Decoupling from China: A Potent Economic Threat to Germany's Prosperity, According to New Research
China's economic decoupling from Germany would likely induce a severe economic shock, concludes a recent study published by the Kiel Institute. Amidst the fresh analysis titled "What if? The effects of a hard decoupling from China on the German economy," a temperature drop of around 5% in the German economy is predicted as a result of an abrupt interruption in trade relations, as dataset figures substantiate (IfW Kiel, 2023).
"We reap prosperity through trade with China and it's challenging to replace it in the short run," pronounces Moritz Schularick, the President of IfW Kiel. Albeit acknowledging Germany's economic resilience, he stresses that the shock may not immensely differ from that encountered following the financial crisis or the COVID-19 pandemic. The prediction assumes stalled transactions with the People's Republic, which could be offset by gradual adjustments in his viewpoint.
The analysis revolves around a hypothetical scenario degrading the global economy into two formidable camps: the G7, EU, and neutral countries – including countries like Brasil – and China's alliance, led by Russia. The predicted consequences for both Germany and China differ significantly. In essence, the IfW researchers projected that, in relation to its economic strength, Germany will incur estimated initial losses around 1.5% per annum.
Conversely, China would bear a heavier toll of about 60%, according to the study. Although the analysis might feel unsettling, Germany could benefit from weighing decoupling options to alleviate future vulnerability and reliance on a solitary trading partner.
The study also highlights the advantages of approaching decoupling progressively. Gradual adjustments help avoid exorbitant initial costs, which predominantly arise from the abrupt, substantial setbacks that typically accompany sudden trade interruptions.
Details to Consider:
- The severe competition between Chinese manufacturing companies, backed by significant state subsidies, impedes German industries from retaining market dominance in specific sectors, such as electric cars and wind turbines.
- Shifts in energy supply from Russia have magnified pressure on German industries due to escalating energy expenses. This dire predicament can potentially impact their competitiveness.
- Decoupling from China might diminish Germany's price competitiveness worldwide, primarily resulting from technological advancements in the US and China.
- In the automotive sector and other advanced manufacturing domains, German companies risk falling behind in terms of innovation while their American and Chinese competitors inevitably surpass them.
- The study underscores the need for Germany to diversify its trading partners and invest in strategic agency to propel EU cooperation in coping with climate change and counteracting protectionist obstacles.
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