Competitive pressure from China for German companies

Among these, the proportion of German companies that state high or fairly high competitive pressure from China is relatively high, has risen sharply and will continue to do so. In industry, almost two thirds of the companies surveyed with competition from China see this as a major or rather major challenge. This also applies to 60 per cent of innovative companies with competition from China, i.e. to firms which continuously conduct research and development (R&D). The proportion of companies for which Chinese competitive pressure has increased or has increased significantly in the last five years and which expect it to increase or increase significantly in the next five years is similarly high.

At least half of the companies (this also applies to the various depicted subgroups) state that Chinese competitors offering comparable products undercut their prices by more than 20 per cent. Chinese companies even enter the market with prices that are more than 30 per cent lower than those of the companies surveyed. This applies to 63 per cent of companies that feel strong competitive pressure from China, but also to 37 per cent of innovative companies, i.e. firms that continuously conduct research and development. Although Chinese companies are seen as innovative, government subsidies are also thought to be behind the high competitive pressure. The approval rates for both aspects are similar, with shares ranging from around 55 to over 70 per cent, depending on the company group in question.

As a result of competitive pressures from China, many companies are threatened with a loss of market share and a drop in profits (60 to almost 95 per cent depending on the subgroup). An astonishingly high proportion of companies also have to resort to production cutbacks, redundancies and relocations as a consequence. Around half of the industrial companies competing with China want to reduce production and make redundancies for this reason, and almost a third are planning to relocate to lower-cost countries. The proportion of redundancies and relocations abroad is even higher among companies that perceive the competitive pressure from China to be high. Although cutting production costs and increasing research expenditure are often used as a response, these strategies do not appear to be sufficient to prevent the impending negative consequences for the respective firms. This has consequences for industrial employment: The manufacturing companies that have stated to react with redundancies as a result of competition from China represent just under 23 per cent of the approximately 7.5 million employees in this sector.

Firms estimate the probability of a trade war with China due to the Taiwan conflict in the next ten years to be high at around 70 per cent. The companies' approval rates for tariffs on subsidised Chinese e-cars and the possible prevention of sensitive technology transfer, which threatens to transfer high technology from German companies to the Chinese military, are also remarkably high. Around 80 per cent of the companies surveyed consider these measures to be justified or partially justified under certain conditions.

In summary, the survey results show that competition from China, which is often perceived as subsidised, is another serious stress factor for the German business model. The threat level appears to be surprisingly high. This indicates a relevant danger for the industrial location and industrial employment in Germany. Even continuous R&D efforts only appear to provide limited protection against the negative consequences of the immense competitive pressures from China. The business community's approval rates for a tougher approach towards China are remarkably high.

These findings, together with the extensive evidence cited in Chapter 1 on the extraordinarily high and widespread subsidies in China, suggest that the ability of Chinese firms to offer much lower prices is not the result of fair competition alone.

Clear recommendations for German and European policy can be derived from this:

• In view of the problematic economic framework conditions in Germany, a fundamental and broad-based reform initiative is needed to vigorously improve the competitiveness of the German economy. However, in view of the extensive Chinese distortions of competition, this is only a necessary, but not a sufficient condition to ensure the survival of companies affected by high Chinese competitive pressure.
• Continuous monitoring of German industry is necessary in order to determine where efficient companies are coming under pressure from Chinese distortions of competition. Otherwise, the survey suggests that a gradual and quiet industrial demise is likely to follow in the wake of production cuts, redundancies and relocations abroad.
• If affected small and medium-sized companies are not sufficiently informed about the EU's trade defence instruments, they should be supported by business associations and the public bureaucracy.
• The use of trade defence instruments has nothing to do with protectionism. These instruments are legitimised by the WTO. The EU usually applies them in such a way that the WTO framework usually leaves even more room for manoeuvre (Matthes, 2020a). The aim of an anti-subsidy investigation is precisely to distinguish between fair and unfair (subsidy-induced) competitive pressure. Given the lack of transparency of subsidies in Chinese state capitalism, this is a certain challenge. However, should the EU investigation infer subsidies that are higher than in reality, China would have the opportunity to provide evidence to the contrary.
• Germany and the EU are not doing anything wrong by using trade defence instruments. On the contrary: China's subsidisation is a violation of the rules and ultimately a protectionist measure. The EU is merely trying to compensate for China’s distortion of competition by levelling the playing field. As long as the EU remains within the WTO framework, the following applies: If China retaliates with countermeasures to EU tariffs, the Chinese government is once again putting itself in the wrong and instigating a trade war. Against this backdrop, the Chinese calls for a ‘truce’ are extremely questionable. Agreeing to this would mean to step into a strategic trap, as the EU would give up its indispensable level playing field instruments.
• There is an urgent need for more clarity in the public debate about who is on the right side and who is on the wrong side. All too often, statements by high-ranking German politicians suggest that the EU and Germany are putting themselves in the wrong by using anti-subsidy measures. The opposite is the case.
• Chinese countermeasures would lead to certain economic disadvantages for Germany. But these effects would have to be accepted. Firstly, the effects would be bearable, as our overall economic dependence on China is limited. For example, only around 3 per cent of German jobs are directly and indirectly dependent on exports to China. Secondly, if the EU were to waive punitive tariffs, there would be a silent but also costly erosion of our industrial base. Thirdly, in view of China's export offensive, it is important to show that the EU is prepared, if necessary, to use its toolbox against Chinese distortions of competition and Chinese threats. Fourthly, it is questionable whether China would really resort to serious countermeasures, as a trade war would further jeopardise China’s access to the EU market – at a time when the US and key emerging economies are increasingly closing their markets to Chinese products.