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China’s rise is inextricably linked to globalization and the open markets created by the rules-based world trade system developed after the Second World War. President Xi Jinping will be the foremost international leader present at this week’s World Economic Forum at Davos.
The world is currently experiencing a clash of currents: While the internet and smartphone revolution have linked people together in a global megalopolis, narrow nationalist policies are on the rise. In the sphere of international trade and investment, simple recipes seem to gain currency: Take manufacturing back home, keep imports out and send foreigners home. If this were to become mainstream we would risk the downfall of the open rules-based global order.
Germany and China share a strong interest in moving the world towards more openness and to defend multilateral approaches towards solving trade and other issues. In order to stem a current trend towards closing markets and minds, we need strong political leadership, strong political signals and, above all, credible action that shows we mean what we say when we talk about further opening. We would strongly welcome if China were to make a call in defense of open markets and globalization and against protectionism at Davos. In the present climate of growing uncertainty, a speedy conclusion of EU-China negotiations on a bilateral treaty on investment would be a clarion call showing that two of the world’s leading trading regions are determined to move forward towards more investment, more trade and more prosperity for mutual benefit. This would also pave the way for first steps towards a free trade agreement.
However, a lot of homework still has to be done. The political leadership of China never ceases to assure us that further opening towards foreign investment, a level playing field between German and Chinese companies as well as protection of intellectual property is a priority. However, many companies keep telling us that their difficulties in these areas have increased. It often appears that somewhere down the line, political assurances of equal treatment give way to protectionist tendencies.
There is a growing worry by European companies that some line ministries and possibly local actors are trying to tilt the playing field towards purely domestic companies. Obligations to transfer technology to both Chinese companies directly and authorities are getting more stringent. The obligation to enter joint-ventures, also mostly with a view to transfer technology to the Chinese partner, the majority of them State-owned enterprises, has hardly been changed over the last decades. The recent overhaul of investment rules is largely a repackaging. In the area of new energy vehicles, China is massively tightening rules mandating technology transfer. Additional draft rules on NEV quotas are so onerous that they could even bring a decades-long trend of rising German investment in China’s manufacturing sector to a halt. It is steps such as these that have resulted in China ending up at the bottom of an OECD list on FDI restrictiveness.
China’s industrial modernization blueprint “Made in China 2025” is impressive, but its implementation risks turning it into a rigid top-down instrument setting targets for national production by national champions across a huge-spectrum of industries. There is a temptation for line ministries and local authorities to ignore wider goals such as a level playing field between all market participants, in order to fulfil the goals set by industrial policy.
But even old-style import substitution is alive and kicking. Take food and agricultural products. The recent overhaul of licensing structures for milk powder have reduced channels for imports and given a competitive advantage to local producers. A minister has promised the national milk industry in a public meeting full government support and protection in achieving market dominance. Companies in this field are forced by new regulations to hand over their innermost company secrets to the same government authorities closely working with domestic competitors. A recent regulation on baby milk powder requires foreign companies to reveal their entire production know-how down to the last detail to the authorities, not just the exact recipe but for example the set-up of machinery in the production process, even CVs and contact details of every person involved in the companies’ R&D.
A strong defense of open global markets and recognition of the positive effects of globalization are more necessary than ever. China could help at Davos to set a positive tone. Later in the summer at the G20 summit in Germany, the leading economies of the world have an opportunity to further stanch the hemorrhaging of our open global order. The summit’s main theme will be “Shaping an interconnected world”. Germany is willing to closely cooperate with China to work against protectionist and populist trends. The most effective way to do that is to match strong political signals with action.