Joerg Wuttke: 'The Chinese economy will feel the impact'

Donald Trump has been elected as the next president of the United States. What does this mean for China – and for German companies in the country?

That depends entirely on how far Trump implements what he announced during the election campaign. The general rule in Washington is that although everything he says sounds terrible, he will probably follow through on it. He owes it to his voters. So, tariffs of 60 percent on Chinese products are likely to happen. The only question is: Will they come in one big bang, or in increments? In other words, one quarter in 2025, one quarter in 2026, and one quarter will be exempt from the tariffs because these areas are too price-sensitive for the lower classes. I expect the measures to come into effect over two to three years.

How strongly will the tariffs affect China?

With China selling goods worth 430 billion US dollars to America, the Chinese economy will feel the impact. The big economic picture will certainly be somewhat clouded for the time being. Companies will reduce their investments somewhat. However, they will step on the pedal when it comes to exports so that they can ship as many cars or other goods abroad as possible before Trump enforces the tariffs. After that, exports will fall. It will look very cyclical.

German automotive companies will probably stick to their investment plans. They will first look at where the tariffs will be implemented first. Will it be in the electronics sector, or will mechanical engineering be affected? The affected products will probably be challenging to sell, and investments in China will be less worthwhile. We will also have to look at the extent to which Chinese customers of German companies are affected.

Apart from this, in which other areas will problems occur?

Particularly in supply chains. We are now in the so-called lame-duck period until mid-January and over 70 legislative proposals are being discussed in Washington during this phase. Many in the area of artificial intelligence, many in China, including the Biosecure Act. This will make it very difficult for American companies to work with Chinese companies in biotechnology. The other will be the Countering CCP Drones Act, which is aimed at DJI in Shenzhen. Many German companies are also involved as suppliers. The USA is expected to issue legislation making it impossible for DJI to fly on American communication channels.

The other issue will be an Investment Screening Act for American companies. Although it won't affect German companies directly, Trump will certainly come to Berlin or Brussels next year with all these ideas he is implementing – with tariffs and investment screening. And then perhaps he will say: If you want me to support you in Ukraine, you have to support me against China. I assume the pressure will be extremely high, whether we like it or not.

Should we fear a deepening rift between the markets?

Decoupling will certainly continue to increase. The Chinese started it, the Americans brought it to the fore, the Europeans tried to counter it with derisking. The trade volume between America and China will decline as a result. And that will lead to the Chinese pushing their overcapacity onto other world markets, including the European market. That will be a big problem for all of us. We will have to wait and see how the Chinese react. Will they impose punitive tariffs on American products, or will they respond to the tariffs by lowering the renminbi somewhat? That would make Chinese products even cheaper in Europe and thus even more competitive.

How can German companies minimize their risk?

The "in China for China" strategy is certainly one way of dealing with this. China is a large market. However, our problem in China is that market access is still very difficult, and the economic outlook is nowhere near as positive as it is in the USA. So that will also be an issue: How will the American economy develop? My assessment so far has been that the Germans are doing extremely well in the USA, while in China, they are bringing out ever bigger position papers due to trade barriers.

In the USA, however, German companies have the problem that they cannot find enough workers, especially in the low-wage segment. We have to see how this develops and how companies react. Will there be a shift towards America and away from China because supply chains are becoming difficult and China's economy will continue to stagnate?

In any case, I don't believe that we can abandon America. The USA is too big a trading partner, as are the investments. "In America, for America" can also be a strategy. German workers are in the middle and may have to watch investments migrate to America because its economy is booming. The dollar is strong. And Trump, like Biden, will encourage investment in the manufacturing sector. Lastly, we also need to look at the areas where trade distortions affect third markets.

You mentioned third markets. Is it possible that they could absorb overcapacity from China, for example?

China currently exports around five million cars, with only half a million going to Europe, mostly EVs. They mainly export gasoline cars to the other markets. And that's where they become competition for us, which we don't want. South America, Africa and Oceania are not typical EV markets. There will undoubtedly be cut-throat competition for combustion engines there. We have to see to what extent the Chinese will also act as investors there, for example in Thailand, Turkey and Brazil. Russia has already become a monopoly market for China.

Let's get back to Trump. What reactions have you heard from companies in China?

There is a lot of unrest, but it is directed more inwards: How is the economy doing? Will the real estate crisis continue? Will the Chinese government slowly come out of its corner? The main concerns are more about China's economy itself, which is surprisingly weak and where you can see that the government's normal, rapid response over the last two years has been very different from the previous decades.

Will the collapse of the German government coalition also affect companies?

The end of the German government coalition causes further uncertainty and uncertainty always leads to restrained investment. There is no planning security, which has been a longstanding problem because of the back and forth in the government. Moreover, we currently have the politically weakest Europe we have ever had. We will have to see what happens between now and March, but we are looking at an extreme lame-duck period. The German economy is already emotionally at rock bottom anyway. That's not good. We need a shot of optimism, and we need to see if a new government can spread it. Will China continue to look at Germany? Definitely. The size of the market and the importance of German politics in Europe will not diminish drastically. We will see who the successor in Berlin is and to what extent Germany will be more in line with America. A lot can still happen between January 20 and the end of March.

Joerg Wuttke has been a partner at Dentons Global Advisors-Albright Stonebridge Group in Washington for several months. Previously, he was Managing Director and Chief Representative of BASF China and President of the European Chamber of Commerce in Beijing. Wuttke lived in China for over 25 years.