German-Chinese relationship: Morphing into a zero-sum game
While it seems that the narrative of the German underperformance over the past five years has been chewed out by now, it is important to recognize how much has changed for Europe's largest economy since the pandemic. A cyclical recovery is in the cards for 2025 due to improving real wages and a global uptick in trade and industrials. However, the structural factors could remain a burden for many years to come if not addressed.
Most analyses focus on the domestic struggles and the failure of German politics. However, one of the key points to highlight is external in nature: The win-win relationship between China and Germany has merged into a zero-sum game, in which both have become competitors in most aspects. German and Chinese growth had gone hand in hand for most of the past decades. That trend stopped in 2018. China has transformed itself from exporting cheap goods to Germany and importing luxury items like cars and other high-tech products to rivalling the European powerhouse in most verticals. China is now the largest exporter of autos, adds more value to global manufacturing than the following nine largest countries combined and has become an important producer of chemical products.
Small- and Medium sized enterprises in Germany have suffered from this trend. However, despite the export volume to China going down in recent years, foreign direct investment hit a record high. This adds to the insights from institutions such as the German Bundesbank, which suspect that an ever growing share of German profits made in China don't find their way back home. Large corporations continue to expand into China as domestic bureaucracy, high labor and energy costs and the lack of digital opportunities remain a drag on competitiveness. In addition to this domestic weakness, Chinese oversupply, subsidies, and catch-up in the high-tech space has added to its advantages.
This poses two problems:
- It goes against the recently (unclearly) formulated de-risking strategy of the German government. There are currently around 200 product categories in which Germany is highly dependent (>50% import ratio) on China, according to the Ifo Institute and the Federal Statistical Office of Germany. This list, which is heavily focused on the chemical industry and electronics, will likely need to be reduced.
- Conglomerates and large corporations will see their profit margins squeezes over the years due to Beijing continuing to favour local companies. Around two-thirds of German businesses operating in China say they fear unfair competition.
China will remain a key trading partner for Europe and Germany in particular. It is still important to recognize the shift that has taken place over the past few years. The obligatory and mutualistic relationship between the two countries is becoming more differentiated. Awareness and political will to implement change and enforce its own interests will be needed to avert a lost decade in Germany.
