Geopolitical Challenges and their Consequences for the German Economic Model

Tasks

The international integration of global production processes through value chains is often portrayed as a risk in the current public debate. Therefore, the focus of this study is on discussed de-globalization strategies such as trade policy decoupling from China or autocratic states, block formation or the relocation of the production (reshoring and nearshoring). The aim of the study is to quantify and evaluate the costs and benefits that would result from a change in the value chains in each scenario. For this purpose, the long-run effects on the German economy and other selected regions as well as the sectoral value added of German industries and the resulting changes in real income are simulated.

Methods

Five trade policy scenarios are formulated in this study:

1. relocation of production back to Germany (reshoring) or to the EU-27 member states, Turkey, and North Africa (nearshoring)
2. decoupling of the EU from China
3. bloc formation: decoupling of western countries from China
4. bloc formation + free trade agreements: Decoupling of western countries from China and free trade agreement between EU and U.S.
5. decoupling of the EU from autocratic states

For scenarios 2 to 5, in addition to unilateral decoupling through an increase in trade costs for imports from China or autocratic states, the case of a trade war is also simulated, i.e., the countries concerned also impose tariff and non-tariff trade barriers as a countermeasure. The ifo trade model is used to quantify the long-run economic effects of the individual scenarios. In a first step, we simulate the trade and real income changes for Germany, the U.S., China, the rest of the EU and the world for the individual scenarios. In a next step, we quantify the sectoral changes in value added as a result of each scenario`s change in the supply chains.

Data and other sources

GTAP 10 data base and democracy index of the Economist Intelligence Unit (2021).

Results

The results show that de-globalization associated with a strategy of nearshoring and reshoring production to Germany would have the most negative long-rung impact on the German economy compared to the other scenarios. An increase in trade barriers with China would also lead to significant GDP losses, which are many times higher than the estimated costs of “Brexit”. However, since in the long-term companies can partially replace trade linkages with China by trading more with other countries, the negative effects of decoupling from China are somewhat smaller than those of relocating production back to Germany or neighboring countries. Further, an increase in trade costs between the EU and all autocratic states would even double the costs for the German economy compared to the scenario of decoupling only from China.