Germany’s strategic dilemma between the US and China: Who is the better partner? | To the Point

First China, then the US. The German Chancellor visits the two largest global power centres to secure as much as possible for the German economy and Germany's geopolitical standing. China is the key market for Germany. Trade between the two countries amounted to more than 250 billion euros last year. However, Chancellor Merz must campaign for German products. They are selling increasingly poorly there. Afterwards, he travelled to the US, Germany's second largest trading partner, where President Trump's tariffs are undermining the traditional partnership. Trade volume there has shrunk by around 5%. We ask if Germany is at a crossroads. Who is a better partner, the US or China? Welcome to To The Point. I'm pleased to introduce today's panel. Torsten Bennert from the Global Public Policy Institute, a think tank here in Berlin. Noah Barkin from the Rhodium Group and a journalist and senior fellow at the German Marshall Fund. And Meredith Crowley, Professor of Economics, Deputy Chair of Faculty at Cambridge University in the UK. A warm welcome to all of you. Noah, I'm starting with you. The US and China, the struggle between these great powers seems to be intensifying recently. Does Germany have to choose, really? No, I don't think Germany has to choose. I think Germany needs to develop its own policy embedded in a European approach to what is increasingly a quite distressing geopolitical environment. I think relations with China have been under strain for a number of years for various reasons. The economic relationship, China's support for Russia and China's weaponization of dependencies, critical raw materials, rare earths. The tensions in the transatlantic relationship, of course, are newer in the sense that Donald Trump has been in office for a year now and we've had a number of major problems in that relationship. Greenland, the tariffs, and the Trump administration's free speech campaign to impose MAGA values on Europe. I don't think it's a matter of choosing. I think Germany and Europe need to have a smart approach to both. But that will not mean US yes, China no, or vice versa. With an increasingly belligerent White House, let's say, do you think that China is trying to drive a wedge into these long-established partnerships? They always try, although I think there's quite a sanguine view in Beijing that Europe and Germany in particular is still more of an appendix of the US and that the real chance to get them out of this transatlantic alliance are not that great. But that being said, of course, the Chinese leadership tries to sell itself. You saw that Chinese foreign minister at the Munich Security Conference as the responsible superpower that is predictable. But I think that shouldn't detract us from the facts. The mortal threat to the German industrial base is not Donald Trump. Donald Trump wants to re-industrialize. Donald Trump experienced that in the US 15 years ago, what we're experiencing now. A China shock that's gutting our core industries. Trump wants to rebuild America's industries. We need to protect and develop our industries, and the threat is mostly from Chinese competition and not from US competition. And I think it's also important to note that, yes, we have a big trading relationship with China, but we export more to the US, more to the Netherlands, to Poland, to Italy, than we export to China. So to just keep things in proportion. Meredith, can Germany, the world's third largest economy, play an independent role economically? So I think one thing that you've been talking about is you're focusing very much on Germany's trade relationship and the relationship it has with both the US and China. Another important thing, not just for Germany, but also for Europe, is its dependence or independence in terms of digital services that it buys and sells. And the fact that going forward, much of what we purchase in terms of automobiles, et cetera, are going to have embedded service flows, whether this is software to drive our car or these types of things. And right now, all of those industries of high-tech services are concentrated in the United States and in China. And a point of concern for the European Union is none of these big tech firms are located in the European Union. And so where there's a role for sort of an independent European policy, one of the big questions is, in the future, where does Europe want to purchase its digital services from? Because this is going to be a larger and larger share of all consumption everywhere. And do they want to be sourcing it from within Europe, from new tech firms that don't yet exist? Do they want American affiliates of large tech firms locating in Europe? Or do they want to be sourcing this from Chinese firms, which are very large and, at some level, on a competitive level with the American firms? So I think for Germany to think about its own independent economic power, combined with that of Europe, there are a lot of people here that are going to be buying these services. And so the question is, how do you build and structure and regulate the industry that's providing those service flows? Because all of these German cars are going to be using service flows. And thinking about what's the right regulatory environment to get the firms that you want. At some level, you know, the Americans... But before, if I may interrupt you there, before we start regulating these industries in Europe, we have to create them. Is Europe doing enough there to actually create an ecosystem of tech companies so that they can provide chips and software that the economies need? No, they're not. But some of this regulation is also sort of general market competition regulation. And there's a need for the market to be much more open and innovative and less, you know, in an old-fashioned sense, heavily regulated. But you want a regulatory infrastructure that allows big firms to come and to get started and to build. And if you don't have the right infrastructure to help those firms start, you also want to need... you need to think about how do you want to regulate the foreign firms that come in to deliver these services? And so I think this is something that right now, with all of the trade tension with the U.S., there is market power in Europe. And Europe needs to think about, you know, what kinds of services do you want to be buying from American firms? And if you do buy those services, how do you want to regulate those firms when they come to Europe to deliver them? And at the moment, I think Europe is very much on the back foot in terms of regulating American tech companies in Europe. They have no competing firms here, so they're a little bit, you know, in a very difficult situation. But I think this is one of the future relationships that has to be fostered. And my sense is you're going to be much better lining up with America than you will with China because the rule of law is better established in the U.S., even under President Trump. And so it will be easier to work with the U.S. as a partner in these new industries that are going to be coming forward. It will be more and more important. We're going to address that issue a little bit later, and there was a lot of nodding here around the table. But first, let's have a closer look at the issue and the numbers because trade with China has been turned on its head. Germany buys more and more from China while it sells less and less goods there. Some call it the China shock, which caught most experts and politicians by surprise. German exports to China are plummeting. Last year, they totaled about 81 billion euros, while imports from China reached 170 billion euros. The People's Republic is increasingly focusing on the very industries Germany has long been known for, exporting cars, machinery and chemicals, often with the support of state subsidies. During Merz's first visit to China's German Chancellor, there was a bitter aftertaste, confirming the concern he had voiced before his departure. We need economic relations with the whole world, and that naturally includes a country like China. But the Communist People's Republic is a challenging partner. China today sees itself in explicit opposition to the US and claims its right to establish a new multilateral order according to its own rules. Freedom of expression, freedom of religion and freedom of the press are not part of this understanding. For a long time, the US was Germany's largest trading partner, but transatlantic relations have cooled, both politically and economically. Last year, trade decreased significantly. The main reasons for this are the US president's unpredictable customs and foreign policies. As a result, car exports to the US dropped by 40%. German chemical and pharmaceutical products are also experiencing poor sales. To the point asks, is Germany's export model coming to an end? Yeah, could that be? I mean, Germany has relied on its strong industry and strong exports for decades. Is it coming to an end? Yes, I think at least the way we've known it, with China and the US as large markets, that's no longer so easy. The US will see there might be a change in government at some point, it might get easier again and more predictable, most of all. But with China, the problem is that the Chinese model, in a way, in terms of being world export champion, is very much the German model. But China, through the authoritarian state capitalist advantages that they've created, a non-level playing field, a currency that's artificially devalued, subsidies, plus also a very, very good innovation ecosystem they've built, is now a big threat to German traditional industries. That's why I think our answer has to be, first of all, creating more demand within the European Union, more domestic consumption and deepening the European market and looking for new partners or deepening partnerships with the likes of India, Latin America. In order to diversify. That's a very good point. Partners like India, can they step into the void there? Well, India is part of the solution. I don't think India is going to replace China. It's certainly not going to replace the United States as a market. So the EU needs to diversify, look to Latin America, look to other parts of Asia. I would agree with Torsten that the German export model, as we've known it in recent decades, is coming to an end to a certain extent. German exports to China have fallen by about a quarter in the last three years. It's quite dramatic, actually. It's dramatic. In the car sector, it's something like two thirds over the past three years. We need to find new partners, new markets. We also need to do a lot of homework within Europe. I think that's probably where the most work needs to be done, is to implement some of the steps that former ECB president Mario Draghi has recommended, complete the single market, because a country like Germany exports much more within Europe than it does to the US or to China. You mentioned Latin America there just recently. The Mercosur trade agreement was sort of torpedoed by the European Parliament, if you will. Do you think that Europe is currently acting in a way economically that it should, if we look, for example, at Mercosur? There's certainly the incentive, as you find that some markets are not very accessible, to try to look for other markets. Not going forward with a better deal with Mercosur is not great. That said, for all the potential of that deal, the point that it is easier to serve markets that are close to you is important, and so the potential growth there might be somewhat limited. In terms of a global strategy for what are the big issues facing Europe, some of it, it's not just that you can't sell more cars in China right now because of all the heavy state subsidies, but those heavy state subsidies in China are now going to mean that you would also be competing for sales in Brazil because the Chinese have a complete glut of what they produce, and car prices are dropping very rapidly. So in some sense, this is very similar to the concern policymakers have had about other industries like steel. There's been excessive subsidization and state intervention in the market in China in order to push the economy forward to a higher technology level, but the spillover consequences on the one hand for consumers, these automobiles are less expensive. Everywhere around the world will have cheaper automobiles. At the same time, though, it means that if your comparative advantage is in making high-tech, sophisticated autos, you're going to be having a harder and harder time, and one of the challenges in Europe is that there's not this very high level of fiscal capacity to engage in the same level of subsidization that you have in an autocracy. So a global solution would be something like the European Union, Germany come together with the U.S. and Japan, and they try to pull China to a table and say, look, your level of subsidization and your global export-led growth model is causing, we want you to develop technologically, but at the same time, these production levels are causing real disarray in many economies around the world. And so this is a fundamental problem, just as we had in steel, and we need to think about how can we manage your very high level of subsidization. Could Europe do the same? I mean, could Europe sort of threaten more subsidies? Is that money there? Would a more robust approach towards China help? Do you see any of that? We definitely need a more robust approach, but not just with subsidies is not at the center of the approach. The more robust approach, one is we need to decrease our single points of failure in terms of dependencies, because right now, China can blackmail us, for example, on critical minerals. So we need to go in there. And that actually, funnily enough, requires subsidies, because the only way you get alternative or positive incentives or regulation, because the only way you get an alternative to a supplier that controls more than 90% of the market is if you have a guaranteed supply. Otherwise, it doesn't work in a market economy. But for the rest, we need a whole mix of instruments. That means also deepening the market and having reciprocity agreements with, you know, Meredith mentioned that. You have the Chinese market, that even without subsidies, profits from enormous economies of scale and the innovation ecosystems. And we need to build that, Europeans with like-minded countries, eventually, hopefully also with the U.S. being integrated once Trump or a future president comes to his senses and realizes that the U.S. won't reindustrialize and compete with China with a tariff wall, but only by working together with like-minded countries that have the industrial capacity. I mean, Germany and Europe has, you know, for example, artificial intelligence. Everybody says Meredith mentioned it. It's partly dominated by U.S. services firms, but the future is partly in robotics, what you call embodied AI, where Europe has certain advantages without which the U.S. actually cannot compete with China, shipbuilding and so on. So the answer is not just subsidies. Plus part of the answer, of course, also gutting bureaucracy in Europe that is holding us back. Noah, do you agree? Yeah, I mean, we need a multifaceted approach to this. It's not just about subsidizing or industrial policy. China is a world leader in that and has shown that, you know, state intervention also in a capitalist world can work. I think a lot of people have been surprised by how successful China has been creating a sort of manufacturing hub for the entire world in an authoritarian state. But we need to do a lot of other things. We need to make it – we need to boost risk aversion in Europe. We need to boost innovation. Europe has lots of internal – even though we have a single market here, we have lots of internal restrictions that need to be removed. And Mario Draghi has sort of pointed in the right direction. But this will mean very tough decisions, right? If we're talking about a single market in banking, that might mean Germany accepting a takeover by an Italian bank or stuff like this. So I think we're heading in the right direction. I think reducing bureaucracy and overregulation is part of the solution, but partnering with other countries and also what we haven't really talked about is protecting certain industries that we see as vital that are really under threat from China. We've seen the solar industry in Europe disappear. But if you look at cars, if you look at machine tools, if you look at chemicals, all these industries are under threat at the moment because of Chinese competition, unfair Chinese competition, I would say. So you're saying we should subsidize, Europe should subsidize? Well, I'm saying we need to decide what industries we want to remain in. The Japanese are very good at this. They've mapped out what industries they want to be in in 10 years' time, what industries they need to develop. So we need to take this sort of strategic approach. It also means accepting that certain industries may be gone, right? And politically that's quite difficult, especially in an environment where populace and the far right is rising. Just one sentence, the toolkit is much larger than subsidies. You can have regulation, positive incentive, negative incentives. You can have tariffs and so on. So it's not just a question of subsidies. Meredith, do you agree? Should Europe really decide to drop some industries, if you will? Would that help to focus more on what Europe does well? So I don't think there's any need to drop industries, because I think what you want is, again, maybe echoing this idea, the Draghi report gives you a lot of ideas about how to make Europe more competitive and more market-based, and that will create the right incentives for some of this longer-term investment. So there are real benefits to finalizing the single market, getting financial markets more well deep. There's not enough depth to the financial markets. There's also not enough risk-seeking behavior by entrepreneurs in Europe. Culturally, it's shameful to have a company go belly up. In Silicon Valley, they expect companies to go bankrupt when they make the investment. So those are some things. But I'd also echo the point that the toolkit is larger, and as much as possible, we know from the Draghi report, Europe is being held back by its own regulations. We want to come up with as many market-based tools to try to get Europe in a stronger footing. And so just a very simple thing is this idea that we want to reduce some of our reliance in the West on certain Chinese supply lines. That's going to require some view that there's going to be a return on that investment, whether it's critical minerals or a particular type of silicon chips. So one possibility, you need to get a consortium of firms together to engage in some sort of partial, at least, long-term purchase contracts, because if I know that the only place Germany is going to buy chips from in 15 years is going to be chips manufactured in Europe, there's a very strong incentive for me to invest in that company and then purchase them in the future. But right now, the short-term incentive for any company that needs chips is to get them from China because they're cheap. The U.S. government's been... We lost the connection there. We're coming to the end of our program, and I would like to return to the question of the beginning, as in how can Germany maneuver between these two big power blocs, China and the U.S., both politically and economically? Investing in our own strengths, Meredith has outlined that, what we can do to unleash... And I think we can learn from China. China actually wants to shape the future and has this desire and has a plan for that. I think Europeans need to rediscover that, invest in our strengths, and reduce our single points of failure on dependencies. We talked about the ones from China. I think we do need to talk about the ones from the U.S. That means strengthening our ability to defend ourselves in Europe because that's what blackmails, what's the source of blackmail on the part of Trump. So the recipe in theory is simple. How to get a political majority for that is a different story. What do you think? Well, I think if we're focusing first on Europe, I think the EU has been a wonderful peacetime project. We're now in a world where big powers, the U.S. and China, are adopting a more aggressive strategy. Might makes right. And so Europe needs to adapt, right? Whether it's coalitions of the willing pressing ahead, whether it's giving certain powers to the European Union that have been in member states until now. We need to think out of the box on that. I'm afraid we're running out of time. I don't know whether we still have a connection with Meredith. We have, but we're running out of time. I'm afraid. I'm sorry, Meredith. That's it for today. I hope you enjoyed our discussion. Do leave us a comment down here if you're watching us on YouTube. Until next week, the To The Point team says thanks for watching and goodbye.