Why Germany and Austria Are More Dependent on China for Strategic Raw Materials than on Russian Gas
China has established global dominance over many of the strategic raw materials needed to be competitive in the economy of the future. Read how Austria, Germany, and others have arguably become more dependent on these materials from China than on Russian gas.
While Russia’s brutal invasion of Ukraine has highlighted the dangers of European dependence on Russian oil and gas, it has also raised strategic questions about the growing global reliance on China.
As the world has increased trade relations with China and the Chinese economy has steadily strengthened over the past few decades, the world’s dependence on China has significantly increased as well. This can be seen in various sectors, but it is especially evident with respect to certain strategic raw materials.
Given the growing focus on transitioning to a green economy to fight climate change, there is an increased need for the raw materials required for producing things like electric vehicles, solar panels, and wind turbines. In addition to their uses in the green economy, many of these same materials are also critical for digitalization and countless other technologies.
Austria and Germany have repeatedly been highlighted as examples of European countries that are too reliant on Russian oil and gas. While Germany and Austria are undoubtedly dependent on Russian oil and gas, these two German-speaking nations (and others) are arguably repeating this mistake and becoming even more reliant on Chinese raw materials and rare earths, especially as they attempt to transition from Russian oil and gas to renewable energy sources.
Importance of raw materials in today’s economy
The climate crisis has become one of the key challenges facing the world, and countries are tirelessly working to lower CO₂ emissions and transition to a more climate-friendly economy. The technologies that are central to this fight, e.g., electric vehicles, wind turbines, and solar photovoltaics rely heavily on specific raw materials.
According to a lecture by Dr. Frank Melcher, a professor at the University of Leoben, some of the most critical materials for transitioning to the green economy include rare-earth metals, germanium, gallium, cobalt, graphite, lithium, indium, and silicon.
Phosphates (fertilizers), niobium (steel refiner), platinum metals (catalyst), antimony (flame retardant), and tungsten (carbide) are also particularly important for this transition.
Wind and solar energy technologies each require significant amounts of rare-earth metals, indium, selenium, gallium, and germanium. However, the technology used to store the generated energy is arguably even more important in the fight against climate change.
Graphite for lithium-ion batteries, lithium, cobalt, and vanadium are all crucial for being able to properly store the energy from these sources. As lithium-ion batteries are also essential for many hybrids and nearly every electric vehicle, the importance of these raw materials cannot be understated.
As mentioned above, these materials are not only central to the green economy. Many of these same materials, such as rare earth metals and semiconductors, are necessary for digitalization and are utilized in various technologies that we use every day. Everything from smartphones and computers to jets and military equipment relies on these same materials to function.
Unfortunately, when it comes to many of the materials described above, China absolutely dominates the global supply.
China’s strategic monopoly on raw materials
Of the 30 critical raw materials for industry identified by the European Union in a 2020 study, Deutsche Welle (DW) reports that China has mining access to and is the main global supplier of two-thirds.
China’s domination of the global supply of critical raw materials is due to a combination of geological luck and strategic effort.
While the Chinese Communist Party seems to have hit the jackpot regarding the number of critical materials that are inside its borders, the government has also strategically secured access to some materials not abundant inside China.
For example, South Africa is the world’s leading supplier of platinum, and the Democratic Republic of the Congo (DRC) is the leading supplier of cobalt, a key component for making lithium-ion batteries. As such, Chinese companies have invested in mines in both of these countries to help China gain control of even more of the global supply of critical raw materials.
In addition to investing in mines inside and outside the country, China has also established itself as one of the global leaders in the processing of raw materials. Therefore, even though other countries may not be reliant on China for the supply of certain raw materials, many still depend on China’s ability to process these materials.
By developing this processing expertise, China has inserted itself into the supply chain for raw materials that it does not have direct access to, thus accumulating more leverage in the global market. Thanks to this, according to DW, China is not only the leading producer of critical raw materials but also the leading importer.
China’s disregard for human rights, environmental protection, and fair trade practices has also been particularly useful in gaining control over critical raw materials.
Hanns Günther Hilpert, head of the Asia Research Division of the German think tank SWP, told DW that the Chinese government has assisted its companies in dominating the market by offering subsidies for factories, allowing them to pay workers very low wages, ignoring the negative environmental impacts of mining, and enacting export restrictions.
Additionally, China pays little attention to the instability that the mining of critical materials in other countries can facilitate. Despite the fact that the revenue generated from the sale of certain raw materials may be funding internal conflicts in other countries, China continues to mine what have been deemed as “conflict minerals,” such as Cobalt from the DRC.
Although it has utilized questionable methods to do so, China has clearly established a near-monopoly on critical raw materials, and the world is now dependent on China for these resources.
Austria, Germany, and the European Union
In addition to the shared language, history, and culture, Austria and Germany now have another thing in common–they are both becoming particularly reliant on China for critical raw materials.
Like most of the world, the two countries are dependent on modern technology, especially in their endeavor to meet climate goals. As was established above, China has a near-monopoly on many of the critical raw materials necessary for the technology that Austria and Germany need.
Given that the EU has committed to transitioning off of Russian oil and gas because of Russia’s invasion of Ukraine, Austria and Germany are particularly vulnerable to increasing their reliance on China.
Due in part to their decision to not use nuclear energy, Germany and Austria have both been heavily dependent on Russian oil and gas for energy while working to transition to renewable energy sources.
With the war in Ukraine hastening a transition away from fossil fuels to alternative sources of energy, Austria, Germany, and Europe more broadly will need more and more of the raw materials for solar panels, wind turbines, and electric vehicles.
According to the Austrian Broadcasting Corporation (ORF), a study by the German Economic Institute (IW) highlighted that Germany imports about 45 percent of its rare earth minerals from China.
Additionally, a report by the European Think-tank Network on China entitled “Dependence in Europe's Relations with China” stated, “Recent years have seen the emergence of a new dependence narrative focused on strategic sectors [in Austria]. Indeed, starting in mid-2018, the dependence in critical raw materials, in particular in relation to batteries for the e-mobility industry, was repeatedly pointed out.”
Furthermore, the ORF reported that the German Economic Institute warned that Europe’s dependence on China is already especially high in the renewable energy sector. “The EU imports 65 percent of the raw materials for electric motors from China. ‘Even with wind turbines and photovoltaic systems, China is the leader in raw material supplies with a share of over 50 percent,’” wrote the ORF.
Moreover, value-added trade data from the OECD indicates that Germany and Austria are steadily increasing their trade shares with China and are thus becoming more dependent. In 2008, more than 4 percent of Chinas economic output was still linked to German-Austrian imports, while 10 years later it was only 2 percent. For Germany and Austria the trend is in the opposite direction, in 2008 the figure was around 0.5 percent, 10 years later it had risen to two percent, i.e. in contrast to Germany and Austria, China is successively reducing its export dependency. The same trend can be seen on the import side. Germany and Austria are becoming increasingly dependent on China, while China continues to reduce its dependence.
Although Austria and Germany are prime examples of countries that are overly dependent on China for raw materials, the EU only has two Member States that are global leaders in the supply of any critical raw materials–France (Hafnium) and Spain (Strontium)–clearly making this an EU-wide problem.
What can be done?
The Russian war of aggression on Ukraine with its consequences for the economy shows how disastrous too much dependence, especially on totalitarian countries, can be. Only now, as a result of the Russian invasion, has it become clear to many in Germany and Austria, and in the West in general, that too much dependence on individual states is risky and makes them geopolitically vulnerable.
To begin with, Germany, Austria, and the EU should learn from the past mistake of becoming overly dependent on an authoritarian, adversarial country and hoping it will change its behavior through increased economic ties. The economic impact of the Russian invasion of Ukraine and resulting sanctions was a wake-up call regarding the potential consequences of such a decision.
Under the leadership of President Xi Jinping, China has swallowed up Hong Kong, is committing a potential genocide against its Uyghur population, and has arguably expressed its intentions to invade Taiwan. Given these facts, the EU should begin working towards lessening its dependency on China immediately.
Germany has already begun formulating a new strategy to limit its own dependence on China. Janka Oertel, Director of the Asia Programme at the European Council on Foreign Relations, stated that this will involve a “reassessment of strategic dependencies and the need for diversification,” but it will not mean a “full decoupling.” While national reassessments of relations with China are an important start, even a country the size of Germany will have difficulty contending with the economic might of China.
Particularly glaring is the above-average dependence of the German and Austrian economies on critical raw materials and especially rare earths. Critical raw materials are needed for the construction of wind power and photovoltaic plants, electric cars, fuel cells or batteries. The share of raw material processing by China is between 50 and 70 per cent worldwide for lithium and cobalt and almost 90 per cent for rare earths. In the strategically important renewable energy sector, the dependence of the two countries on China is particularly high. Germany and Austria import 65 per cent of the raw materials for electric motors and over 50 per cent of the raw materials for wind turbines and photovoltaic systems from China. Giving up access to these critical raw materials and rare earths would affect the ability of the two countries to be at the forefront of industry in these technologies.
Reducing dependence will not be easy. The dependencies shown above - especially for critical raw materials and particularly rare earths - where China has already demonstrated in the past that it is willing to use this leverage, cannot be changed significantly in the short to medium term. Due to mutual economic interdependencies, complete decoupling from China cannot be the goal, but China's relevance on the import and export side should be gradually reduced.
This requires a strategic reorientation of politics and the economy. This debate should be elevated to the EU level, and the policy must be coordinated throughout the EU because, in many ways, the EU’s ability to strategically counter China is only as strong as its most China-dependent member. The state must change the framework conditions for the economy:
- It can first reduce additional incentives for business activities in China, such as investment guarantees.
- Bilateral investment agreements would tend to promote dependence on China and should therefore be avoided. In addition, the EU should continue taking steps like the European Chips Act, which aims to address Europe’s semi-conductor shortage and build up capacity within the EU.
- A diversification strategy should be supported, explored and pursued, especially with regard to new sales markets in other emerging countries. Sufficiently attractive location and investment conditions are necessary for this. The EU should therefore work with the governments of these countries and with multinational companies to find out how these goals can best be achieved together. The EU should consciously promote this location competition between potential partner countries because it gives it a certain political leverage.
- A successful diversification strategy away from China also requires a new awareness among internationally active European companies. As a central prerequisite for this, the EU must finally succeed in concluding new trade and investment agreements with the emerging countries in Asia, Latin America and Africa. The dismantling of mutual trade barriers is a central prerequisite for being able to trade more with these countries. Many Free Trade Agreement (FTAs) negotiations have stalled, been abandoned or have been stuck in the ratification process for years. Because the ASEAN countries and India in particular are indispensable for diversification away from China due to their size and economic dynamism, and because the EU fundamentally needs to play a greater geostrategic role in the future region of Asia, a strategic reprioritisation in the EU's Free Trade Agreement negotiations is necessary.
- Such strategic reprioritisation is very likely to meet resistance from civil society. The same applies to the European Parliament, which increasingly sees FTAs as an instrument to impose European values on trading partners. An open policy debate is therefore needed. It must begin with the recognition that there is a clear conflict of goals and lead to new priorities being defined on this basis.
- Just as the individual EU Member States are stronger as one bloc, the EU is stronger when it works with its allies. The EU can work with other democracies to collectively reduce dependence on China and ensure the Chinese government plays by the same rules. For example, in 2012, the EU, the US, and Japan were able to remove Chinese export restrictions on critical raw materials by challenging them together at the World Trade Organization (WTO).
Unfortunately, reducing the high dependence on China and countering its raw materials strategy is not going to be an easy task and will take years, as the Chinese government has already created a near-monopoly on the global supply of these critical raw materials.
There is much to suggest that geostrategic goals should be given priority in the current turn of events. The demands of realpolitik leave little other choice.
All these changes and reprioritisations must be set in motion quickly, because the path to reducing dependencies on China will be very long. But since China is also taking this path and since we must not fall into asymmetric dependence, this path must be taken.
Ultimately, the important thing is that the debate begins immediately because Europe is already transitioning to a green economy and China continues to become more adversarial and ambitious.
European Council on Foreign Relations
European Think-tank Network on China