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Germany Needs to Take the EU’s De-Risking From China More Seriously

With another Trump presidency in the offing, Berlin should accelerate efforts to reduce Europe's economic dependencies on China.


By Sebastian de Quant, Sander Tordoir, Shahin Vallée

January 24, 2024


All rights reserved © China Daily via REUTERS


                       

Donald Trump sizeable polling lead over US President Joe Biden is a harbinger of economic pain for Europe, not least the continent’s largest economy. For the past few decades, the German growth model—and the European industrial hinterland that supplies it—has relied on demand from China and the United States, energy from Russia, and security provided by the Pax Americana world order.


But as Beijing floods the world with its overproduction in advanced industrial goods like electric cars and squeezes European products out of its market, Germany’s trading relationship with China is in jeopardy. Gas from Russia has, for the most part, stopped flowing. And if Trump comes to power again, the last two pillars of the model—US demand for European products and a military umbrella protecting Europe and international trade—may also crumble. Instead, Trump 2.0 will exert significant pressure for the European Union to align closely with the US when it comes to dealing with China. Germany and the EU urgently need a toolkit to prepare for this new dark age.


Trump dislikes Europe’s trade surplus with the US and if elected would impose more penalizing trade restrictions on EU imports, choking American demand for European products. He also wants to undermine—if not end—the US commitment to European defense. Such is the uncertainty surrounding the presidential favorite, that no ally knows if his administration would maintain the US-led naval coalition currently defending Red Sea shipping against Houthi rebel attacks or the US commitment to NATO.



The Only Certainty


The only certainty is that big-power geopolitics between the US, China, and the EU will dominate world affairs. Trump may escalate economic competition with China into military confrontation. Or he may prolong President Biden’s policy, which was actually started by the Trump administration, of throttling China’s access to technology and finance. Either way, because the US has sufficient economic leverage to force Europe into its geopolitical slipstream, Europeans urgently need a gameplan to manage their interdependencies, and none more than Germany, vis-à-vis China. 


To be fair, the EU has taken tentative first steps. Ursula von der Leyen, the president of the European Commission, coined the concept of “de-risking”, moving away from the unrealistic idea of “decoupling” initially propagated in the United States. To that end, the commission developed a new economic security strategy while Germany formulated its own strategies for both China and for a modern industrial policy suited to geopolitical rivalry and climate transition needs.


Yet, these initiatives fall short of a comprehensive plan. The EU’s trade deficit with China continues to rise and has ballooned since 2019 from €165 billion to almost €400 billion in 2023, in part because China’s successful “dual circulation economy,” in which it aims to become self-sufficient in resources, technology, and production. For any single member state, unilateral de-risking is impossible, because trade and investment will merely reroute via other trading partners. An economy as integrated as Germany’s will only succeed in “de-risking” its trade if it also integrates regional, federal, and crucially, European policy mechanisms.


Success therefore hinges on Berlin and Brussels correctly identifying genuine risks and determining tools to address them. Four critical risks stand out that must be addressed through such a multi-layered policy approach.



Four Risks


First, European, particularly German, intellectual property is vulnerable in China. European companies have been all but left to fend for themselves as they barter local production requirements and technology transfers in exchange for admission into Chinese markets.


This is strikingly evident in sectors like aerospace and automotive, where Chinese firms may have leapfrogged decades of research and development, emerging as formidable competitors as a result. To de-risk intellectual property, two robust measures are needed: a stringent federal outward investment screening process to scrutinize the conditions set by Chinese joint venture partners; and an investment treaty with China—predicated on a robust dispute settlement mechanism—should be back on the table.


The second major risk involves critical European technologies, companies, or infrastructures falling under foreign control. Mitigating this risk requires proper assessment of strategic industries and priorities. For instance, the EU raised no objections to COSCO or China Merchants Ports Holdings taking significant stakes in key European ports like Rotterdam, Dunkirk, Le Havre, Vado Ligure, but more recently did warn about Hamburg—the last highly controversial in Germany. This speaks to the lack of a shared mechanism for inward investment screening. Such a framework would de-risk the deployment of new technologies and infrastructure, whether it be 5G networks developed by Huawei, or European semiconductor production.


The third critical issue is Europe’s dependency on imports of crucial materials and technology, foremost for the green transition. The Net Zero Industrial Act aims at increasing domestic production of essential green industrial goods like wind turbines, solar panels, and electrolyzers. Yet, the act may fail to achieve its aims, as it neither mandates strict local content requirements nor offers matching subsidies for domestic production. On the minerals front, Europe’s critical mineral strategy is significant, but in practice, access to scarce resources will be challenging in a world divvied up by US and China-led alliances. Local industry and the green transition need not be oxymoronic, if Europeans adopted an EU-wide industrial policy backing both. For that European Commission President von der Leyen should be willing to confront Berlin, which has thus far been reluctant to set up a mutualized European fund dedicated to industrial support.


Finally, for Germany, regional and sectoral export concentration poses a significant risk. As a share of its GDP, Germany’s import reliance on China is like other G7 advanced economies, but its export reliance is a magnitude higher, and highly concentrated in a few sectors and regions. Germany’s automotive sector is especially vulnerable to the rise of Chinese electric vehicles. It is not clear whether such exposed sectors can remain competitive in an increasingly mercantilist world without anti-subsidy or anti-dumping measures. Though an investigation by the European Commission into Chinese subsidies is ongoing, applying these instruments often amounts to “too little, too late.” This situation is a potential source of division within Germany, as automakers with substantial investments and local production in China may resist change. Moreover, it could lead to divisions within Europe, with countries with minimal car export exposure to China, like France, advocating for a more aggressive strategy.


No European leader can say they were not warned. But with less than a year to go before Trump potentially regains power, Europe and Germany seem to be sleepwalking into a geoeconomic crisis that could be economically and politically devastating. Action is needed but policy levers are fragmented. While trade policy is already an EU prerogative, the wider toolkit necessary for de-risking, including foreign investment screening and export controls, remains largely national. As a result, decisions will remain sluggish and fragmented, leaving the EU exposed to pressure from China or the US.


Every aspect of de-risking in Europe calls for an EU-wide consensus. This is a tall order but with another Trump presidency looming, Berlin and Brussels had better accelerate their efforts.



The article is based on a newly published study by the authors.


Sebastian de Quant is an Associate Fellow at the German Council on Foreign Relation (DGAP)’s Geopolitics, Geoeconmics, and Technology Center.


Sander Tordoir is Senior Economist at the Centre for European Reform (CER).


Shahin Vallée is Senior Research Fellow at the German Council on Foreign Relation (DGAP)’s Geopolitics, Geoeconomics, and Technology Center.





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