of conflicting exhortations from EU governments, the European Commission, Joe Biden’s White House and Xi Jinping’s administration — increasingly backed by open-ended subsidies — advising them where to invest.

Scholz’s words, which were strikingly similar to what Li Qiang, China’s premier, told German corporate executives a week earlier, were surely disingenuous. Even in less fraught times, highly politicised trade disputes mean that business and official decisions in certain sectors are intertwined — particularly in Germany, given its powerful government-corporate-trade union nexus.

And these days, national and economic security imperatives are rising. Some parts of German industry in particular are already locked too far in to a model of engagement with China not to expend political capital arguing for trade and investment to be kept open. Reluctantly, we should probably wish them at least some luck. But along with that needs to come a more far-sighted view about building a diverse and competitive economy.

Companies operating in sensitive areas like high-end semiconductors may not like disengaging from China — the American chip company Nvidia warned recently about the cost of decoupling — but those exposed to the coercive powers of the US administration, even those in Europe, don’t have much choice. Last week, the Dutch government announced the new export control regime for semiconductor equipment that Washington has bullied it into creating.

By creating a case-by-case licensing requirement, it essentially forces every export deal by the Dutch chip machine manufacturer ASML with a Chinese entity to run the gauntlet of the US government, which may deem the sale a national security threat. There is more corporate room for manoeuvre in less sensitive technologies such as, say, electric vehicles. But here too it’s going to be impossible to take business decisions without heavy input from the political process. Indeed, there’s currently an escalating debate within the EU over what role to allow China in Europe’s expanding electric vehicle market.

Thierry Breton, the French internal markets commissioner, recently threatened an antidumping investigation into Chinese EV manufacturers exporting to Europe, which could in theory also hit European companies selling into the EU from their Chinese plants. And if the commission is really hell-bent on decoupling, it could use its new regulation against state-subsidised companies to deter Chinese car businesses from building plants in the EU.

But German (and especially Volkswagen) investment in China’s car sector, both for sales in China and exports elsewhere, mean the traditional German instinct for avoiding trade disputes and remaining open to China persists — even though Scholz’s coalition government is tacking away from his predecessor Angela Merkel’s alignment with Beijing. Grudgingly, we should concede that German industry probably has a point here. China has established such a strong global lead in EV technology and production capability that trying to exclude it from the EU market is counterproductive.

As my colleague Martin Sandbu has written, if the EU wants to build its own green tech industry, then encouraging domestic take-up (as did China with EV purchase as well as production incentives) is a better route than trying to disengage from China. In any case, the “distance effect” in trade for EVs seems to be rising: the cars are likely to be built close to where they’re bought, a good sign for the prospects of expanding production inside the EU. I say grudgingly because here we’re in a world of corporatist mercantilism rather than a competitive market, and the European business-government nexus has shown a woeful lack of foresight in shifting towards EVs. German car manufacturers and their friends in government have spent far too long trying to extend the use of conventional engines, including failing to clamp down on the faking of emissions tests in the Dieselgate scandal, rather than embracing change and encouraging the take-up of EVs.

For all Scholz’s talk of a clear division between government and business, the idea of a company like VW making decisions divorced from official influence is absurd. VW is a part publicly-owned enterprise (the state of Lower Saxony holds a stake and has important veto rights) with a powerful trade union presence and longstanding influence on German trade and investment policy. There’s a strong argument for weakening those links, but for the moment it’s pointless to pretend they don’t exist. Some sectors will always come under more government influence than others, but companies operating in an increasingly politicised environment need sharper awareness of the potential for official interference.

Taking EVs as an example, the extent of interference remains uncertain, while companies’ own reactions to technological and market developments have been dilatory and reactive. De-risking trade with China has to proceed from a realistic appraisal of what governments can and should be doing, not promulgating the illusion that they have no role to play at all.


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