KUALA LUMPUR (Aug 18): A decoupling of the European Union (EU) and Germany from China, which would result in retaliatory measures from the latter, would cost Germany almost six times as much as Brexit.
In a report released on Aug 8, the ifo Institute’s Lisandra Flach said: “Deglobalisation makes us poorer.
“Rather than turning away from important trading partners without good reason, companies should additionally source inputs from other countries in order to reduce one-sided and critical dependencies on certain markets and authoritarian regimes,” said the co-author of the study.
The report said those in Germany who stand to lose the most in a trade war with China would be the automotive industry (-8.47% loss in value added or US$8.31 billion or RM37.16 billion), companies producing transportation equipment (-5.14% or US$1.53 billion), and manufacturers of machinery and equipment (-4.34% or US$5.2 billion).
Florian Dorn, another co-author of the study, said if Germany, as an export nation, wants to realign its business model, then onshoring supply chains isn’t a solution that will help the economy.
“A more promising option would be to establish strategic partnerships and free trade agreements with like-minded nations, such as the US.
“That should be the objective of German and European economic policy,” said Dorn.
The ifo Institute applied its trade model to the simulation of five scenarios, including the decoupling of Western countries from China, combined with a trade agreement between the EU and the US.
The EU-US trade agreement could cushion the negative effects of the decoupling of the German and US economies, but not offset them completely.
Given the expected gains in the trade relationship with the US, the net costs would be similar to the projected costs of Brexit.