Jakub Jakóbowski and Janka Oertel
For decades, the performance of Germany’s economy—Europe’s largest—has been fuelled by selling goods to China. This export-orientated approach was essential to the German industrial-led economic model. But those times are over and Berlin now faces a dilemma.
The world has been hit by two “China shocks” since the turn of the millennium. The first followed China’s accession to the World Trade Organization in 2001, when Chinese-made consumer goods began to flood global markets and displaced manufacturing jobs, particularly in the US. Meanwhile, after the end of the cold war, central and eastern Europe provided a skill-rich, relatively low-wage neighbourhood that suddenly became available to the German economy. Thus, during the first China shock Germany benefited from deep integration with markets in central and eastern Europe—and from its complementarity with a Chinese economy to which high-quality German products and technology transfer were extremely valuable.
This time around, the second China shock is going to harm Germany and its neighbours, potentially very seriously. To compensate for low consumption at home and as part of its national security-driven economic dominance strategy, China engages in predatory trade practices. The colossal Chinese economy exports massive overcapacities of advanced manufactured goods to the world. But these goods are no longer the cheap electronics, washing machines and textiles of 25 years ago; complementarity is a thing of the past. Chinese goods now compete directly with Germany’s core industrial sectors. Current trends have the potential to dissolve Germany’s industrial backbone, including first and foremost its car industry.
Because of Germany’s deep integration with its neighbours, the ramifications of the second China shock will be widely felt. Direct trade between central and eastern Europe and China is comparatively low. But central and eastern European countries are wrapped tightly into German supply chains (and with each other). For years, these countries’ governments have been looking for a sweet spot: attaching themselves to competitive German global value chains, while cosying up to China for additional economic benefits. Yet central and eastern European leaders still fail to grasp that this China shock will be bruising for Germany—but fatal for them.
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