Rise Kine from poverty to the world's second largest economy, he changed the rules of globalization. Now it is Beijing breakthrough into high-tech sectors is taking place at an even faster pace.
While the United States and the United Kingdom had decades to adjust to the first "China shock" at the beginning of this century, countries facing the second — most notably Germany — had significantly less time to prepare.
The first clear sign that China's massive high-tech investment was paying off was in 2023, as soon as the first Chinese electric cars appeared across Europe. Few believed that Chinese cars would seriously threaten the traditional German manufacturers, but only a little more than two years later the Chinese became a serious competitor on the European market.
70517191_906The Chinese giant BYD presents its cheap model Seal U DM i / Photo: DW at the Frankfurt fair
Exports to China are falling – imports from China are rising
German giants such as Volkswagen, BMW and Mercedes have been warning of falling earnings in recent months as sales decline in both China and European markets.
Eurostat states that German vehicle exports to China have fallen by two-thirds from 2022.
That competition does not only include the automotive industry: last year, exports of all goods to China fell by 9,3 percent, to 81,8 billion euros - the lowest level in the last ten years - while imports from China rose sharply in the same period.
"Germany is at the center of the second China shock," says Andrew Small of the Asia Program at the European Council on Foreign Relations (ECFR). "For a long time, the economies of Germany and China complemented each other, but now they are competitors." Last week was a research house Rhodium Group from New York, specializing in China, warned that German trade with China has entered a "structural decline".
This means that there will be even more bankruptcies and layoffs in Germany if the industry does not find new markets.
Fierce fight for world markets
In his report "The German China Shock – Once Again", Rhodium states that Chinese competitors are taking over the market from German manufacturers of machinery, chemical products and power generation equipment.
"The Chinese market used to be a gold mine for German multinationals," Noah Barkin, one of the report's authors and an expert on China, told DW. "But in the last three years, a quarter of Germany's exports to China have disappeared."
For years, China was the first or second most important market for German exporters, but in 2024 it dropped to fifth place. According to the agency's forecast Germany Trade & Invest (GTAI), last year it should have slipped to seventh.
The pressure on German industry is no longer limited to exports to China. Competition from China is increasingly active in markets in Asia, Latin America and Africa. Barkin notes that in those regions, China "is making huge progress over German companies, offering much cheaper products."
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Both to please and to threaten
As Chancellor Friedrich Mertz prepares for his first official visit to China, he faces a difficult task. It must find the right balance between appeasing China as a key market for German industry and pressuring Beijing to resolve old problems - market access and state subsidies for its excessive production capacity.
Germany PoliticsSave what can be saved: German Chancellor Friedrich Mertz / Photo: AP Photo/Ebrahim Noroozi
But China also needs Germany, so both sides appear to want to stabilize relations that have been strained since the pandemic exposed Germany's dependence on Chinese components and raw materials. In the last few years, however, this has led to a partial reduction of risk and dependence.
Stefan Messingschlager from Hamburg University Helmut Schmidt believes that the complete restoration of relations will be a "difficult task", but indicates that an acceptable goal would be - "controlled stabilization".
"The key is to reduce China's blackmail power over scarce raw materials and single-supplier dependence on materials for batteries, chips, pharmaceutical ingredients and key industrial software," says Messingschlager.
Germany will not be able to do it alone.
China controls about two-thirds of the world's production of rare earth metals and 90 percent of its processing capacity. Last year, it imposed restrictions on exports of those key minerals to the EU and the US, disrupting car manufacturing on both sides of the Atlantic.
Messingschlager believes that Berlin will not solve many problems - excessive Chinese production and huge state subsidies - bilaterally, but only jointly, i.e. with the entire EU. These include anti-dumping measures and Chinese state subsidies.
China ParadeParade in Beijing: Xi Jinping / Photo: Wang Ye/Xinhua News Agency via AP
At a competitiveness summit in Belgium last week, EU leaders backed a stronger industrial strategy for the Union, including a "Buy European" policy for public procurement. New measures against unfair Chinese competition were also announced.
In January, the European Commission launched new investigations and safeguard mechanisms to correct market distortions caused by China's industrial policies.
The European Union is also rapidly negotiating trade agreements with India and important Latin American countries, which should open up new markets for German exporters.
They won't be able to without protective measures
Teaching Rhodium points out that German industry continues to do well in the EU, Great Britain and Turkey due to proximity and preferential trade agreements. But the report warns that Chinese manufacturers could very quickly advance in those markets as well if safeguards are not introduced.
Small of the ECFR agrees that “diversification without defense is not enough” and calls on the EU to cooperate with other countries that want to protect their industries from Chinese competition. The right message to Beijing would be a decisive and simultaneous response from multiple trading partners.
"It will have to be done discreetly because there is already nervousness about the perception that various states are teaming up against China," says Small. "But there is a real interest outside the EU to introduce safeguards in strategic sectors."
Many economists compare the pressure on German industry to Detroit. The former heart of America's auto industry has suffered decades of economic decline and emigration.
Barkin uses the word "panic" when talking about certain German industrial sectors and China's progress. At the same time, he regrets that the harsh political tone in Berlin has not yet been followed up with concrete measures.
Their report warns that "without the credible threat of restricting access to the European market, China will have no incentive to reduce exports," while German industry will continue to "fight against a much larger competitor that does not play by the same rules."
Source: Deutsche Welle (DW)
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