The German central bank, Bundesbank, has issued a warning about the excessive dependence of Germany’s economy on trade with China. According to the bank, this reliance on China, combined with high energy prices and labor shortages, has put Germany’s economic model in jeopardy. The report highlights that 29% of German companies import essential materials and parts from China, making them highly vulnerable to potential disruptions in the trade route due to increasing geopolitical tensions.
The Bundesbank emphasized the need to reduce dependencies on China, particularly for primary products that are difficult to replace. Annalena Baerbock, Germany’s foreign minister, echoed this sentiment by calling on Europe to decrease its reliance on China. Baerbock supported the European Union’s investigation into electric vehicle subsidies by Beijing, warning that close ties with China could endanger Europe’s interests.
The faltering trade with China has contributed to Germany’s economic contraction or stagnation over the past nine months. This has led the International Monetary Fund (IMF) to predict that Germany will be the worst performing major economy this year, with a projected growth shrinkage of 0.3%. Chancellor Olaf Scholz attributed Germany’s stagnation to weak export markets, particularly China, high inflation, and disruptions caused by the Covid pandemic and Russia’s invasion of Ukraine.
Despite the risks associated with a sudden separation from China, the Bundesbank called for a reevaluation of supply chain structures and increased diversification away from China. The bank also emphasized the need for more free trade agreements, better integration of immigrants into the labor market, and a reduction in bureaucratic barriers to attract investment.
Germany’s trade reliance on China extends beyond goods to the investment sector. In 2022, China ranked as the third-largest direct investment destination for German companies, accounting for 6% of the total. The report also highlighted China’s dominance in certain sectors, such as carmaking, where it represents 29% of direct investment.
The Bundesbank’s report urges both companies and policymakers to reassess their supply chain structures and the expansion of investment in China due to increasing geopolitical tensions. It also emphasizes the importance of taking action to reduce dependence on Chinese imports and increase the attractiveness of Germany as a business destination.
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