There’s a cynical old saying in Brussels: EU trade policy is set by Germany, whose trade policy is set by German export manufacturers, whose trade policy is set by the German car industry, whose trade policy is set by Volkswagen. A bit of a caricature, of course, but not the worst basis for analysis.
The country’s manufacturing export model is now under threat. Voices in government are arguing that having already suffered from a reckless reliance on Russian gas, Germany’s economic dependence on another belligerent autocracy in the form of China has left it dangerously exposed.
The German and international media report that the economy ministry, run by the Greens, is looking at reducing support such as state investment and export guarantees for German companies operating in China. It’s intended to be about diversification rather than reducing exports or investment overall. But since a reduction in operations in an economy the size of China’s is unlikely to be made up by foreign markets elsewhere, it might well form part of a long-term reorientation away from manufacturing mercantilism.
If so, that would be a good outcome. The dangers to the German and wider EU economies from Berlin’s export-orientated model have long been clear. From the early 2000s, by suppressing domestic wages and demand and prioritising current account surpluses, Germany ultimately shifted production home and unemployment to the rest of the eurozone, and increasingly irritated the US.
This model is also more and more at odds with the EU’s stated approach to trade policy. Traditionally, the German export lobby (and its supply chain satellites in central and eastern Europe) has been important in pushing for free trade agreements — even if these days it is often more interested in investing in consumer markets like China than exporting there. Former chancellor Angela Merkel regularly undertook trips to China with a gaggle of German corporate executives in tow.
The Greens, who have intriguingly emerged as Germany’s chief Russia and China foreign policy hawks, have pointed out the difficulties and contradictions of this position. A draft EU deal with the South American Mercosur trading bloc signed in 2019, for example, is widely known as “cars for beef”. It gives European automakers access to Brazil’s vast consumer market, overriding the protests of French and Irish cattle farmers against Brazilian imports. In the dying days of its six-month EU presidency in 2020, Germany also drove through the bilateral Comprehensive Agreement on Investment (CAI) with China, largely designed to protect German operations there.
For a trading bloc which claims to uphold the multilateral order and protect the environment and labour rights, the model is increasingly trapping the EU in a contradiction. The Mercosur deal is now stalled because of concerns about the destruction of the Amazon. CAI was deservedly blocked by opposition in the European Parliament, which rejected Commission president Ursula von der Leyen’s laughable claim that the deal would materially promote human rights in China.
You can believe that the EU should not be fiddling about with tangential issues such as the environment and human rights in trade deals, but you cannot seriously argue that agreements like CAI do much to advance them.
Much of the German industrial elite doesn’t appear to lie awake worrying about trade with morally dubious partners. Herbert Diess, the now-sacked chief executive of Volkswagen, in 2019 famously denied knowledge of Uyghur re-education camps in China’s Xinjiang province, where VW has a plant, and this year called for an end to the war in Ukraine and for rapprochement with Russia.
Germany has passed a law making companies responsible for human rights abuses in their supply chains, ahead of a similar initiative by the EU. Brussels has also enacted a ban on products made with forced labour. But German industry leaned against such moves. Germany’s domestic legislation does not create a new civil liability for companies, and their obligations to find and eliminate abuses are considerably weaker in lower tiers of their supply chains. In another triumph of German corporate communications, Roland Busch, chief executive of Siemens, said last December that import bans were a bad idea and the forced labour issue couldn’t be fixed by confrontation with China.
For the moment, Germany is having enough trouble with its rushed attempt to do without Russian gas. Fundamental structural change in business and the country’s political economy will take a lot longer. Still, if the EU is serious about reorientating its trade policy and Germany about rebalancing its economy towards domestic demand, ending the export bias is an important step. In the meantime, reducing artificial incentives for companies to become dependent on China is a good development in itself.
alan.beattie@ft.com
Source: Economy - ft.com
