Analysis of possible scenarios: A trade war with China would cost Germany six times as much as Brexit

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Car production in Zwickau: "Globalization makes us poorer"

Photo: Jan Woitas / dpa

Brexit was expensive for Germany – according to a study by the Ifo Institute, a trade war with China could be almost six times as expensive.

The automotive industry would be particularly affected, according to a study published on Monday on behalf of the Bavarian Economy Association.

Here there would be a loss of added value of around 8.5 percent or $8.306 billion.

Companies that manufacture transport equipment and machine builders would also be severely affected.

The German economy fears a further intensification of the conflict between its most important trading partner China and Taiwan.

After a visit by US top politician Nancy Pelosi, the People's Republic has been holding military exercises near the island it claims since Thursday.

As a result, voices are getting louder that Germany shouldn't make itself as dependent on China as it is on Russian gas.

China is by far Germany's most important trading partner: in 2021, goods worth around 245 billion euros were exchanged between the two countries.

"Globalization makes us poorer," said co-author of the Ifo study, Lisandra Flach.

»Companies should not turn away from important trading partners without necessity, but instead rely on advance payments from other countries in order to reduce one-sided and critical dependencies on certain markets and authoritarian regimes.«

If Germany as an export nation wants to realign its business model, the nationalization of supply chains is not a solution that will help the economy, according to the Ifo Institute.

"It is more promising to conclude strategic partnerships and free trade agreements with like-minded nations like the USA," said co-author Florian Dorn.

"That should be the goal of German and European economic policy."

In their study, the Ifo researchers simulated five scenarios – including a decoupling of western countries from China, combined with a trade agreement between the EU and the USA.

The EU-US trade deal could cushion the negative impact of the West's decoupling from China on the German and US economies, but not fully offset it.

Due to the expected gains in the trade relationship with the USA, the net costs would be at a similar level to the expected costs of Brexit.

Economic decoupling from China and other authoritarian states would mean major prosperity losses for Germany, according to the Ifo Institute.

On the one hand, sales markets would collapse, on the other hand, preliminary products and raw materials for German industry would become more expensive, write the Munich economists in a paper published under the leadership of Ifo President Clemens Fuest.

The client was the Association of Bavarian Business.

The "Süddeutsche Zeitung" had previously reported. 

A mutual decoupling of the EU from China alone would hit German industry very hard and reduce its competitiveness, especially car manufacturers and mechanical engineering.

According to the Ifo calculation, higher import tariffs and other trade barriers on both sides would reduce German gross domestic product by 0.81 percent, which would cost a considerable proportion of overall economic growth.

In addition, the Ifo researchers emphasize that these are only the lower limits of the losses to be expected.

Accordingly, only comparatively small areas such as the textile industry would benefit.

"Deglobalization could not only lead to higher unemployment and lower growth, but ultimately also endanger the country's political stability," warn the authors in the paper.

The Ifo Institute recommends reducing one-sided dependencies and diversifying supply chains.

ani/Reuters