ifo Institute Opposes Government Intervention in Supply Chains and General Return of Production to Germany

The German economy benefits more than almost any other from open global markets, Flach writes. Germany’s gross exports include a 21 percent share of foreign value added. The figure for China is only 17 percent, while for the US it is 9 percent. In addition, just over 30 percent of German value added is exported abroad; for Germany’s manufacturing sector, this figure rises to some 60 percent. Demand from other EU countries alone accounts for 20 percent of total industrial value added in Germany; the US accounts for 9 percent and China for 6 percent. The rest of the world accounts for 25 percent.

A general return of supply chains to Germany would result in huge revenue losses, Flach adds. For this reason, the government should generally refrain from intervening in the design of supply chains. Any interventions should be based on clear criteria and be legally compliant with World Trade Organization rules. She argues that strategic free trade agreements such as the one between the EU and Mercosur offer the opportunity to reduce trade costs and decrease dependencies on individual countries. Building up strategic reserves at the national or European level or entering into contracts with companies for corresponding reserve capacity could also be cost-effective ways of ensuring security of supply.

The EU has an important role to play: 67 percent of imported goods sourced from five or fewer supplier countries come from other EU countries. It is therefore important to strengthen the European Single Market. Especially in the case of cross-border services, the potential for integration is far from exhausted. Often, a lack of harmonization, inadequate implementation of EU law, and bureaucratic hurdles stand in the way of economic integration. Particular attention should also be paid to creating a fully integrated European market for digital services.