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Does Germany Have Time To Learn The Lessons From Russia?
Olaf Scholz Wants To End Dependence On Trade With China. Good Luck.
By now, it is beyond indisputable that Germany seriously screwed itself over by becoming way too dependent on Russian hydrocarbons, to the extent that even now they do not have a sustainable strategy for replacing them.
Without replacement sources, Germany’s industries—and the foundation of much of its own export-oriented economy—ends.
End of Sentence.
End of Discussion.
But there’s a wrinkle. Germany is also dependent on intermediate goods sourced from China to sustain that same export oriented economy. If China turns off the tap (or if they have it turned off by things like America’s semiconductor bans), their export economy is almost in as dire a situation as with the loss of Russian energy.
On Tuesday, Robert Habeck, the country's economic minister, told a news conference in Paris that Berlin is planning to cut its dependence on China and will limit investment support for German companies doing business in China, the AFP reported. In particular, Berlin is working on a new trade policy with China to cut dependence on Chinese raw materials, batteries, and semiconductor chips, Reuters reported in September.
According to Scholz and the rest of the German economic team, they are “serious” about diversifying away from China.
Sources told Reuters last week the economy ministry was considering a raft of new measures to make business with China less attractive. This is the first time the minister has made clear the tougher line was being translated into policy measures.
While Germany quite conceivably wants to distance itself from China (under that oldest of diplomatic strategies “fool me once, shame on you, fool me twice, shame on me.”), the question remains: How does Germany plan to pull it off?
The trade policy shift was announced in September.
In October German industry said “Nein!”
In October, German businesses pushed back against an economy ministry proposal aimed at curbing investment into China, Reuters reported.
"We can only warn against Germany turning away from China," said Markus Jerger, head of businesss alliance Mittelstand Association told Reuters at the time.
German business is quite happy with the status quo and does not want it to change. It’s worked so well for them up until now (in a mercantilist, screw the country and the worker in pursuit of corporate profits sort of way).
This could prove challenging for Scholz's administration, as China has been Germany's largest trading partner for six straight years, according to Berlin's statistics office.
However, Germany has a problem: At the very least, the American semiconductor bans are happening—that train has already left the station. China’s ability to deliver even low-end semiconductor chips is in serious jeopardy. Germany may very soon have no alternative but to resource their chip supplies—and German business does not want to do that.
Scholz claims he wants to do that—but he is also still playing footsie with Xi Jinping (which rather undermines his credibility on the point). Yet whether he wants to move a way from China or not, the unraveling of global trade and the gradual ending of China’s status as the world’s biggest factory are on course to very quickly leave him no alternative.
Germany has one existential threat over Russian energy. It very likely has a second existential threat over trade with China. And it is running out of time to be able to make a stable and somewhat smooth transition on the second (the transition on the first is already going to be swift and violent).
Can Germany resource its essential intermediate goods in time to keep its export firms from spiraling into bankrupty?
Right now, nobody really knows. Olaf Scholz has his work cut out for him.
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