Change through trade? But with oomph!

Not looking at each other, but looking in the same direction, Antoine de Saint-Exupéry describes the secret of a good relationship. What makes togetherness? You want to feel secure, live the same values, build a common future. There are always risks: False promises, differing motives, deception, separation. Germany is currently experiencing such a relationship crisis. The Russian war of aggression on Ukraine has suddenly worsened external and security relations in Europe and globally, and the growing conflict between the US and China is creating additional pressure. Because in many ways personal relationships do not differ that much from commercial ones: If you bet on the wrong partner, you end up sitting alone – or as we will soon be, in the cold.  So keep your eyes open when choosing a partner.

Should we fundamentally question our relationship capacities? Does Germany’s business model still have a chance in a rule-based and globalised world with largely open markets? I say: Yes! Now, more than ever, Germany must reflect on its own strengths and shape trade relations with confidence. This means differentiating wisely, but also seeing risks, as well as opportunities. But in my view, it is not enough for Germany to identify its own weaknesses and risks, particularly with regard to China. The intensive networking of both economies clearly means that both trading partners have a lot to lose, but also to gain.

In the last decade globalisation has already slowed down significantly

The war in Ukraine and the rivalry between the US and China now threaten the collapse of international value chains. This affects all the major players: The US, the EU and, in particular, Germany and China. Will future geopolitics only be influenced by security policy aspects or is there still room for trade policy arguments?

It is clear that security and trade policy will have to be more closely linked in the future. This should not exclude coexistence and competition, or cooperation and trade, for two reasons:

Firstly, a trade partnership with China on an equal footing

The focus of German and European politics must be on their own, especially economic, interests. The first pillar of a future foreign trade policy is therefore to defend it confidently with China. Given the size and potential of the domestic market, in negotiations, Germany and the EU should enforce more rules and conditions that correspond to our values and objectives than they have done in the past. If necessary, by means of restrictions, e.g. high-tech containment.

It was already clear that after the stormy period of growth in the 1990s and 2000s, following the end of the Cold War and the resurgence of China, things would not continue unchecked. The focus on capital goods and high-quality technology products, e.g. vehicles, were a recipe for success. In this period, China, on the other hand, has developed from a workbench for consumer goods into a technologically equal supplier. One measure of this success is the degree of openness. For Germany, it is 88 percent, a very high figure for a large economy. For China, with its large domestic economy, at least 36 percent. In 2021, the share of German exports to China was 8.4 percent. The share of exports from China to the EU was around 20 percent. Both sides have a lot to lose.

The focus of German-Chinese economic relations has continued to develop: From cheap production in China to exports and direct investment. But the US will increase pressure on German companies over business with China. Sanctions may be imposed for individual industries and high-tech products. This could lead to Chinese backlash, which could also include essential sources of raw materials. In addition, significant market risks in China (e.g. zero-Covid, the real estate crisis) should be taken into account. They bring with them declining growth below the potential growth of about six percent (2022/23: Three to five percent).

Secondly, global diversification, direct investment, and the strengthening of the internal market

The problem: Germany has poorly balanced its economic relations. For example, China has become both a very lucrative sales market for German companies and a source of supply for critical raw materials of paramount importance – keyword, cluster risk. In addition, Germany was able to market its industrial product portfolio worldwide, as Russia supplied cheap energy and through NATO, Europe was able to rely on the USA for security policy. Now this system, lacking in diversification, is under pressure.

This fundamental system rivalry is exacerbated by numerous conflicts over human rights policy and by a potential dispute with Taiwan. On the other hand: As a second pillar, therefore, better diversification of opportunities and risks is needed. The priorities for this are: Bilateral trade agreements; direct investment in second-row markets; a new raw materials strategy; nearshoring and optimisation in the EU internal market, especially for (digital) services. Because of the greater independence of the major regions of the world, North America, Asia, and Europe, localisation will become increasingly relevant. It is vital to remember: Representing about two-thirds, Europe remains by far the most important foreign market for the German economy. “Change through trade” has been interpreted too naively in the past.

In an intensified climate, the geopolitical lines of conflict are already emerging, calling existing cooperation strategies into question. At the same time, we are making no progress with a strategy that is primarily geared to confrontation. If we want to achieve major goals, above all to prevent a global climate catastrophe, we can only achieve this together – with a 3C strategy: Coexistence, cooperation, and commerce. The German business model must be developed further in the direction of the two pillars and can then become a successful model – also on a global scale.

Impulse by Christian Böllhoff on LinkedIn

Last update 14.10.2022