Germany’s Strategic Adaptations in the Chinese Market

According to the latest statistics, Germany’s investment in China hit a record high of €7.3 billion in the first half of 2024. Although Western countries, including Germany, have been pursuing a “de-risking strategy” toward China for over two years, the increase in German investment in China appears to contradict this. This has led some to conclude that Germany remains dependent on China, and there will be no substantial change in this dependency, writes ANBOUND Research Fellow for Geopolitical Strategy Zhou Chao.

However, concluding that Germany and the EU’s de-risking strategy toward China is ineffective solely based on the significant increase in German investment may be overly simplistic.

First, regarding Germany’s new economic strategy toward China, a sudden and complete severance or significant reduction in economic and trade cooperation has never been a policy choice for Germany. However, ideological and geopolitical contradictions between Germany and China, as well as between Europe and China, have intensified in recent years, highlighting the risks of politicizing economic relations. Furthermore, the nationwide lockdowns in China during the pandemic have severely disrupted global supply and industrial chains, deeply impacting Germany as the Western nation most reliant on economic ties with China. Additionally, conflicts in Israel and the crisis in the Red Sea have further hindered maritime supply chains from China to Europe.

Hence, Germany must adjust its supply chains in Asia, particularly regarding China, through two main strategies. First, it will treat the Chinese market as an independent regional market rather than a crucial part of the global industrial chain. German companies will continue to operate and do business in China, yet they also move their subsidiaries toward independent operations. Should relations between Germany and China deteriorate, these companies can sever ties with their German headquarters and operate independently. Second, Germany will diversify its concentrated supply chains in China to neighboring countries and other regions, adopting a “China +1” strategy. Given the significant existing investments in China, a sudden cut in economic cooperation would be impractical for the German business community and government. Therefore, it is possible to pursue a “de-risking” strategy while simultaneously increasing investment in China, although the Chinese market is gradually being excluded from the global operational networks of German companies.

Second, the deeper changes in Germany’s foreign economic and trade relations are becoming increasingly evident. As things stand, the economic ties between China and Germany (or Europe) still lag behind those between Germany (or Europe) and the United States. German officials and business leaders frequently state that China is Germany’s largest trading partner, but in 2022, the trade volume of goods and services between the two was $348.45 billion, less than the $394.15 billion trade volume between Germany and the U.S. Both U.S.-China and Europe-China trade weakened in 2023, while US-European trade saw an increase.

Additionally, due to the Russia-Ukraine conflict, Germany has shifted its primary source of natural gas to the U.S., increasing its reliance on American energy supplies. Consequently, Germany and the EU’s focus on economic and trade cooperation is likely to shift further toward North America, enhancing the U.S.’s economic influence on Germany and elevating the importance of the Germany-U.S. relationship above that of Germany-China. In the first half of this year, Germany’s total trade with Poland also surpassed its trade with China.

Third, economic friction between Germany and China is increasing. A report from the Kiel Institute for the World Economy (IFWK) indicates that 99% of China’s new energy companies have received substantial government subsidies, severely affecting related industries in Germany and the EU and making it difficult for European companies to compete on price. Furthermore, a survey conducted by the German Chamber of Commerce in China in 2024 revealed that nearly two-thirds of German companies “say they are affected by unfair competition”. This escalating economic friction raises concerns about the stabilizing effect of economic relations on bilateral ties.

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Furthermore, China’s economy is exhibiting signs of weakness, with declining consumer spending. This unfavorable macroeconomic environment is likely to impact the profitability of German companies operating in the country. If these companies struggle to achieve profits or face increasing challenges, it is difficult to envision them maintaining significant investments in the Chinese market.

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