Tuesday, May 17, 2022
International Finance
Economy Magazine

Germany’s Indo-Pacific strategy

ifm-march-2021-feature-germanys-indo-pacific-strategy
Germany aims to strengthen its trade and investment linkages with Australia, New Zealand, India, ASEAN, Japan, and South Korea

In the last two decades, China has developed into a trade giant, with cheap Chinese products dominating almost every market in the world. Last year, while discussing Europe’s trade negotiations with China, German Chancellor Angela Merkel said, “In the last 15 years, China has become much stronger economically and this means that the demand for reciprocity – for a level playing field – is of course very justified today.”

In September 2020, the German government released a document entitled ‘Policy guidelines for the Indo-Pacific region. Germany—Europe—Asia: shaping the 21st century together’. While endorsing the concept of Indo-Pacific for the first time ever, the document highlights Germany’s approach in dealing with China’s growing influence in the region as well as global trade.

The approach is assertive and the document, which is 70 pages long, is a set of guidelines for multiple ministries across seven priority areas. Through the document, Germany has stressed the importance of multilateralism and urged The North Atlantic Treaty Organization (NATO), an intergovernmental military alliance between 30 European and North American countries, to expand ties with Southeast Asian countries such as Japan and South Korea. Germany also called for the speedy conclusion of free trade agreements with countries like Australia and Indonesia and pledges to expand regional sustainable infrastructure initiatives.

Why Germany needs an Indo-Pacific strategy?
More than 50 percent of the world’s population resides in the Indo-Pacific region. In the last two decades, economies such as China, India, Vietnam and Japan have seen rapid economic growth. Some of the world’s topmost emerging markets are found in this region. It also accounts for nearly 40 percent of global GDP, according to reports. During the same period, countries such as China and India have emerged as global superpowers with huge nuclear capabilities. This has led to the region gaining economic as well as political importance from the west and the rest of the world.

The shifting geopolitical power structures in the Indo-Pacific region impacts not only Germany, but the whole European region as the whole region is interconnected through global supply chains. Some of the major international trading routes pass through the Indian Ocean, the South China Sea, and the Pacific. Hence tensions in these regions impact Germany too. Through its new strategy, Germany wants to work more intensively with the countries of the region with regards to climate change, human rights or to enhance cultural, educational and scientific exchanges.

Another important reason is the expansion of economic relations with the region. Germany understands the importance of the region. What Germany wants to do is eliminate unilateral dependencies, which can be achieved by diversifying partnerships. The Indo-Pacific strategy serves this very purpose. Some of the other aspects include digital transformation, connectivity, free access to information and protection against misinformation.

Indo-Pacific strategy to add value to the German economy
The Indo-Pacific region is of central importance to not only Germany but also Europe. Not only the region is leading global growth, but it is also leading in innovations when compared to the rest of the world. Germany, being an export-oriented economy, did need to develop its strategy when it comes to the Indo-Pacific region. While taking to International Finance in this regard, Rituparna Majumder, Industry Principal, Frost & Sullivan said, “Germany’s digital transformation journey has over the last few years remained lackluster as evidenced by the slow speed of the Internet and the low digital adoption rate by the local firms. The Indo-Pacific strategy with its commitment to deepen the German alliance with the ASEAN markets, in addition to Japan, Australia, and South Korea stands to boost Germany’s Industry 4.0 agenda while garnering bigger investment opportunities in digital infrastructure.

“The Indo-Pacific strategy is also perfectly in sync with Germany‘s Digital Strategy 2025 programme as the former aims for closer cooperation with Indo-Pacific countries in the field of research and development to make Germany a leader in artificial intelligence. In light of the Sino-US trade tensions and the US sanctions against Huawei Technologies, Germany is keen on safeguarding the economic interests of the country.

“To expedite 5G deployment in Germany and to develop a multi-vendor alternative to Huawei, the Indo-Pacific strategy will help Germany to strengthen its relations with leading Asian equipment providers such as NEC Corporation of Japan and The Samsung Group of South Korea,” Rituparna added.

Similarly, Rashmi Banga, Senior Economic Affairs Officer, Unit of Economic Cooperation and Integration among Developing Countries, Division on Globalisation and Development Strategies, UNCTAD told International Finance, “Within the European Indo-Pacific strategy, Germany has also decided to support the expansion of Europe’s engagement with the Indo Pacific region and accordingly in September 2020 Germany released policy guidelines for the Indo-Pacific region in the form of Germany-Europe-Asia for shaping the 21st century together. Indo pacific region is emerging as an important trade partner for Germany. In recent years, Germany’s exports have grown by an average of around three percent globally, but exports to the Indo-Pacific region have increased by approx. seven percent annually.

“Around 15 percent of Germany’s global exports are directed to the countries in the Indo Pacific region, of which about half of the total exports are directed to China. On the imports side, Indo Pacific region contributes around 19 percent of the global imports of Germany, of which around 52 percent are from China. China is, therefore, a major trading partner to Germany in the Indo-Pacific region.”

With this strategy, Germany aims to strengthen its trade and investment linkages with all countries in South Asia, Southeast Asia, East Asia as well as Australia and New Zealand, with a particular focus on India, ASEAN, Japan and South Korea.

One of the areas where Germany is hoping to gain traction in the region is in digital infrastructure. Indo-Pacific region can prove to be a steadily growing market for Germany’s digital goods and services along with a sizeable destination for its investments. The region is in the process of digital transformation and Germany is a leading provider of digital technology. Digital connectedness in the digital age will become more important than physical connectedness as more and more machines get connected in an intelligent way connecting markets, producers, and consumers.

“Germany, therefore, sees a huge potential for exporting its digital goods, services, and technology to the region in the coming years. This will also help in diversifying tradeable products and markets for Germany in the region. Japan and South Korea are also engaged in digital dialogue with Germany in terms of collaborations of digital technologies like 5G, Cloud applications and artificial intelligence,” Rashmi added.

Germany’s economic conditions amid the protracted pandemic
The Covid-19 has battered economies across the globe. In Germany, the pandemic led to a historic decline in economic output. However, due to the monetary and fiscal policy measures introduced by the government, the economy started to recover. Policies such as the economic stimulus package adopted by the German federal government of €130 billion, played a crucial role.

Guntram Wolff, Director of Bruegel told International Finance that, Germany has handled the pandemic relatively well. He said, “In the first phase but more recently numbers have been quite high as Germany has not escaped the second wave. Thanks to strong government support, however, the economic decline has been kept in check.”

According to Rashmi, Covid-19 is not just a health crisis but has also unfolded into an economic crisis that has slowed down the global economy, creating widespread unemployment and poverty. While the South has been hit economically harder and will take more time to recover, even developed countries like Germany have felt its impact.

The Federal Office of Statistics in Germany said that the country has experienced a significant slowdown during the pandemic. While growth has revived in the third quarter of 2020 as compared to the first and second quarters, GDP in the third quarter of 2020 remains around 4 percent lower when compared to the third quarter of 2019.

Rashmi said, “Production in terms of gross value-added has declined in manufacturing by 10.8 percent in the third quarter of 2020 than a year earlier; while this decline has been of around 8 percent in business service; 3 percent in the areas of trade, transport, hospitality and 3 percent, in the construction industry. Pandemic has also adversely impacted Germany’s exports of goods and services which were 9 percent lower in the third quarter of 2020 as compared to the third quarter of the previous year. With a slowdown in almost all sectors of the economy, employment also declined by 1.5 percent which translates into 688,000 people. Germany is therefore facing an economic slowdown with adverse impacts on its growth of trade and industry with associated employment losses.”

Germany emerged from the Covid-19-induced recession during the third quarter of 2020. During the period, Germany recorded 8.5 percent GDP growth as compared to the previous quarter, driven by strong gains in domestic demand and rapid recovery in industrial production. In this regard, Rituparna said, “As the economic conditions under this recession are closely tied to the pandemic’s trajectory, the reimposition of restrictive measures in November to curb the second wave of the spread of the virus risks creating a double-dip recession in Q4 and early Q1 2021.

“In 2021, the economy is projected to grow by 4.3 percent, supported by improved domestic and external demand and continued fiscal support by the government. The expectation about the availability of the vaccine by Q1 2021 is also likely to restore consumer sentiment.”

The Indo-Pacific strategy might enhance free trade
The Indo-Pacific strategy will potentially work toward strengthening the multilateral trade system supported by a well-diversified supply chain in the post-Covid era, by eliminating tariff and non-tariff trade barriers. According to Rashmi, this should also pave the way for a fruitful EU-ASEAN free trade agreement and agreements with other countries in the region. The strategy also emphasises the Asia-Pacific Conference of German Business and the German Chambers of Commerce Abroad to actively promote Germany as a strategic business location and to further generate employment opportunities.

She said, “In light of an aging German society and the shortage of skilled workers in the country, the Indo-Pacific strategy is also looking to strengthen the new Skilled Immigration Act that came into effect in March 2020 by easing the visa processing services to facilitate students and skilled workers to come to Germany or to relocate outside of the country for training or employment purposes.”

Rituparna added, “Indo-Pacific strategy of Germany can open new avenues for trade and investments especially concerning Industry 4.0. This has the potential of creating new sources of demand for the goods, services and investments in Germany creating job opportunities for millions of people. However, in the much new age FTAs there is a growing concern about data flows, data security and digital technology transfers. This is leading to a rising mistrust in developing countries for trade and investment agreements with the developed countries. For example, the e-commerce chapter in RCEP is not enforceable. In my opinion, a country like Germany needs to be more open to the needs of the developing countries and not enforce rules which may restrict their policy space.

“Any firm commitments on digital technology transfers to partner countries can build mutual trust and the possibility of effective trade and investment agreements. Investments in data centres and digital infrastructure in the Indo-Pacific region can be a win-win situation. However, insisting on rules like free flow of data, no data localisation laws and no source-code sharing, etc. can slow down the negotiations and conclusions of trade and investment agreements.

“For Germany and for the EU it is important to understand that developing countries, especially in the Indo-Pacific region, are in the process of designing their policies for digital transformation and need the policy space which these countries had when they were building their digital infrastructure. Trade and investment agreements, therefore, need to provide sufficient flexibilities to developing countries and also fulfil their need for digital technology transfers. This can increase the possibilities of inter-regional FTAs between EU and the Indo-Pacific.”

Guntram Wolff said, “A strategy is not a concrete agreement but a directional impetus. The key to success will be to develop a proper EU strategy and then agree on free trade deals and connectivity deals with the region. In particular, ASEAN is a region that the EU needs to focus on as well as relations with India.”

How will the strategy impact Germany’s relations with China?
China alone accounts for almost 10 percent of total German imports and is a major market for Germany, particularly evidenced by the fact that almost 30 percent of the vehicles of the largest German automakers are sold to China.
Guntram Wolff added, “China is and will remain of fundamental importance to Germany. But many in Germany have indeed grown more worried about the political orientation that China has taken in the last years. The new strategy paper represents a small shift of direction.”

However, on the back of the US-China trade war and the Covid-19 pandemic disruptions, Germany seeks to diversify its foreign trade policy beyond China and aims to pursue deeper economic relations with the Indo-Pacific region. Notably, the Indo-Pacific region is an important global consumer market accounting for almost 40 percent of the world GDP. The region’s youth population share (ages 20-39 years) is also much higher than the global average with the region being home to more than 50 percent of all global megacities.

Rashmi said, “It appears that Germany wants to continue trading with China and the Indo-Pacific strategy is more of an addition to rather than a substitution in the German economic policy. Hence, the strategy is not supposed to have any significant disruption to the Sino-German relations.”

Will Germany’s Indo-Pacific strategy impact trade with the EU?
Some of Germany’s biggest trading partners include many European nations, most notably France and the Netherlands. When it comes to the Pacific, only China features among the other countries in the nations in Germany’s top trading partner list. So, will an Indo-Pacific strategy impact Germany’s position in the EU and also trade in the region?

In this regard, Rashmi said, “With France initiating the idea of an integrated Indo-Pacific strategy in 2018, and with Germany and the Netherlands initiating the same in September and October 2020 respectively, a coherent Indo-Pacific vision is plausible for the entire EU region. Besides, the United Kingdom which proposed an alliance of 10 democracies including India, South Korea, and Japan to create an alternative 5G source of supply is also expected to soon launch its Indo-Pacific vision.

“Hence, the German move with its Indo-Pacific strategy does not pose any potential complication for Germany as well as the EU economy. That said, an EU-wide Indo-Pacific strategy is going to be a function of the success rate of the German economic diversification with regards to the market access to the ASEAN, supply chain strengthening, and tariff reductions.”

Also, the EU is already pursuing bilateral trade and investment treaties with countries in the region. So far, the EU has or is negotiating bilateral agreements with many countries in the region including Singapore, Vietnam, Indonesia, Thailand, Malaysia, the Philippines, Japan, Australia, New Zealand and India.

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