Why German industry is looking past China to the rest of Asia

Europe Materials 8 December 2020 16:38 (UTC +04:00)
Why German industry is looking past China to the rest of Asia

Dr. Frederick Kliem is a visiting fellow at the S. Rajaratnam School of International Studies and the Centre for Multilateralism Studies in Singapore.

Joe Kaeser, chief executive of manufacturing giant Siemens, is often referred to as Germany's "CEO politician," whose frequent public comments on domestic and international issues are intended to nudge the country's political establishment in certain directions.

In October 2020, Kaeser joined Chancellor Angel Merkel and Economy and Energy Minister Peter Altmaier in a nationwide call for business to look beyond China in their Asia investment strategy. His comments shed light on radical changes to Germany's foreign policy.

For decades, Germany has been heavily invested in China, not just in terms of capital but in an unsuccessful gamble on a more liberal future for trade with and investment in China.

But in August, Germany joined an exclusive club of nations to release an official Indo-Pacific White Paper, the Leitlinien zum Indo-Pazifik. Much of the analysis so far has focused on the implications for the regional balance of power, with a lot of talk about how Germany is suddenly getting tough on China, and perhaps even joining an anti-China coalition.

What is often overlooked and is now important to point out, however, is that the paper's main theme -- echoed at business forums across the country -- is diversification. In other words, when it comes to the Indo-Pacific, Germany has recognized that it must find new partners, new areas of cooperation, and new supply-chains and investment destinations.

Germany's new Indo-Pacific guidelines symbolize a transformation of traditional German foreign and trade policy amid a growing realization that Berlin can no longer simply reap the rewards of a booming Chinese economy without getting embroiled in geopolitical dynamics. Further, it is as direct an admission as you will ever get from Berlin that Germany had become overly dependent on the Chinese market and on one-sided just-in-time supply-chains.

Germany's largest source of imports, China is also its most important non-European supplier and its third-largest export market. More deeply integrated into global supply-chains than most other industrialized economies and -- not least as a result of COVID-19 which saw severe supply-chain disruptions and shortages -- Berlin has become increasingly aware of the vulnerability of such one-dimensional dependencies.

Chancellor Merkel has laid out precisely the conditions she would like to see German businesses find she is urging them to explore: markets with a level playing field; transparency; legal certainty; and intellectual property protection. Namely, precisely the four main concerns that the European Union has regarding the Chinese market.

So, while it would be wrong to argue that Germany is becoming more hawkish on China, the call to diversify trade partners and supply-chains is about as far as Berlin will go toward addressing Germany's China problem as we will ever see. Diversification is a euphemism for reducing Germany's China dependency -- owing to international pressure as well as national vulnerabilities.

Of course, unlike Beijing, Berlin has limited means to force its businesses to abandon their Chinese operations overnight, and German businesses are not going to do that. But government statements that Germany will continue efforts to improve the framework conditions for businesses to diversify away from China, suggest that it could follow Japan by offering financial incentives for German businesses to bring manufacturing back to Germany or at least relocate outside China.

Calls by such highly influential business leaders such as Siemens' Kaeser are proving influential within the German business community and are helping to build momentum and national consensus on the need to look beyond China.

All this adds to increasing concerns among German business leaders about economic and investment security when it comes to China, which, in combination, will compel them to gradually turn their attention to other markets, especially in Southeast Asia, with the 10-member Association of Southeast Asian Nations taking center stage in the White Paper.

Berlin does not subscribe to a binary view of Indo-Pacific great power competition, instead preferring the multilateral architecture created and followed by ASEAN. The real German vision for the Indo-Pacific is based on the same multilateralism and institution-led rules-based order. This vision corresponds well with ASEAN's own priorities and has been music to ASEAN's ears. The knowledge that it will lead to concrete economic benefits for Southeast Asia is something of an early Christmas present for ASEAN.

Joe Kaeser has already singled out Indonesia and Vietnam as very attractive places to invest, and where he is confident that local conditions will allow for a fairly smooth and quick relocation process, while Economy Minister Altmaier has pointed to Singapore.

Local investment reforms in Vietnam have already boosted German business interest there, and the recently concluded EU-Vietnam free trade agreement will only accelerate this trend. As most ASEAN countries have been comparatively successful with their management of COVID-19, that will further help their economies to recover quickly and cement ASEAN's appeal as a German investment destination.

For Southeast Asia, it is absolutely vital to not miss the moment. Building on the momentum of the recently concluded 15-nation Regional Comprehensive Economic Partnership free trade agreement, ASEAN must further develop its economic community and advance local conditions to attract investment.

This will bring substantial economic benefits, including job creation and growth. And just as Germany is seeking ways to become less reliant on China, harnessing newly vacant German capital will equally reduce ASEAN's own asymmetric dependency on China. German-ASEAN business ties are as good a win-win as you will ever see.