ifo Institute / EconPol: Formation of Geopolitical Blocs Would Hit the EU’s Pharmaceutical, Machinery, and Automotive Industries Particularly Hard

A division of the global economy into geopolitical blocs would hit European pharmaceutical manufacturers, automotive manufacturers and suppliers, and manufacturers of machinery and equipment particularly hard. This is the finding of a study conducted by the EconPol research network and presented today in Brussels. Although agriculture and mining could see small increases in value added, they account for only a small proportion of the EU’s total economic output. “A geopolitically motivated restriction of trade flows would significantly damage the competitiveness of the European economy. In particular, restricted access to international intermediate products would result in major productivity losses for European companies,” says Lisandra Flach, Director of the ifo Center for International Economics and one of the study authors.

If the global economy were to split into a western bloc (EU and US) and an eastern bloc (China and Russia), this would permanently reduce Europe’s level of prosperity by 1.6 percent and cause losses in value added worth billions. European manufacturing and the service sectors in particular would suffer as a result.

“A unilateral withdrawal by the EU from international supply chains would be accompanied by even greater losses in prosperity, as well as a decline in industrial value added in Europe of more than 10 percent,” adds Andreas Baur, foreign trade expert at the ifo Institute. Small and very open economies with a high proportion of trade outside the EU, including Malta, Luxembourg, and Belgium, suffered the most in the simulated scenarios. The Baltic states would also be severely hard-hit. Larger European countries, such as Italy, Germany, and Spain, would still be significantly affected but to a lesser degree.

“To avoid these disadvantages, the EU should continue to advocate for the multilateral trading system. A deepening of the European single market and new free

trade agreements with strategic partners are also becoming much more important in a world of growing geopolitical tensions,” says Florian Dorn, coauthor of the study.

The ifo trade model was used to simulate five geopolitical scenarios, including a simultaneous withdrawal by the EU, the US, and China from international supply chains. This scenario would hit China the hardest economically, followed by the EU, Mexico, and Canada.

Article: “Rethinking Geoeconomics: Trade Policy Scenarios for Europe's Economy”, by Andreas Baur, Florian Dorn, Lisandra Flach and Clemens Fuest, in EconPol Policy Report 44. Online at:
https://www.econpol.eu/publications/policy_report_44/rethinking-geoeconomics