Jürgen Hardt: 'Our China policy is too naive'

Mr. Hardt, which of Germany's key China policy projects would you like to see implemented during this legislative period?

We still cultivate too much naivety and recklessness when it comes to China. Although we benefit from favorable political and economic relations, there is a whole series of risks that we have underestimated. We have not been able to assert ourselves in key technologies in parallel with China, to make ourselves more independent. As a result of this dependency, China only needs to press a few buttons to get us into serious trouble.

Germany is currently feeling this in the rare earths sector.

China has restricted the export of high-performance permanent magnets, which are essential in many technological applications today, such as in modern electric motors, to such an extent that trade has largely come to a standstill. Formally, exports have been halted, and a special permit is required. But you can't get this permit because the Chinese say: let them squirm a little. I'm afraid that requests for special permits are piling up at the embassy in Beijing.

China has presumably taken this measure in response to the American tariffs against China. It shows us that we have failed to position ourselves in key technologies and supply chains, leaving us vulnerable to blackmail.

Why? The dependence on rare earths has been known for a long time.

We have failed to synchronize politics and economic activity. Although we have signed raw materials agreements, for example, with Kazakhstan, we have used sound arguments to suggest that it is up to the economy to bring these raw materials agreements to life through appropriate cooperation and investment. In other words, building a permanent magnet factory in Kazakhstan, for example, as a joint venture with one or more Kazakh companies. That never happened.

What was the reason?

In my opinion, the German economy has lost the ability to see long-term risk categories. For a long time, all politicians who warned against becoming overly dependent were dismissed as naysayers. We saw this with the discussion about the expansion of the 5G network with Chinese Huawei components and with Nord Stream II. In the end, the controllers who looked at the costs of production always had the upper hand. With Nord Stream II, this has backfired on us, and I'm afraid we don't yet see the risk with 5G either.

Let's stay with the Kazakh plant: How could politics have made this project more palatable to the business community?

First of all, politicians must create the framework conditions. At the time, Chancellor Merkel had concluded a raw materials deal, which would have made it possible to reduce dependence on Chinese rare earths. However, any monopolist's strategy is to try to prevent alternatives to the monopoly by making them unattractive through low prices. But even if something is economically unattractive, it can still make economic sense. And I expect the CEO of a large German company to do more than just look at the bottom line: Namely, to keep an eye on the long-term economic development of the company.

Dependence on key products that are monopolized by a single supplier who uses its power for political and economic gain can be very harmful. Especially when you cannot sue the government in court for your rights in this country. This should really set alarm bells ringing in the German economy.

Almost every modern product contains an electric motor. And if you can't sell a 50,000 euro car because you don't have motors for the electric windows, then you won't be able to deliver this car to the customer. Then production will come to a standstill.

What additional instruments does politics have to encourage the economy to make decisions that may be economically unattractive in the short term but bring long-term benefits?

I believe that there used to be a better link between the government and the German economy. Politicians were able to mobilize the economy to do politically sensible business. And to refrain from others because they carried high risks. Some people mocked this at the time as "Germany Inc.," but the idea that the economy is systemically relevant and strategic – that you have to develop certain ideas together – is correct.

The state can provide incentives. Firstly, by making the import of products more expensive through tariffs if it believes that they have too strong a dominant market position, thereby setting economic mechanisms in motion that lead to diversification or ensure that domestic production is boosted. The second is that it purposefully promotes investments and investment partnerships through Hermes guarantees and special depreciation allowances.

Surely all this was possible for the Kazakh plant that was never built, to stay with the example.

If these instruments are not sufficient, we have to take things further. We cannot override the mechanisms of the market economy. However, I believe that when evaluating the economics of a major project, such as the construction of electric cars in Germany, we must look beyond what we can order, where, and how in the global market. We must also ensure a reliable supply. What China has over us is this superiority in the strategic integration of politics, economics and global politics.

We need a new awareness and a new responsibility. It has to be rewarded if a board member is willing to risk his annual bonus by saying, "I am now investing 300 million euros together with the competition in a third country to build a magnet factory." And accept short-term consequences in exchange for long-term security. The government needs to consider this: What incentives and coercive measures can we use to achieve this?

What could these be?

I believe that politicians must open up alternatives to China.

For example, a free trade deal with India?

You sometimes hear from the business community: it's so difficult there, with this bureaucracy and inertia, everything gets lost in the small details. But if you ask entrepreneurs: Was it easy in China 40 years ago? No, of course not. Was it easier back then than it is now in India? Again, no. And do you think it will take another 50 years to achieve the same in India that you achieved in China? The entrepreneurs say no again. But when I ask them, 'Why don't you go to India then?' The answer is: Because we have China.

That's the point: 40 years ago, there was nothing else. There was only China. It was far away from war and had a unified leadership that wanted to open up. But India's future prospects are much brighter than China's, which, interestingly enough, the Chinese leadership is also aware of. It knows its weaknesses: demographics, the real estate bubble, the shortage of skilled workers. We must now introduce further arguments in India's favor.

Jürgen Hardt is an economist and has been a member of the German Bundestag (CDU) since 2009. He has been the foreign policy spokesman for the CDU/CSU parliamentary group for ten years.