It’s the economy, stupid

Europe is falling behind

In recent years, China has massively expanded its trade with the most important countries of the Global South. Indeed, it has now become their leading trading partner, ahead of the United States and the EU. This trend is analysed in a recent study by the Cologne-based German Economic Institute (IW, Institut der deutschen Wirtschaft),[1] which finds that the People’s Republic was able to grow its trade volumes by 47 per cent between 2019 and 2023 with respect to twenty-five countries in the Global South, some of which have considerable economic clout on the world stage. China now accounts for 20 percent of those economies’ combined foreign trade volume, compared to just under 12 percent in 2010. The United States has been able to keep its 18 per cent share more or less stable since 2010, but the EU has lost a lot of business. The latter’s trade volume fell from 18 per cent in 2010 to 14 per cent in 2023. Germany was able to maintain its share at around just 4 per cent. Russia, by contrast, has managed to increase its share of foreign trade with these most important countries of the South from just one per cent in 2021 to three per cent in 2023. This upward trajectory means that Russia, which can be considered the biggest winner of the past two years, is actually about to overtake Germany.

The New Silk Road

According to the IW report, China’s expanding share of foreign trade in the Global South cannot be explained solely by the general growth of the Chinese economy or, particularly, its hugely positive foreign trade balance worldwide. It is also due to Beijing’s deliberate focus on a policy of promoting trade along the New Silk Road.[2] While it presents the South with opportunities, most Western countries have rejected this offer, and those that engaged, such as Italy, have been forced to detach themselves again.[3] Consequently, the New Silk Road has helped to focus Chinese business on the Global South. Another factor is the role Beijing played in assisting numerous countries of the South during the Covid-19 pandemic. Helping to meet medical needs and, in particular, supplying much needed vaccines acted as a trade stimulus. The same goes, to a certain extent, for Russia. Moreover, the punitive Western sanctions imposed on the Russian economy since 2022 have effectively forced Russia to focus its business dealings on the Global South, with considerable success. At the same time, the EU has failed to implement a number of projects announced with great fanfare, including free trade deals with India or with South America’s Mercosur. These failures have only accelerated Europe’s decline as a global economic player.[4]

Largest trading partner

The IW analysis for the twenty-five most important countries in the Global South can be confirmed by looking at dimension of global regions. The Chinese share of Latin America’s foreign trade was still insignificant in 2000, yet it has risen to become the region’s largest trading partner with the exception of Mexico. Mexico is the exception because its largest trading partner by far, the United States, maintains a system of low-wage factories located near the border. Since these maquiladoras are supplied by US producers and then export the processed products back to the US, huge foreign trade volumes are registered. Another key region is Southeast Asia. Here, China is the largest trading partner for the Association of Southeast Asian Nations, ASEAN, ahead of the US and EU.[5] As for Africa, China is the largest trading partner at bilateral level, although the member states of the EU are still ahead on foreign trade if taken together as a bloc. But for how long?[6] China is also in the fast lane when it comes to direct investment in the Global South, often acting as the most dynamic investor in new projects. The investment portfolio of US or European companies still, however, generally involve larger volumes than their Chinese competitors due to the decades-long lead times needed for major investments. In Latin America, for example, China already accounts for an 11.3 percentage share of the total stock of direct foreign investment.[7]

Not surprising

In short, China’s share of foreign trade in the Global South is rapidly expanding while Germany’s share is simultaneously stagnating and the EU’s share declining significantly. The IW study concludes that, “Against this backdrop, Germany should not be surprised that its geopolitical weight in the Global South is declining.”[8] This decline is “apparent” in, for example, the “rhetoric of Brazilian President Lula, who is taking a stance on the Ukraine war and the Middle East conflict that is contrary to the West’s position.” The report underscores that “it is clear” that “the economic importance of China and Russia for Brazil” plays a key role here. And the economic trend threatens to continue. For example, Chinese exports of electric cars reportedly increased by 83 per cent and 41 per cent in 2022 and 2023 respectively, while German exports only increased by 18 per cent and 39 per cent. As Chinese producers “are already achieving an export volume more than one and a half times as large” as German manufacturers, “the gap that exists between China and Germany is widening”. The report identifies a similar situation for key chemicals products, a traditionally strong German export earner. These economic trends indicate that the Beijing’s trade influence will continue to grow, while that of Germany and the EU will continue to shrink.

Economic deeds, not words

As a remedy, the IW study recommends decisive measures to promote Germany’s foreign trade. It notes that while Chancellor Olaf Scholz has verbally emphasised a “policy focus on the Global South” and repeatedly proclaims a “partnership of equals”, his practical success is at best modest. The economic balance of forces has shifted. As the report notes, “countries like Brazil, India and Saudi Arabia have long been able to pursue their own interests.”[9] The author believes it is “more urgent than ever” that Berlin responds with “the prompt conclusion of trade deals,” such as with Mercosur. There is also a reminder that, “the economic importance of development aid ... should not be neglected.” Indeed, critics of current policy have repeatedly pointed out that Germany’s development cooperation benefits above all German investors or German exporters (german-foreign-policy.com has reported [10]). In March 2013, the then German Development Minister Dirk Niebel reasserted that “for every euro of development cooperation ... two euros will certainly flow back to us in the long term through business ties.”[11]

[1], [2] Simon Gerards Iglesias: Handel mit Globalem Süden: Deutschland stagniert, China und Russland expandieren. IW-Kurzbericht No. 25. Cologne, 03.05.2024.

[3] Chinas “Neue Seidenstraße”: Italien zieht sich zurück. wiwo.de 06.12.2023.

[4] See also: No Alternative und Vor dem Scheitern.

[5] Matt Ferchen, Cheng-Chwee Kuik: EU-ASEAN Trade, Investment, and Connectivity Cooperation. carnegieeurope.eu 04.07.2023.

[6] Karoline Eickhoff: Strategische Beziehungen mit Afrika: Konnektivität als Türöffner? megatrends-afrika.de 17.10.2023.

[7] Jörg Kronauer: “Eine Welt ohne Hegemon”. China, der Globale Süden und das Ende der westlichen Vorherrschaft. Hamburg 2024. S. 84.

[8], [9] Simon Gerards Iglesias: Handel mit Globalem Süden: Deutschland stagniert, China und Russland expandieren. IW-Kurzbericht No. 25. Cologne, 03.05.2024.

[10] See also: Eigennützige Entwicklungshilfe.

[11] Niebel interview for “Bild/Bild online”. liberale.de 04.03.2013.