Sebastian de Quant is an associate fellow at the German Council on Foreign Relations (DGAP), Sander Tordoir is a senior economist at the Center for European Reform and Shahin Vallée is a senior research fellow at the DGAP. You research how geopolitical risks influence the economy.
Donald Trump’s significant lead over Joe Biden in the polls is an ominous sign for Europe’s largest economy. In recent decades, the German growth model has been based, among other things, on demand from China and the USA and energy from Russia. But now China is flooding the global market with electric cars, Russian gas supplies have largely come to a standstill, and there is a threat of another Trump presidency. Germany and the EU must develop instruments to prepare for this new, challenging era.
Donald Trump’s sharp criticism of the European trade surplus may result in an escalation of trade restrictions by the USA against the EU. This could lead to falling demand for European products. At the same time, Trump plans to reduce or even end US involvement in European defense. The ongoing uncertainty surrounding the next presidential election raises questions about whether future governments will maintain their participation in international coalitions, such as the current naval coalition in the Red Sea against the Houthi rebels, or their commitments to NATO. In this unstable situation, it remains certain that the geopolitical relationships between the major powers USA, China and the EU will shape the world order. The possible escalation in competition between the US and China, whether in the form of a military confrontation with Taiwan or continued economic sanctions, urgently requires a clear plan from the Europeans. They should review and correct the mutual dependencies, especially between Germany and China.
To be fair, the EU has already taken its first steps. Commission President Ursula von der Leyen coined the term “Derisking” and thus cleverly distanced itself from the illusionary idea of ”decoupling” as it was originally propagated in the United States. In this context, it outlined a new strategy for economic security. At the same time, Germany developed its own, carefully thought-out strategies for the Dealing with China and for a contemporary industrial policy.
Derisking made in China
However, these initiatives alone are not enough. The EU’s trade deficit with China is reaching alarming heights: since 2019, it has expanded from 165 billion euros to almost 400 billion euros last year. A significant part of this increase is due to China’s so-called dual circular economy – the plan to make resources, technology and production autonomous. Derisking made in China. For a single EU member state, however, unilateral derisking is virtually impossible. The German economy, as a highly integrated system, will only be able to derisk successfully if regional, federal and, above all, European policy mechanisms are integrated at the same time. The success of this project therefore depends crucially on the fact that: Berlin and Brussels recognize the actual risks and develop tools to deal with them.
A significant risk initially lies in the threat to European, especially German, intellectual property in China. European companies are almost on their own when it comes to accepting local production requirements and technology transfers in exchange for Chinese market access. This is particularly evident in key sectors such as aerospace and automotive, where Chinese companies are catching up on decades of research and development work and becoming serious competitors.
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To effectively minimize intellectual property risk, two measures are required: First, a strict European screening process for foreign investments that closely examines the terms and conditions set by Chinese joint venture partners. Second, an investment agreement with China based on a robust dispute settlement mechanism should be renegotiated.
EU allows Chinese to take over ports
Another risk is that critical European technologies, companies or infrastructure could come under foreign control. For example, EU states have allowed and even encouraged China’s takeover of the port of Piraeus in Greece. At the same time, they did not object to the acquisition of significant shares in important European ports such as Rotterdam, Dunkirk, Le Havre and Vado Ligure by companies such as Cosco or China Merchants Ports Holdings. However, concerns were raised in Germany when China sought a stake in the port of Hamburg. This highlights the lack of a common mechanism to screen foreign investments. Such a framework would be crucial to mitigating the risk associated with the introduction of new technologies and infrastructure, be it the 5G networks developed by Huawei or European semiconductor production.
Another aspect concerns Europe’s dependence on imports of important materials and technologies, especially those that serve the energy transition. The Net Zero Industrial Act seeks to boost domestic production of wind turbines, solar cells and electrolyzers. However, the law could fail to achieve its goals because it lacks both clear guidelines for local participation and sufficient subsidies for domestic production. The European strategy for critical raw materials is also of particular importance. In practice, however, access to scarce resources will face significant challenges in a world characterized by alliances led by the US and China. Local industry and promoting the energy transition do not necessarily have to be seen as opposites, as long as Europeans pursue a comprehensive EU-wide industrial policy that supports both aspects. In this context, Commission President von der Leyen should be prepared to deal with Berlin, which has shown itself to be standing in the way of the establishment of a European fund to support industry.
In addition, regional and sectoral concentration of exports is a risk. Measured in terms of GDP, Germany is similarly dependent on imports from China as other G7 countries. However, export dependency is many times higher and is heavily concentrated in a few sectors and regions. The German automotive sector in particular is extremely vulnerable to the rise of Chinese electric vehicles and batteries. At the same time, China is increasingly exporting vehicles with internal combustion engines, which are difficult to sell on the domestic market due to advancing electrification. The question of whether such exposed sectors can remain competitive in an increasingly mercantilist world without anti-subsidy or anti-dumping measures remains open.
Danger of a geoeconomic crisis
The EU Commission is currently investigating Chinese subsidies. This situation has the potential to divide Germany, especially if automakers with significant investments and local production in China resist change. Furthermore, it could lead to tensions within Europe as countries with low car exports to China, such as France, could advocate a more aggressive strategy.
No European head of government can claim that he was not warned. But with less than a year to go before Trump potentially returns to power, Europe looks set to slide into a geoeconomic crisis. There is a need for action, but the political levers for this are not in one hand. While trade policy already falls within the EU’s remit, the broader set of tools required for comprehensive derisking – including foreign investment screening and export controls – remains largely at the national level. This leads to slow and inconsistent decisions, leaving the EU exposed to pressure from China or the US. Every aspect of derisking in Europe requires an EU-wide consensus. This is an enormous challenge, but given Trump’s possible return to the presidency, Berlin and Brussels should intensify their efforts.
Sebastian de Quant is an associate fellow at the German Council on Foreign Relations (DGAP), Sander Tordoir is a senior economist at the Center for European Reform and Shahin Vallée is a senior research fellow at the DGAP. You research how geopolitical risks influence the economy.
Donald Trump’s significant lead over Joe Biden in the polls is an ominous sign for Europe’s largest economy. In recent decades, the German growth model has been based, among other things, on demand from China and the USA and energy from Russia. But now China is flooding the global market with electric cars, Russian gas supplies have largely come to a standstill, and there is a threat of another Trump presidency. Germany and the EU must develop instruments to prepare for this new, challenging era.