The West can only make itself partially independent of Chinese suppliers in the medium term. This gives rise to new problems. Economist Klaus-Jürgen Gern sees only one solution: identify the particularly vulnerable areas in order to prepare in a targeted manner. In any case, our prosperity will diminish.
As the case of Russia painfully revealed, the strong global economic ties are not strong enough to deter authoritarian states from a military attack. “Following Russia’s attack on Ukraine, sobering has set in,” says Klaus-Jürgen Gern, who heads the international economic forecast at the Kiel Institute for the World Economy (IFW) in an interview with ntv.de. “We have to be able to deal with everything.”
Even if the People’s Republic would suffer massive economic damage, China could attack Taiwan. For the West, that would probably be the beginning of another economic war – with a much more powerful opponent than Russia. What has already begun due to the corona pandemic is increasingly becoming the goal of politics, but also of the economy: to break free from dependence on China. However, this only seems possible to a limited extent, as Gern explains.
China is by far Germany’s most important trading partner, more goods are imported from no other country. The country is the second most important customer for German exports. However, our economic ties are even stronger, as the economist explains. Although China’s market share in consumer electronics has already fallen, the last stages of production have been relocated to other Asian countries such as Vietnam, where wages are lower. However, the contents of the products still came from China. “That’s the big problem with solving China: The new suppliers themselves source from China. The decoupling often seems greater than it is.” For example, Samsung has closed its last smartphone factory in China, but many intermediate products still come from the country.
Decoupling is also difficult due to the huge amount that is produced in China. The large country has become so specialized in industry and manufacturing that 15 percent of global industrial production is now located there. “This quantity cannot be easily replaced,” emphasizes Gern. “Everyone looking for alternative suppliers jumps at the small quantities that can be produced in other countries.” This also drives up prices. Building up additional production capacities would take decades rather than a few years.
Another problem arises: there are new problems at alternative locations. Indonesia, for example, is a very large country with a well-educated population, but difficult investment conditions – because of regulations, but also corruption. “There are reasons why a shift has not taken place,” says Gern. Africa is seen as a continent of hope; in Ethiopia, for example, there are signs of industrial production settling in. “But that’s still in its infancy,” says Gern. In Eastern Europe, Romania and Bulgaria still have potential for additional production. “Turkey was very interesting for the industry, but there are now also political problems there.” Morocco is also attractive and has great potential, and Tunisia also offers a large number of well-trained workers. “But these are all countries that are not stable or authoritarian,” says Gern. “It gets really difficult when you include political considerations.”
The economist believes that we should fundamentally ask ourselves whether we can and want to compete between political systems using economic means. There is also the danger of losing one’s international credibility at some point. In the energy crisis resulting from the Ukraine war, for example, the West suddenly wants to cooperate more closely with Saudi Arabia. An alternative to political decisions would be to leave them to the market: to make supply chain disclosures mandatory and to let consumers decide whether to punish manufacturers by no longer buying their products and bonds. “That might be a way to deal with ethical issues,” says Gern.
Another reason for manufacturing in China is its raw materials. “China also has a dominant position when it comes to the raw materials for production: China has large market shares for aluminum, copper and steel, for example; many raw materials are processed there in particular.” There are also other environmental standards. “We can no longer imagine any major production steps in Germany,” says Gern. The further processing of rare earths pollutes the air and water, and even with very expensive precautions, this cannot be completely avoided. When rare earths are mined, the landscape is also massively changed. “We don’t want that in the EU.” And so the countries in which the politicians accept the environmental pollution take over the production.
Another fundamental problem: the additional costs. “We no longer want to make location decisions based solely on efficiency, but we also have to push through the higher costs with end customers and investors,” Gern clarifies. It is therefore a gradual process at best. “It can only get more expensive,” emphasizes Gern. “We have to realize that we don’t get as much for our income as we used to.” All would end up poorer than they are now.
A large part of the current higher costs for energy and other imports are due to dependence on Russia and the lockdowns in China. This shows that, similar to climate change, it is expensive not to prepare. “We should therefore accept moderate price increases in order to be prepared,” says Gern. For example a trade war with China. “We now have to analyze where the critical points are and how we can prepare,” demands the economist.
Something has already happened with the raw materials. After China had achieved a market share of more than 90 percent for rare earths, people woke up at some point. Ten years ago, the country was still able to use them as a means of political pressure, but production facilities have since been opened up elsewhere. “But that takes many years with raw materials,” explains Gern.
Building a new chip factory also takes about five years. Since the industry is highly specialized, Gern also thinks it is questionable how independent a European factory like the one planned in Magdeburg can actually be. “In the end, Intel may be making chips there with parts from Taiwan.” Taiwan not only accounts for more than half of the world’s contract manufacturing of chips, but also has an even larger market share for parts of the production. For example, Chinese chip manufacturers also use wafers from Taiwan, the preliminary stage in production.
“In this networked world, it’s not so easy to become independent,” the economist sums up. The further the division of labor goes, the more likely it is that there will be a bottleneck. “The risk can never be completely eliminated. You can only take countermeasures at central points.” Producing everything yourself, as some people currently think is desirable, is “simply not possible without giving up our economic model, which is the basis of our prosperity”. There was a lack of skilled workers anyway. “No one is suggesting closing car factories so those workers can make chips,” says Gern.
When switching to other products, a new problem arises, as the scientist explains: Then other products are not manufactured. “For example, when Turkish textile factories produced masks during the corona pandemic, they could not produce T-shirts for them.”
The only approach seems to be to at least partially diversify the sources of supply. But that will be expensive. And takes. There may not be that much time left in the Taiwan conflict.
