A turning point also in dealing with China: The “Putin shock” has highlighted the danger of dependencies. Human rights abuses, saber-rattling against Taiwan and zero-Covid extremes make doing business in China riskier.

The beautiful idea of ​​“change through trade” failed in China. Economic cooperation with Germany and the rest of the world has not led to political changes there.

On the contrary: dependencies have arisen that the communist system in Beijing uses as a political lever. Former Siemens boss Heinrich von Pierer once argued: “The risk of not getting involved in China is greater than the risk of working in China.” But today top managers have to ask themselves how much China risk their company can still tolerate.

There is the draconian zero-Covid strategy that is choking off companies in China and disrupting supply chains. Russia’s war in Ukraine has also revealed the danger of over-dependence on autocrats. China’s backing for Vladimir Putin, the threat of conquering Taiwan, human rights violations and the oppression of minorities such as Uyghurs and Tibetans, which has just been drastically illustrated by a data leak, mean that activities in China increasingly appear as a risk and a burden.

«Freedom is more important than free trade»

“The epoch of globalization of the last 30 years, free from political disruptive factors, is over,” said Max Zenglein from the Merics China Institute in Berlin. “When making economic decisions about cooperation with China, political risk factors must be given greater weight in order to reduce dependencies in sales or in the supply chains.”

There is a rethinking in business and politics. “The war in Ukraine shows how economic relations with authoritarian regimes can create vulnerabilities,” said NATO Secretary General Jens Stoltenberg at the World Economic Forum in Davos, Switzerland. “Freedom is more important than free trade.” Vice Chancellor and Economics Minister Robert Habeck complained about “very relevant problems” with China that had been “hidden for years”. He wants to reduce dependencies. “The protection of human rights has a higher weight.”

Less dependency takes a lot of time and causes high costs

The Federal Association of Wholesale, Foreign Trade and Services (BGA) already sees efforts to diversify “in full swing”, as BGA President Dirk Jandura said in Berlin. “First of all, this has more to do with the Russian attack on Ukraine. But the Chinese government’s zero-Covid strategy has also helped to look for new trade and supply routes.” Alternative sales markets could be developed in the long term, for example in North and South America, but also in India and Africa. However, depending on the industry, less dependency takes a lot of time and causes high costs.

The German Institute for Economic Research (DIW) is more critical of the possibilities for greater independence from the second largest economy. Companies like Volkswagen made almost half of their profits in China. “Similar to Russia, the asymmetry and one-sidedness of Germany’s dependence on China is the central problem,” said DIW President Marcel Fratzscher. China is increasingly using this as a means of exerting pressure on Germany and Europe.

China is Germany’s most important trading partner

More than 5000 German companies are active in China and thus secure one million jobs in Germany. China is Germany’s most important trading partner. Eight percent of German exports go to the People’s Republic. German import dependencies exist for strategically important products such as lithium batteries or rare earths, as reported by the German Chamber of Commerce (AHK) in China. The lockdowns in Shanghai and elsewhere also demonstrated the dependency on supply chains when products cannot be delivered to Germany because a single small part is missing.

“In the case of strategic products or raw materials, it is important to reduce them with a sense of proportion,” said Jens Hildebrandt, executive board member of the AHK. At the same time, however, trade and investment also mutually secured the population’s prosperity and served to moderate conflicts. “The dependency between Germany and China is mutual.” In order to turn away from China, new supply chains would have to be set up elsewhere, which would take a long time. “In the meantime, price increases can be expected.”

Due to the close integration of German companies in Chinese supply chains, a decoupling would “have a negative impact on the entire German economy,” warned Hildebrandt. There was a foretaste due to the Covid restrictions and bottlenecks in the supply chains. The lack of primary and intermediate products slows down German companies not only in China but also in Germany.

Daily goods for 600 million euros

Unlike with Russia, which mostly supplies energy, turning away from China would be much more difficult, said Jörg Wuttke, President of the EU Chamber of Commerce. «Russia is a three-product economy. That’s all while we source tens of thousands of products from China and create an insane number of jobs in Germany,” Wuttke said. Although Europe delivers goods worth 600 million euros to China every day, China sends exports worth 1.3 billion euros to Europe every day. In this respect, China is “more than twice as dependent”.

What is happening to Uyghurs and Tibetans is “unforgivable” and raises “huge questions,” said the Chamber President. It forces companies to turn away when they go through their supply chains and cannot rule out forced labor taking place somewhere. Diversification is in every company’s best interest. “We all do it too,” said Wuttke. “But there is no alternative to a market the size of China.”

However, Merics expert Zenglein sees no reason to be too pessimistic, even if there are likely to be higher costs or bottlenecks in the short term. In the medium term, he anticipates new opportunities for the industry. “As uncomfortable as this may be, it is not the first time that global supply chains have been reorganized. You can see that as an opportunity.”