Dependence on China – diversification is not a panacea

With a view to the federal government’s raw materials strategy, the BDI recently called for Germany and Europe to “diversify and become more independent”. The reason for this demand can also be assumed to be in China: in 2022, Germany imported almost 70 percent of the rare earths, which are indispensable in the IT industry and in the energy sector, from the People’s Republic of China. According to a survey by the Ifo Institute, almost half of all German industrial companies purchase primary products from China, and more than three quarters in the automotive industry.

According to a survey, 80 percent of companies want to diversify their sources of supply in order to reduce their dependence on China. At EU level, at federal level and in companies, diversification is also seen as a panacea – but if you look closely, it has significant pitfalls.

Not every dependency creates vulnerability. Germany is dependent on Madagascar for the supply of vanilla beans – but a complete failure of these imports would be of no significance to the economy as a whole. Vulnerability through dependency exists when, for example, the basic supply is endangered by delivery failures, there is a threat of macroeconomic damage or companies can only buffer failures at considerable cost.

The conceptual difference between dependency and vulnerability is often ignored in the ongoing debate about managing geopolitical and geoeconomic risks – and this makes it difficult to develop effective countermeasures.

As a geopolitical strategy for economic security, diversification is expensive and only makes sense in the face of acute crises. Because the high costs that companies, consumers and taxpayers usually have to bear often remain when the crisis is long over.

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An example of this is the European agricultural policy: After the Second World War, the focus was on securing the food supply. Today, food is no longer scarce in the EU, but agricultural policy remains – as a protectionist and expensive subsidy project in which powerful interest groups are involved.

It also takes time to diversify, and time is often lacking: it will take years to tap Sweden’s recently discovered rare earth deposits, but Germany’s dependence on China and partial vulnerability are now acute.

In the event of impending bottlenecks, alternative products, recycling and economical use help

Nevertheless, diversification plays a central role in EU efforts to manage risk. The term appears 28 times in the Commission’s most recent document on the subject.

With the concept of “strategic dependency”, the EU also introduced a less precise category which, in addition to economic policy, even includes national security policy.

German-Chinese Relations

Germany is trying to free itself from its dependence on China.

(Photo: dpa)

From their perspective, the European space industry, for example, may be significant. However, their dependence on raw materials and preliminary products does not meet the outlined criteria for vulnerability and should not be considered in the context of economic security policy.

How economic actors will react in geopolitically triggered supply crises is difficult to predict precisely, but governments and companies can preventively improve their resilience to crises. If you want to reduce vulnerabilities, you have to optimize both the supply and the demand side.

Several approaches, also sustainable from an ecological point of view, can be helpful. This includes using alternative products in the event of impending bottlenecks, strengthening recycling and using critical raw materials and preliminary products more sparingly.

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The key is flexibility. There is potential to increase this at all stages of production. But that takes time – which is usually lacking when a geopolitical crisis is imminent.

Government stockpiles can protect against geopolitical risks

This is where the topic of stockpiling comes into play, because it creates room for adjustments. State-organized strategic stockpiling can offer protection against geopolitical risks.

The International Energy Agency’s crisis oil distribution system could serve as a model for international coordination. It dictates how much stock Member States must build up and how they reduce domestic demand in the event of an oil supply crisis. If there are shortages, the available quantities are redistributed in favor of the countries most affected.

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Defining dependency precisely, supplementing diversification with resource-saving, sustainable management and the strategic creation of stocks: the challenges of the turning point require a differentiated approach.

The author:

Hanns W. Maull is Senior Associate Fellow at the Mercator Institute for China Studies (MERICS) in Berlin.

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