First EU country to consider business split with China

The German Ministry of Economy has prepared a series of measures to do business with China less attractive for local companies, according to familiar sources. The initiative aims to reduce the dependence of the largest European economy on the Asian giant, according to Reuters.

Measures may include reducing or even completely canceling investment and export guarantees in China, as well as ending advertising at trade fairs and training managers there, the agency’s sources said. Loans from state-owned investment bank KfW can be redirected to projects in other Asian countries, such as Indonesia. The purpose of the change is to diversify trade and strengthen business ties with countries with more democratic governance.

The ministry also plans to carry out a full review and inspection of not only Chinese investment in Germany, but also German investment in China, one of the sources said.

In addition, the German government plans to submit complaint to the World Trade Organization (WTO) against China for unfair trade practices. According to a familiar source, this will be done jointly with the other G-7 countries. “We need to show Beijing that we are ready to fight for the principles,” the source told the news agency.

A spokesman for the Ministry of Economy declined to comment on the aforementioned measures, but stated that the department is preparing specific steps “to support the diversification of trade and supply chains and to strengthen resilience.”

The ministry has already decided not to give investment guarantees to projects in the Xinjiang region, as well as to companies with business affairs there, due to concerns about human rights violations or a lack of reliable information about what is happening. In May, the department refused guarantees to Volkswagen for new investments in China precisely because of what is happening in Xinjiang.

China’s foreign ministry was quick to react to the information, and a spokeswoman for the ministry told reporters yesterday that authorities in Beijing hoped the German economic policy with regard to China to remain “pragmatic and rational”. Europe’s biggest economy should inject “positive energy” into mutually beneficial cooperation with China, not “pick up a big stone and then drop it on its foot,” Mao Ning said. In her words, measures to cancel state guarantees for investments and exports would be “too absurd”.

Asked about a possible WTO complaint against China’s unfair trade practices, Mao said: “China has always followed WTO rules. If a complaint is filed, China will protect its rights and interests.”

If Berlin’s plans go ahead, it would be a major shift in policy imposed by former Chancellor Angela Merkel, who led large business delegations on her many visits to China and is responsible for the boom in German-Chinese economic relations.

In 2016, China became Germany’s leading trading partner, and last year the volume of bilateral trade reached 245 billion euros and contributed significantly to the growth of the export-oriented German economy.

German automakers are particularly dependent on the Chinese market, with Volkswagen making around half of its profits there. Germany also relies on China for the rare earth materials widely used in the automotive industry.

In recent years, however, German politicians and businessmen have begun talking about diversifying trade with Asia in response to the tightening of governance in China initiated by President Xi Jinping. Merkel herself said last year, shortly before she left the chancellorship, that she had been naive about China’s cooperation in certain areas.

The coalition agreement of the government headed by Olaf Scholz takes a tougher line on China and declares intentions to reduce strategic dependencies on this “systemic rival”. In addition, topics too sensitive for Beijing, such as Taiwan and Hong Kong, are mentioned for the first time. It is also significant that Scholz’s first visit to Asia was in Japan, unlike Merkel, who was betting on China.

Berlin is also developing a new national security strategy that will mention China, and a specific strategy for relations with the Asian giant will be ready next year, the sources said.

The Green Party, which holds the economic and foreign ministries, is particularly concerned about human rights abuses and the risks of being tied to an increasingly authoritarian state. In addition to China, she is specifically referring to Russia.

“We cannot afford to follow the motto ‘business first’ without taking into account the long-term risks and dependencies,” Foreign Minister Analena Berbok, who is from the Green Party, said last week at the annual meeting of ambassadors.

However, Scholz’s Social Democrats are more reserved about China. The chancellor warned of negative consequences of a possible “separation” with Beijing and expressed confidence that companies have already started the process of diversification.

Business and its associations and organizations are also concerned about the hardening of Chinese politics. They are demanding help from the state in diversifying trade, not confrontational steps in dealing with such an important market.

“We cannot isolate China,” said Hildegard Müller, president of the German automobile association VDA, quoted by the online edition “Table Media”. “That would be naive and fatal, both politically and economically,” he concludes.


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