Germany in the “China shock” – imported more cars from China than it exported

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Automotive executives from Germany and the United States who attended this year’s Shanghai auto show may have hoped for an industry revival after a three-year absence due to the pandemic. However, Western manufacturers have faced a harsh reality: dozens of new Chinese electric vehicles (EVs) are arriving to take over their market shares. Increasing EV production in recent years has led the Chinese auto industry to global dominance. Car exports from this Asian country already in 2022 exceeded car exports from Germany, thanks to a 54% increase in sales. China is expected to overtake Japan to become the world’s largest car exporter later this year.

Obsolete German technologies?

This change was evident in Shanghai, where Chinese consumers ignored offers from BMW, Volkswagen and Mercedes in favor of new models from Chinese manufacturers BYD and NIO. Compared to the new Chinese cars, equipped with state-of-the-art batteries and sensors, the German electric vehicles seemed almost old-fashioned. For decades, German engineers perfected the internal combustion engine; now the electric vehicle revolution threatens to render all German technological know-how obsolete. employment in Germany, this country – thanks to China – may experience a shock comparable to that experienced by the United States and other high-income countries in the early 2000s. After China’s entry into the World Trade Organization in 2001, Western manufacturers faced a severe competition from Chinese companies – starting with low-value-added products such as furniture and clothing, and later moving to more advanced industries such as IT and electronics.

Economies in the “China Shock”

Between 2000 and 2010, the share of Chinese-made imports in total U.S. imports increased by 25 percentage points, contributing to the deindustrialization of the so-called the rust belt and transforming the US economy and politics. Contrary to what trade economists predicted, the contraction of sectors competing with imports has not been compensated by an increase in exports to China. Likewise, redundant workers were not easily able to find new jobs, and those who found them had to accept much lower wages. The decline in manufacturing employment contributed to the increase in “deaths of despair” and set the stage for Donald Trump’s victory in the 2016 US presidential election as the electorate most exposed to competition from Chinese imports has shifted to the right. There are clear signs that Germany is already experiencing its own version of the “Chinese shock”. Until last year, Germany was a net exporter of cars. Today, for the first time in history, they import more cars from China than they export. From January to August 2022, Germany imported 1.8 million cars from China, while it only exported 1.7 million. There is a similar trend in the machine tools sector, where imports from China have surpassed German exports. The irony is that what facilitated China’s rapid industrialization was the massive import of German machinery, especially cars and machine tools, which are key to the locomotive of the European economy. Over the past 30 years, Germany has trained a generation of Chinese workers through joint ventures with Chinese companies. Beijing required these technology transfers as a prerequisite for access to its market. But now that the Asian country has become an industrial power in its own right, it has forgotten the need for help from Germany.

Beijing is expanding its economic influence

China has two significant advantages over Germany. First, in times of technological breakthrough, past experience doesn’t matter. China doesn’t need to be an internal combustion engine expert to beat Germany in the electric vehicle market. Secondly, their size allows for scaling production, accelerating the learning process and quickly reducing costs. In doing so, China has become the world leader in the lithium-ion battery sector – and this explains why it is now on the verge of developing sodium batteries. In the past, several factors have helped Germany avoid being shocked by China. Initially, Chinese imports competed with products that Germany had previously imported from low-wage countries such as Turkey and Greece, resulting in job losses in these countries more than in Germany. In the same way, the expansion of production networks in former communist Central and Eastern Europe allowed German companies to increase efficiency and reduce costs. For years, Germany has benefited from China’s economic boom as Chinese demand for high-quality German cars and machinery has skyrocketed. But as Beijing continues to expand its economic influence, Berlin may no longer be able to avoid the negative impact that other countries have experienced. While the reconstruction of Ukraine could give Germany a boost similar to that experienced after the fall of the Iron Curtain in 1989, this war must first end, which seems unlikely in the foreseeable future.

What will Germany do to protect the economy?

Policy makers in Germany could take several steps to avoid repeating the painful process of deindustrialization in the United States. They could try to attract foreign direct investment from Chinese battery companies and Asian semiconductor companies. Germany could also imitate China and conduct joint operations of domestic companies with, for example, Israeli start-ups dealing with artificial intelligence. This would help Germany close the knowledge gap in artificial intelligence technology, which will be crucial for self-driving cars and give German engineers the skills they need to remain globally competitive. Finally, Germany can and should take the lead in creating a European version of the government’s Advanced Agency US Defense Research Projects. By reverse-engineering China’s industrial policy strategy and the US’s innovation strategy, Germany can boost economic dynamism at home and elsewhere in Europe, thus avoiding the negative consequences of the Chinese shock and preparing its economy for the challenges of the 21st century. Source: elpais

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