China is closely intertwined with Western economies such as Germany. If there were a break with Beijing, for example as a result of the conflict over Taiwan, there would be immense losses in value creation, calculate the economic researchers at the IFO Institute.
According to a study by the IFO Institute, a trade war with China would cost Germany almost six times as much as Brexit. According to the study commissioned by 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. Companies that manufacture transport equipment (-$1.529 billion) and machine builders (-$5.201 billion) would also be severely affected.
“De-globalization makes us poorer,” said study co-author Lisandra Flach. “Companies should not turn away from important trading partners without necessity, but instead rely on advance payments from other countries in order to reduce one-sided and critical dependencies on certain markets and authoritarian regimes.”
According to the IFO Institute, if Germany wants to realign its business model as an export nation, the nationalization of supply chains is not a solution that will help the economy. “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 German economy fears a further intensification of the conflict between its most important trading partner China and 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.