SHANGHAI – Due to ongoing disagreements over economic and industry policies, Sino-European economic movement is rare. The general pattern of business between the two usually involves China exporting high-quality domestic products to European countries, who in turn export nation-specific high-tech goods and services. In the instance of Germany and China, their economic relationship can be summarized as simple but profitable as German automobiles and machinery parts are in high demand.
So it was a happy occasion when on October 10 German Chancellor Angela Merkel welcomed Chinese Premier Li Keqiang to Berlin for an economic summit. The two leaders and their respective ministers of business and trade pledged some US$2.5 billion in investment deals and innovative cooperation. Affected industries include key companies such as Daimler, Volkswagen and other automobile and airplane manufacturers. Airbus also signed a deal to sell 70 A320 single-aisle jets to China’s aircraft purchasing and processing industry.
Negotiations between Merkel and Li Keqiang progressed smoothly as this was their third bilateral encounter since 2011. Indeed, their partnership has established several beneficial programs, including a government-level exchange program in 2011. This has been extended to universities, and with government support, both nations have developed officially sanctioned student-exchange programs.
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In addition to increasing foreign investment and the signing of bilateral trade deals, the summit also focused on increasing coordination between China and the EU. Merkel and Li Keqiang ratified a 52 page document containing a sundry of long-term projects aimed at fostering innovation in the technology, health, education, climate and energy sectors.
While both the Chinese and German economies are currently slowing, Merkel and Li Keqiang were confident that marked cooperation between the two will contribute significantly to their bilateral economic relationship and would stimulate growth for years to come. Indeed, times are tough for both countries, with German exports slumping by 5.8 percent (in part due to the Ukraine crisis in August) and Chinese growth forecasts chopped to 7.1 percent Nevertheless, with 6.1 percent of German exports heading to China in 2013, total trade between the two countries totalled US$160 billion that same year, a figure likely to increase further in the near future.
However, there are still issues to be hammered out. As previously mentioned, German and Chinese business relations are relatively stable despite points of contention over styles and practices – many economists refer to this special relationship as a ‘honeymoon phase’. But it is these very disagreements that have the potential to upset this developing cooperation.
Last month, for example, Chinese authorities, drawing international criticism for lack of transparency, accused several major foreign firms including Volkswagen affiliate Audi of unfair practices. The German automaker was subsequently fined US$40.5 million for violating antitrust laws. Germany, meanwhile, raised the issues of fair markets, rule of law and human rights during their summit meeting – the chancellor was adamant in stating human rights and economic interests must go hand in hand. In her public podcast, she criticized China for sentencing Ilham Tohti, a Uighur intellectual, to life in prison and stressed the importance of free speech in Hong Kong. Chinese senior diplomats were ready to discuss these issues but the two nations will need to tread lightly to keep relations healthy.
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And yet, given the large mutual benefit for both countries, it is in their national interests to deepen their strategic partnership.
China remains, after all, Germany’s third largest trading partner and second largest market for exports outside of the EU. For its part, China relies heavily on high quality German mechanical tools, industrial parts and heating technology. Big-brand German companies will remain popular in China, so bitter standoffs need to be resolved through transparency over fair trade regulations and emphasis on equal treatment.
With the end of the “Innovation Partnership” talks, it should be noted that both countries are eager to come out of their respective economic slumps. Foreign investors should pay close attention to Premier Li Keqiang’s further visits to Russia and Italy, as China is determined to keep themselves and Europe from dipping into recession.
The Chinese Premier’s speech in Hamburg demonstrated the detail and care with which he is treating this trip: he expressed a desire for increased Chinese investment into Germany’s second largest city and cited numerous industries that could benefit. The Premier will likely keep this momentum as he travels to Russia, where the Ukraine crisis will likely be high on his agenda.
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.
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