Chinese Economic and Trade Challenges to the West: Prospects and Consequences from a U.S.-German Perspective

02/06/2018

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Thomas J. Duesterberg

Over the past 60 years Germany has built one of the strongest and most durable economies in the world. After the seminal event of German Unification, it has rebuilt the Eastern sector and integrated it into the economic structures of the industrialized West, albeit at a steep price. After weathering the storm of the Great Recession, it has regained its footing and established a solid growth path. Its economy is a pillar of the Eurozone and the European Union (EU). The backbone of the German miracle is manufacturing, a technologically sophisticated leader in the goods sector, which is symbolized by strong balances of trade over recent decades. German workers are among the best trained in the world. The German social contract has established one of the most harmonious traditions in the industrialized world of cooperation among labor, companies, and government.
Despite the success of the German economy, there remain certain imbalances and weaknesses in its economy and its trade with the rest of the EU and the world. Among these are over reliance on traditional manufacturing, a slow pace of investment, weak internal demand, slow growth in wages, an inefficient services sector, lack of success in some areas of the emerging digital economy, and a large imbalance in the current account (due to trade in goods) that is unsustainable in the long run. Added to and potentially exacerbating some of these problems is the challenge presented by the rising Chinese economic superpower. China’s ambitions are aimed clearly at new competition in the manufacturing and high technology sectors, and in winning greater global market share in many logistical, materials, industrial process, and digital services sectors related to the goods sector. China is at an early stage of its advanced technology challenge, but better understanding of this challenge and the means to address it are needed not only in Germany but in other industrialized nations as well. This paper outlines the challenge and suggests some ways to address it in a constructive and cooperative way. Germany remains one of the strongest industrial economies in the world. But other sectors of its economy are less efficient and robust. Its economy is unbalanced internally due to the dominance of manufacturing and externally due to a persistently high trade surplus. China is an increasingly sophisticated producer of manufactured products and has the ambition, expressed through its Made in China 2025 program, to displace the products of Germany and those of other advanced industrial economies in its domestic market in 10 advanced technology industries. Eventually, China has the ambition to become the world leader in the smart advanced technology industries of the 21st century. This ambition is a direct challenge to Germany, as at least four of the top German manufacturing sectors, including autos and machinery, are among the sectors targeted by the Chinese. China employs a variety of tools to promote its industrial sector goals. Many of its tools are of questionable legality, under the rules and accepted norms of the post-war global trading system. These include subsidies, localization requirements, coercive technology transfer, support of and preferences for state-owned industries, restrictions on market access, acquisition of leading technologies by state-controlled or directed entities (or by outright theft), discrimination in government procurement, and investment restrictions. Many of these Chinese practices can be countered by enforcement of existing WTO rules and by elaboration of new rules in areas not already covered well by the WTO, such as support for SOEs, distortions in the digital economy, or investment restrictions. Cooperation with traditional allies on trade issues would enhance the probability of success. Certain domestic policies might also strengthen and rebalance the structure of Germany’s economy to better counter the Chinese challenge. These include strengthening domestic consumption and increasing investment. These policies could also contribute to the sustainability of the Eurozone and have other political benefits internally and externally.

Copyright © The Hudson Institute 2018. All rights reserved.

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