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German Stance Toward China Makes Life Much Easier for Its Businesses

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In terms of China, German business leaders like Thomas Schäfer at the automaker Volkswagen and Martin Brudermüller at the chemicals giant BASF have one less item to be concerned about. And so do their stockholders.

The coalition government of Germany has finally released its initial strategy on the People's Republic after years of disagreement among its parties about how far Germany should go to distance itself from its largest trading partner. The largest economy in Europe made it plain that after years of seeing China largely as an attractive market, it is now standing closer to Washington and Brussels on things ranging from technology export limits and supply chain risk to concerns on human rights.

The final statement does not shy away from themes that were once thought to be taboo, such as stances on Taiwan, a place that is self-governed now and China claims as its own territory. Nevertheless, it has been condensed and toned down from a private draft created in November by the ministry of foreign affairs under the direction of Annalena Baerbock of the Greens. Based on a draft, one suggestion at the time involved exerting intense pressure on businesses to divulge specifics of their China-related operations and even perform stress tests on their exposure. Private information about revenue and partnerships with regional partners might have been provided. It was feared by others that forced divestment would follow. With no clear red lines established, such negotiations can now take place in private with the administration.

The decision to compromise was probably made once it became clear that China has become too strategically important to give up without suffering a great deal of harm. Because of this, Brudermüller emphasized in the annual report of 2022 that BASF might be at significant danger if it didn't have a presence in important growth areas like China. China is also currently the largest chemical market for Volkswagen. Actually, nearly 40% of Volkswagen's worldwide unit sales in 2022 came from the People's Republic. According to a poll by ifo Institute, China currently provides crucial intermediate supplies to half of German's manufacturing enterprises.

It's possible that China's new premier was well-informed about this course of action when Germany welcomed Li Qiang to Berlin last month. Beijing's ability to respond decisively is already limited by a weakened domestic economy. By doing so, the nation would only weaken its recently reaffirmed commitment to further market openness and jeopardize its aim to stabilize foreign investment. Additionally, it has been acknowledged that the time in which the administration could influence its relations with the European Union by maintaining close links with Berlin has passed.

Even now, companies like BASF and VW are having trouble. German automakers might still be in the crosshairs, for instance, if the EU moved to impose duties on Chinese electric automobiles. Executives would be happy to know that they can, for the most part, go at their own pace when derisking China.

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