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WORLD OF INDUSTRIES 5/2019

WORLD OF INDUSTRIES 5/2019

Author: Sushen Doshi,

Author: Sushen Doshi, International Correspondent for World of Industries China: a strong partner and also a fierce competitor for German industries NEWS AND MARKETS For so long, Germany and the E.U. have been handling China with caution, as it was too important a market for exports. But now, various industry sectors have been complaining openly about restrictions and unfair treatment to foreign companies. Even the Federation of German Industries (BDI) now defines China as a systemic competitor. China as a market is indispensable, but there is a major shift in approach from Germany and the E.U. For the third consecutive year, China has managed to maintain its position as Germany’s most important trading partner with a total trade volume nearing € 200 billion in 2018, according to preliminary figures published by the German Federal Statistical Office. China accounted for the largest share of imports into Germany with goods worth € 106 billion, followed by the Netherlands with € 98 billion and France with € 65 billion. Germany’s trade surplus was highest with the United States, totaling € 49 billion, followed by the UK € 45 billion and France € 40 billion. Germany’s trade deficit with China amounted to € 13 billion in 2018. It is worth noting that Germany’s trade with China is almost balanced, and mutually beneficial for both the countries. For Germany’s mechanical and plant engineering sector, China has been the most important export market and second most important foreign investment destination. The interest in this market is uninterrupted and a further expansion of business activities in China is expected. A positive factor for German engineering companies is that the Chinese demand for automation and digitization will increase in the coming years. The modernization efforts of China’s industry in particular offer good business opportunities in the short term. But what about the medium and long term? The China’s economy started to blossom after the strategic reforms of 1978 that led to opening of the Chinese economy. Since then there was a belief that China would gradually move towards being an open market and integrate into the global economy. It looks like this convergence is no longer possible as China is in the process of consolidating its trade and economic model. At the same time, China’s economic and industrial strength remains one of the key driving forces of the global economy and is shaping international markets. From Germany’s perspective, it is also one of the important sales and procurement market for German industry. As such, German industry wants to engage and create more opportunities in China, but the Chinese state controlled economic model creates systemic unfair competition with open market economies, which poses challenges that the EU simply cannot ignore. Foul, but play on! China has a hybrid economic system that has a mix of state and market elements. Despite considerable liberalization of the economy, the state still continues to play a strong role in the allocation of resources. Its influence on prices of land, energy, capital, labor and indirect or direct subsidies for companies or entire industry sector have led to production overcapacities and global market distortions, like in the steel sector. In future, overcapacities can be expected in areas of robotics and electric vehicle batteries. Also, while Chinese companies have enjoyed relatively free access to the EUs internal market, this does not apply equally to foreign companies in China. Even today, many industry sectors attract investment bans, caps or obligation to set up joint ventures. Along with this, China also has high levels of industrial tariffs and also multiple non-tariff barriers for foreign companies. 8 WORLD OF INDUSTRIES 5/2019

In order to protect its own market and acquire strategic technology, Beijing introduced new restrictions on foreign firms like investment restrictions, forced technology transfer, lack of implementation of intellectual property rights, customs clearance issues, unequal access to licenses, financing, subsidies etc. Frequent and non-transparent regulatory changes make it difficult for foreign firms to do business, especially in industries that have to rely on long-term investments. Despite multiple announcements on a global level to support free and fair trade, China falls short in implementation, and thus restricting the long-term prospects for foreign companies in China. With the help of state investments in high value technologies and strategic takeovers of foreign high-tech companies, China is rapidly climbing the technological ladder. Thus diminishing Europe’s technological lead over its Chinese counterparts. Chinese mechanical engineering companies are increasingly active on international markets and are thus intensifying global competition. China is already the most important foreign machine supplier in North America and Asia and is further expanding this position. The Federation of German Industries (BDI), has been urging the German government and the European Commission to strengthen the European Union (EU) in the face of growing competition from China. For quite some time now, the BDI has been concerned with China’s state-controlled economy and its impact on German engineering companies. Steps EU and Germany needs to take Choosing what actions to take in dealing with China is a very crafty thing. The EU needs to posture itself strong and decisive but not too strong to create a trade war like situation. There is a fine line between maintaining the liberal, social and open market economy on one hand and a protectionist stance that isolates one’s own markets on the other hand. Measures taken by the Trump administration indicate that protection against Chinese distortions can quickly slide into protectionism. Germany and the EU must strike the right balance in their reactions to China. Germany and the EU cannot rest on its laurels that their model of a liberal and social market economy will bring long-term macroeconomic advantages over the Chinese system. In order to compete with China, Germany and other EU states need to focus on increasing innovation and R&D, improving technical education system, making EU as an attractive business destination, and encouraging strong entrepreneurship. On a policy level, EU needs to reform its industrial policy and set itself an ambitious industrial target for 2030, thereby prioritizing the strengthening of industry a policy objective on equal terms with other objectives such as environmental, climate and consumer protection. It needs to introduce tax incentives on research and reducing existing tax obstacles to private R&D activities. At the same time more work needs to be done on ensuring that Chinese government further improves the protection of intellectual property, technology, patents and trademarks in China. To ensure a level playing field against China’s production overcapacities and dumping of products in market, EU needs to create an effective and balanced trade defense instruments, strengthen anti-subsidy instrument, and prevent dumping of products and services in the European market. Europe also needs to address the issue of shortage of skilled workers, not just university graduates but also master craftsmen, finding the right labor market oriented immigration policy and securing the workforce base for the long term. On the digitalization front, Europe risks falling behind USA and China in the competition for a leading role in the digital transformation of industry and economy. In order to keep up with large and dynamic digital markets in China and the US, EU needs to further develop the European digital market, adapt and synchronize the legal and regulatory framework into a single market. The size of the collective market is a decisive factor for the international competitiveness of digital business models. The German industry body has called for a strong economic policy framework which ensures that companies from ‘non-open market, state-led economies’ are bound to the liberal market economy regulations of the EU if they want to be active in Europe. Internationally, the German industry is not alone in its demands regarding China’s interventionism. Instead of seeking individual answers, the German government and the EU Commission should go for a coordinated approach with like-minded liberal market economies. The EU must strengthen its foreign policy profile in the world. Photographs: Lead Photo Fotolia WORLD OF OF INDUSTRIES 5/2019 9 Turkish Machinery.indd 1 12.09.2019 10:50:29

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