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Global Economy

Economic war with China would be expensive

A trade war with China would cost Germany almost six times as much as Brexit. This is the result of a current study by the ifo Institute. According to the study published today on behalf of the Bavarian Business Association (vbw), the biggest loser would be the automotive industry. Here there would be a loss of added value of around 8.5 percent or $8.306 billion. Mechanical engineering and companies that manufacture transport equipment would also be badly affected – with a loss of 5.201 billion and 1.529 billion dollars respectively. After that, only comparatively small areas such as the textile industry would benefit.

According to the ifo calculation, higher import tariffs and other trade barriers on both sides would reduce German gross domestic product by 0.81 percent, which would cost a considerable proportion of overall economic growth. In addition, the ifo researchers emphasize that these are only the lower limits of the losses to be expected.

"Stick to the business model of internationalization"

"Deglobalization makes us poorer," said Lisandra Flach, co-author of the study: "Companies should not turn their backs on important trading partners unnecessarily, but instead rely on advance payments from other countries in order to reduce one-sided and critical dependencies on certain markets and authoritarian regimes ." In the event of a comprehensive relocation to Germany, the German gross domestic product would then fall by almost ten percent. "Deglobalization could not only lead to higher unemployment and lower growth, but ultimately also endanger the political stability of the country," it continues.

If Germany as an export nation wants to realign its business model, the nationalization of supply chains is not a solution that will help the economy, according to the ifo Institute. "It is more promising to conclude strategic partnerships and free trade agreements with like-minded nations like the USA," said co-author Florian Dorn: "That should be the goal of German and European economic policy." The fact is, however, "that we have to stick to our basic business model of internationalization," summarized Bertram Brossardt, the vbw general manager, for the client.

Germany must make itself more independent

The German economy fears a further intensification of the conflict between its most important trading partner China and the island state of Taiwan. After a visit by US top politician Nancy Pelosi, the People's Republic has been holding military exercises near the island it claims since Thursday. As a result, voices are getting louder that Germany shouldn't make itself as dependent on China as it is on Russian gas. China is by far Germany's most important trading partner: in 2021, goods worth around 245 billion euros were exchanged between the two countries.

In their study, the ifo researchers simulated five scenarios – including a decoupling of western countries from China, combined with a trade agreement between the EU and the USA. The EU-US trade deal could cushion the negative impact of the West's decoupling from China on the German and US economies, but not fully offset it. Due to the expected gains in the trade relationship with the USA, the net costs would be at a similar level to the expected costs of Brexit.

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