China has chosen the economic form of the socialist market economy for itself, and state enterprises and state-controlled firms play a dominant role. These state enterprises grow ever more powerful through mergers. Whereas there were still 189 firms supported by the central government in 2003, after several mega-mergers, there are only 97 left today. The best-known example is the merger of the two Chinese railway rolling stock manufacturers China North (CNR) and China South Locomotive and Rolling Stock Corporation (CSR) to become the China Railway Rolling Stock Corporation (CRRC), by a wide margin the world’s largest enterprise in the industry. This merged corporation was cited by proponents of the prohibited merger of the railway businesses of Siemens and Alstom as the central global competitor.

Now, there are many voices – among them the Federal Minister of Economic Affairs Peter Altmaier and the Chairman of the Board of Siemens Joe Kaeser – who claim that there is only one way to respond to such dominance, with one’s own giant enterprise, the European champions. However, the facts speak against this assumption. The increases in productivity in China were not generated in the state enterprise, but rather in the economy’s private sector. The hope for the giant state enterprise was to create economies of scale through their large size and increase profitability, but this has not been fulfilled to date. Instead, the debt levels of these firms rose to dangerous heights. And for Europe and the US, there is persuasive evidence that mergers lead to fewer innovations, in part because research departments are consolidated and thus downsized.

The textbook argument for competition as a leading market principle should not be ignored: competition increases the likelihood of creating innovations and leads to increased prosperity. Crippling Europe’s market and innovation dynamics at the expense of competition by creating champions would be the wrong response to China from a macroeconomic perspective.

It will turn out over time how the trade-off between private corporate dynamics and government management of firms will develop in China. It is irritating when Chinese companies merge in order to eliminate “needless competition”. Should this development intensify, German corporations should be able to respond to this in their activity in China. One instrument for doing this used to exist. Until the end of the 1990s, export cartels were permitted. These were dismantled on the grounds “that in view of the efforts to dismantle global government and private restrictions on competition, export cartels no longer had any justification for their existence.” If China decides in favour of a non-competitive market form, there are good reasons to reactivate this instrument.

The purchase of European firms by Chinese firms ought to always be evaluated with the understanding that these are not independent purchase procedures by individual corporations, but instead, are being conducted by a (government) enterprise. Given this premise, when there are problems of competitiveness, the competition authorities should be able to intervene. If there are security issues, a risk assessment should be made. Otherwise, one should leave the purchase alone. Germany has done very well with its open markets. Foreign capital and foreign expertise are generally beneficial for the firms and also for the German economy.

Currently, there are further instruments under discussion that might contribute to resolving specific problems related to China’s approach to the global economy but are not a direct economic policy response to state capitalism, and thus would be superfluous in the face of joint treaties. Thus, for example, border tax adjustments could take care of compensating for any competitive advantage for Chinese companies resulting from laxer environmental standards. European anti-dumping instruments could be given more teeth in order to punish too-aggressive price-setting by Chinese enterprises. The investment treaty that Europe has been negotiating with China for six years by now, along with a trade treaty as a further step would be welcome and could take these aspects into consideration. However, even without treaties, Europe is not powerless to stand up to competition with state capitalism.

This essay was first published in an abbreviated version on 26.06.2019 in the “Rheinische Post”.