Germany’s Bet on China Is a Crisis in the Making

by John Austin Elaine Dezenski

Source Link

BASF, the German chemical products behemoth, made a bet on Russia in recent decades. After Russia invaded Ukraine, that bet failed to pay off. Now it’s making another risky bet on China, just as great power competition is heating up.

In 1990, BASF forged an alliance that would provide the company—and Germany more broadly—with a steady supply of inexpensive Russian natural gas. BASF is Europe’s largest commercial consumer of Russian gas. At its largest factory—a small, self-contained city with its own hospital and wastewater treatment plant—BASF consumed thirty-seven terawatt-hours of Russian natural gas in 2021, nearly 4 percent of Germany's total natural gas consumption that year. The fuel became so essential that the CEO of BASF referred to Russian gas as “the basis of our industry’s competitiveness.”

.Months after Russian leader Vladimir Putin’s invasion of Ukraine, a unified Europe turned off the tap of Russian oil and gas, starving BASF of much-needed energy and chemical ingredients. BASF tried to weather the restrictions by dialing back production, but with the prospect of the continuing sanctions and a war stretching toward its second year, BASF has cut its losses and moved operations to China, where it is building a €10 billion factory complex in Guangdong.

BASF is not alone. Germany’s economic and industrial might has depended heavily on cheap Russian gas. High energy prices and uncertain supply have impacted German companies large and small. Facing energy uncertainty, a shocking 9 percent of Germany’s small and medium industrial companies are also considering moving operations abroad.

For BASF, the calculus was rather simple. No longer able to rely on that natural gas to power its factories and create its chemical precursors, like ammonia and acetylene, BASF was forced to find a new jurisdiction where energy is plentiful. China checked that box.

For similar reasons, some German politicians now seek to forge new economic ties with China. German chancellor Olaf Scholz visited China in November in order to “further develop” cooperation between the countries—efforts that led to China’s purchase of 140 Airbus airplanes.

By tying itself to China, however, Germany risks making its Russia mistake all over again. It is doing so at a time when tensions are heating up between Beijing and the West. Moreover, Germany should be investing in unprecedented transatlantic cooperation and pan-democratic unity in the wake of the invasion of Ukraine, and as fears grow over a Chinese invasion of Taiwan.

The reason the Russian gas supply has stopped was predictable but not inevitable. It occurred because Russia is a country that a single person controls—a person capable of horrific and violent blunders. Indeed, reliance on Russian gas was a vulnerability because Russia is non-democratic and capricious. Today, the country is engaged in the megalomaniacal war of one man who has unified much of the democratic world in opposition.

By turning to China, however, BASF and other German companies risk another major miscalculation—allowing the allure of cheaper energy to bind them to another autocratic and capricious regime controlled largely by one man. Germany, which enjoys alliances throughout Europe and North America, should recognize the risks. Xi Jinping’s saber-rattling in the Taiwan Strait could be a sign of things to come. China is capable of making the same mistake as Russia and paying even more significant consequences. China’s economy is entangled with many of its Western trading partners.

On top of that, German engagement with China always carries the substantial risks of technology theft and knowledge transfer—a risk that some scholars have described as Beijing’s “weaponization of cooperation.”

BASF is just one of the many multinational companies that risk being caught flatfooted if Beijing becomes militarily aggressive or if it decides to establish a state-owned competitor to the German companies that it previously cooperated with.

Of course, BASF is also investing heavily in China because, like most multinationals, it values the Chinese market. And it’s not alone here, either. China is Germany’s largest trading partner outside of Europe. German carmaker Volkswagen gets more than 40 percent of its global revenue from China. As BASF’s chief executive explained, “we’ve come to the conclusion that China is an opportunity . . . and it makes sense to expand our position [there].”

BASF is heading in the same direction. While Europe made up 40 percent of BASF’s sales, and North America made up another 27 percent, China’s contribution to global sales is growing. In the third quarter of 2022, China made up 14 percent of BASF’s global sales at just under EUR 3 billion.

BASF currently employs 50,000 workers in Germany. Similarly, small and medium-sized companies in the industrial sectors are major drivers of employment in Germany. If companies and their jobs leave for China, it will be hard for Germans to ignore the economic and social implications of significant job flight. A push toward greater independence is now needed, including boosting energy capacity from existing nuclear power plants and more aggressive renewables infrastructure.

BASF’s calculation to double down on China may backfire on the country in other ways. As the United States and Europe examine their critical supply lines, routing essential industrial chemicals through China seems unappealing. BASF is not alone. Many other countries may find themselves in a similar situation. However, Western countries are increasingly concluding that economic and national security interests require repositioning their critical-component supply lines through friendly, democratic partners.

This is why many multinational companies have recently increased “ally-shoring”—re-routing supply chains to friendly countries for greater economic security, keeping jobs closer to home, and reinforcing democratic norms. Ally-shoring may not work in all markets and for all types of critical industries. But Europe and the United States understand that they must join forces where possible to reduce vulnerabilities. An industrial alliance of democratic countries would be hard to beat—Germany and the United States should be taking the lead in such an alliance.

BASF has taken a great risk. A bet on China might prove even more disastrous than the bet it made on Russia more than thirty years ago.

John Austin directs the Michigan Economic Center and is a nonresident senior fellow with the Brookings Institution and the Chicago Council on Global Affairs.

Elaine Dezenski is senior director and head of the Center on Economic and Financial Power at the Foundation for Defense of Democracies.