Germany´s Indo-Pacific strategy in theory and reality

Germany´s Indo-Pacific strategy in theory and reality

While Trump wanted to decouple the US economy from China and intensify the trade and tech war, Biden is pursuing a somewhat more moderate, but similar line as the original sanctions of the phase 1 agreement have now also been supplemented by further high-tech sanctions. Germany and the EU declared that they did not want a trade war with China, let alone a decoupling, and that they would see and treat China as a partner, competitor and systemic challenger on different levels at the same time, i.e. they wanted more of a Co-petition (Coperation and Competition). The expression of this was the new Indo-Pacific strategy of the German government, which intended to diversify political and economic relations away from China, especially to ASEAN, especially since this was also to become the blueprint for an EU Indo-Pacific strategy. Will the planned diversification of Asian trade like the Indo-Pacific strategy work? According to the latest surveys, the investment appetite of German and European companies in China is apparently not decreasing, but rather increasing, in fact quite a few want to decouple their supply chains from the global focus on China. A withdrawal from China is out of the question for European companies – despite geopolitical tensions with the People’s Republic. On the contrary: they want to expand at the moment.

The geopolitical situation is difficult, but business is booming. European companies in China therefore want to become even more involved in the world’s second largest economy in the future. In a survey the EU Chamber of Commerce in China (EUCCC) presented in Beijing on Tuesday, 59 percent of companies said they were thinking about expanding their activities in China. The proportion of companies considering withdrawing, on the other hand, was nine percent, lower than ever before in the annual survey. And this despite the fact that 41 percent of those surveyed complain that business life in China is becoming increasingly politicized – and half blame the Chinese government for this.

 The nevertheless positive general mood may also be due to the fact that companies did much better business in Corona year 2020 than expected. At the beginning of 2020, half of the companies had expected a slump in sales and only every two hundredth with a plus. However, 42 percent actually recorded an increase in income, especially in the consumer sector: „This was mainly thanks to Chinese customers who, because they could not travel, spent a larger part of their disposable income on the purchase of cars, cosmetics and clothing“, so the survey. Only a quarter reported falling revenues – especially in industries hit directly by the pandemic, such as travel.

The world is still dominated by the pandemic, and the obvious optimism about China – with simultaneous complaints about old and new problems in the country – is almost astonishing: 68 percent of those surveyed expect positive developments in their industry, after only 45 percent in the-Corona year 2019.

The subject of market access to China is well known: 45 percent of companies complain about restrictions – a figure that has remained constant for years. 44 percent see unequal treatment compared to Chinese companies – for example when granting licenses or accessing subsidy payments. 16 percent of companies are still forced to transfer technology to Chinese partners. But there has also been progress: in 2021, for the first time, a majority of those surveyed said that dealing with the ongoing issue of intellectual property was appropriate or even excellent.

 These are typical subjects of the complex trade policy with China. But that is no longer all that concerns companies. They are less and less able to escape the processes of global geopolitics. China’s trade war with the USA has been going on for years. And now relations between the EU and China have also deteriorated – among other things in the dispute over the human rights situation in the North-West Chinese region of Xinjiang. In March, Brussels imposed sanctions on four politicians and a paramilitary organization from Xinjiang – to which Beijing responded with a far bigger blow: sanctions against MEPs, diplomats and think tanks. Chinese nationalists subsequently pushed – at least tolerated by the government – boycotts, for example against the Swedish clothing chain H&M. „Geopolitical tensions are forcing us to change our strategy,“ said EUCCC board member Charlotte Roule at the presentation in Beijing.

One example of this are disruptions in global supply chains caused by the trade war. The USA and China imposed punitive tariffs on each other and trade in individual technology components has been interrupted. Ultimately, this also applies to companies from third countries. Among other things, the conflict indirectly led to a global shortage of chips and semiconductors, which are needed in almost all industries. The companies‘ answer is not to leave China – on the contrary, to concentrate the entire supply chain in China. EUCCC President Jörg Wuttke is observing an enormous wave of localization: „The companies are considering how they can decouple various parts of their China activities from their global ones“ This is done so that the entire supply chain is in one place and external factors such as trade wars cannot break it. 26 percent of the companies surveyed stated that they wanted to bring further parts of their supply chains to China.

An counteracting, but maybe shortlived factor: One of the biggest problems for companies, however, is the strict corona entry restrictions that still apply in China. These were imposed when the first wave of the pandemic hit Europe and the US. This causes problems for 73 percent of companies: They cannot bring skilled workers into the country – for example to install systems for customers. Also, some foreign managers are still unable to return to their jobs in China. “The number of expats is really falling,” reports Wuttke. The chamber learned from members that some of the expats stuck abroad have since given up on returning to China and are settling elsewhere, according to the investigation. In doing so, „many years of experience in China that may not be regainable will be lost.“ There could also be a gap between the China branch and the headquarters. However, giving up business is not an option. According to Wuttke, a surprising finding of the survey was that a whopping 72 percent of those questioned see Chinese companies today as just as innovative or even more innovative than European ones. According to the study, this is one of the main reasons why the members want to and have to stay in China: the companies there compete with their future competitors on the world market.

China expert Prof.van Ess comments these trends as follows:

“China is simply too important for Germany to be given up as easily as Trump and Biden would like. That would hurt all of us here. The Americans will, of course, shape it behind all their theatrical thunder so that they do not lose, but point the finger fiercely at the German companies and drag on VW investments in Urumqi.”

While the German and hoped-for European Indo-Pacific strategy might not work because of the giant appetite of German and European companies for future investment inthe Chinese market, China has reduced its investments in Europe drastically.Chinese direct investment in the EU and the UK fell 45 percent year-on-year. That emerges from a new study. This also gives the reasons for the decline. According to a study, China’s investments in Europe were significantly lower in the past year than in previous years: Chinese direct investments in the EU and Great Britain fell by 45 percent year-on-year – to just 6.5 billion euros. This emerges from a study that the Berlin Mercator Institute for China Studies (Merics) and the Rhodium Group presented together and from which the news agency dpa quotes. It is therefore the lowest level in ten years. Germany, France and Great Britain are still the main destinations for Chinese direct investment in Europe. Germany is at the top. The UK, in third place, saw direct investment from China drop by 77 percent. Poland, promoted by a major acquisition, was a major new recipient last year. According to the study, the trend is likely to continue in the current year: Chinese investments continued to decline in the first quarter. Europe remains an attractive investment location, but the ongoing disruption from the pandemic, high barriers to capital outflows from China and major regulatory obstacles in Europe are further contributing to Chinese investment moving at a lower level. Several EU countries, including Italy, France, Poland and Hungary, tightened their review mechanisms for direct investment from third countries last year, which meant that some Chinese takeovers did not materialize. The strained and deteriorating relations between the EU and China could bring additional headwinds for Chinese investors in the future, Merics said on the occasion of the publication of the study. The question remanins: Is this a sustainable trend or is it the Covid pandemia or the new European, G 7 and NATO policy against China including sanctions, is Italy as first European state which signed a treaty with Xi Jinping for China´s New Silkroad and as former engine of China´s 17 plus 1 group in the backyard of Europe desillusioned by China and supports the G7 and EU China agenda or are potential subsidies and financial fonds US presindet Biden promises with his idea of a transatlatic New Silkroad in Eurasia and Africa interesting for Italyand other countries and goverments as a counterbalance? Will Biden´s New Silkroad and infrastructure project, a Global New Deal and Global New Green Deal like China´s BRI happen, if the Republicans don´t want to finance it by global taxes or taxes for the rich and superrich at home?

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