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China's importance for the European mechanical engineering industry is as great as ever, but there is increasing discord in day-to-day business. Germany and the EU therefore need to examine the trade policy tools they use. An analysis.

By Oliver Wack

The perception of China has changed in recent years. On the one hand, China is a key economic partner and of great significance to German mechanical engineering, too. The country is the second largest export market for the mechanical engineering industry, as well as the second largest destination for foreign investment after the USA. Recent weaker economic growth and the reluctance of some customer sectors to invest are unlikely to change this. Total growth for 2019 is forecast to reach around 6 percent, putting it much lower than in 2018. The reason behind this weaker development may be the falling domestic demand, in part shaped by credit growth being subject to stricter state regulation. Exports to the USA are also falling as a result of trade disputes. Growth is expected to fall once again in 2020, to just 5 percent. Some experts are already interpreting this figure, published by the government, as a "slow goodbye to economic growth at any price."

At the same time, China is not making any notable efforts to create the level playing field for European companies that has long been demanded. There is a growing realization in business and in politics that inequalities that have been tolerated up to now - such as in market access - are no longer acceptable. The strategy of "sticking one’s head in the sand" is never effective, and even less so given China’s strengthening position as a competitor on international markets. After all, the People's Republic is already the world's second largest exporter of machinery after Germany.
China plans to reinvent its economic model, moving towards quality rather than quantity. The country hopes to climb even further up the innovation ladder under its own steam. Its plans are supported by a proactive industrial policy whose focuses include developing local champions and boosting state-owned companies. Despite ongoing discussions with international partners, no change in direction is expected here in the medium term. One example of the increasing influence of the Chinese government on companies is the announcement by Mao Shengyong, spokesman for the National Bureau of Statistics of China, in October 2019: "We must adhere to the guidelines issued by General Secretary and President Xi Jinping and to his ideas for the new era of socialism with Chinese characteristics. We must stabilize growth and put economic development within a sensible framework."

That means it is time to act: In a strategy paper on China in March 2019, the EU adopted a new position. With various measures including the rapid conclusion of the bilateral investment agreement, it hopes to close the gap between European and Chinese conditions. The role of state-owned companies and the issue of subsidies will play a particularly crucial part in the future relationship with China. State funding and protectionist mechanisms on the local market make a significant contribution to unfair competition, which is why VDMA is also calling on Germany and the EU to re-examine their trade policy instruments and, where necessary, to adapt them to the new situation in relation to China.

It was against this background that VDMA Executive Director Thilo Brodtmann traveled to Beijing and Shanghai in late September 2019 to explain the German mechanical engineering industry's position to local organizations, ministries and partner associations. In addition, the delegation that joined him on the trip enjoyed numerous conversations with representatives of VDMA members, gaining authentic and up-to-the-minute insights into the current situation on the market. 

"I am surprised that the Chinese administration appears to be concentrating solely on the trade conflict with the USA at the moment," said Brodtmann at a press conference in Beijing. "We have informed the Chinese Ministry of Commerce and the central authority responsible for planning macro-development of the significantly higher trade volume with the EU and the potential this offers. A fast conclusion to the bilateral investment agreement between China and the EU, which has been under negotiation since 2013, would send a positive signal against the increasing protectionism on the world markets," emphasized Brodtmann.

Further critical issues for the German investment goods industry in terms of the way China is currently dealt with include the introduction of a state assessment system for companies planned for January 2020, the potential effects of the new Chinese cybersecurity law, the lack of transparency on Chinese investment, and the unequal conditions for financing projects in third markets.

"In the future, the services our sector offers in the context of Industrie 4.0 will be internet-based. To achieve this, China needs to ensure that data can be transferred smoothly across borders, for the benefit of our Chinese customers," demands Brodtmann. "When it comes to the planned bonus system for companies, we are calling for it to be based exclusively on hard facts, such as adherence to environmental guidelines and the payment of taxes and contributions."

Given the experiences of the VDMA delegation trip, however, it would appear difficult to win China over to the concerns of the German mechanical engineering industry. Yet at the same time, Chinese economic growth also has its limits. "As an industry, and working together with policymakers, we must continue to speak with one voice and to tackle the inequalities in the markets together. The EU will only be heard if it is strong," sums up the VDMA Executive Director.     

Further information

VDMA Foreign Trade Department

Oliver Wack, VDMA Foreign Trade Department.