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Exclusive German Economy Ministry reviews measures to limit business in China

Employees work on an assembly line during the SAIC Volkswagen MEB electric vehicle plant construction completion event in Shanghai, China, November 8, 2019. REUTERS / Aly Song

September 8, 2022

BERLIN (Reuters) – The German Economy Ministry is considering a set of measures to make business with China less attractive as it seeks to reduce its dependence on Asia’s economic superpower, two sources familiar with the matter told Reuters.

Those people said the measures could include reducing or even canceling investment and export guarantees for China, stopping the promotion of trade fairs and training managers there. Loans from government lender KfW could be redirected to projects in other Asian countries, such as Indonesia, in line with attempts to diversify trade and increase business with democracies.

One of the sources told Reuters that the ministry is also considering examining not only Chinese investments in Germany but also German investments in China.

In addition, the government is considering filing a complaint with the World Trade Organization over what it considers unfair Chinese trade practices, along with the wealthy Group of Seven democracies, a separate source said.

“We must show Beijing that we are ready to fight for the principles of justice,” the source said.

A spokesperson for the Economy Ministry declined to comment on these specific measures, but said the ministry was investigating targeted measures to “support diversification (trade and supply chains) and enhance resilience.”

The ministry had already decided not to grant investment guarantees any longer to projects in Xinjiang or to companies with business ties there due to concerns about human rights abuses there and a lack of reliable information.

In May, the Ministry of Economy rejected Volkswagen’s guarantees of new investment in China due to concerns about Xinjiang.

China’s Foreign Ministry did not immediately respond to a Reuters request for comment.

These plans represent a departure from the policies of Berlin under former Chancellor Angela Merkel, who took huge business delegations with her on her frequent trips to China, and presided over the flourishing of economic relations between China and Germany.

China became Germany’s number one trading partner in 2016, with trade volume reaching more than 245 billion euros last year, helping to support growth in Europe’s largest export-led economy.

German automakers are particularly vulnerable to the Chinese market, with Volkswagen (VOWG_p.DE) making about half of its profits there. Germany and Europe also depend on China for some raw materials, such as rare earths.

In recent years, German politicians and business leaders have already called for further diversification of trade with Asia in response to Beijing’s tight grip on society and the economy under President Xi Jinping. Read more

Shortly before leaving office last year, Merkel told Reuters she may have been initially naive in some areas of cooperation with China. Read more

China’s new strategy

The new government agreed to a tougher line on China in its coalition agreement, pledged to reduce strategic dependencies on its “systemic rival,” and for the first time referred to sensitive issues for Beijing, such as Taiwan and Hong Kong. Chancellor Olaf Schulz made his first visit to Asia to Japan, unlike Merkel.

The sources said Berlin is working on a national security strategy that is due to mention China, and a specific strategy for China that it intends to publish next year.

The small coalition Green Party — responsible for both the economy and foreign ministries — says it is particularly concerned about human rights abuses and the risks of succumbing to an increasingly assertive authoritarian state, Russia being a case in point.

“We cannot … just act by following the motto of ‘work first,’ without taking into account the long-term risks and consequences,” Foreign Minister Annalena Barbock told the annual conference of ambassadors this week.

“In fact, we have never received cheap gas from Russia,” she said. “We have paid double or triple for every cubic meter of Russian gas in our national security,” he added.

Sources said Schulz’s Social Democrats were more conservative about shaking the boat. Schulz warned of the negative consequences of any “decoupling” from China and expressed confidence that companies were already diversifying.

Companies and business associations are increasingly concerned about tougher China policy, and are calling for help with trade diversification rather than confrontational steps in such an important market.

“We can’t isolate China,” Hildegard Muller, head of the German Automobile Association VDA, told digital outlet Table Media. That would be naive and deadly, both politically and economically.”


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