According to a new study, a decoupling from China and other important economic nations outside the EU would hit the German economy extremely hard. A collapse or a deliberate withdrawal from global value chains would lead to significant welfare losses, argues economist Gabriel Felbermayr, head of the Austrian Institute for Economic Research, in the published study.

A complete severing of trade in industrial intermediate and primary products from the EU and the rest of the world would therefore cause the real income of citizens in Germany to fall by 20 percent in the short term. The Munich Foundation for Family Businesses commissioned the study, prompting the political discussion about the economic dependency on China and other nations. Real income is an economic indicator that reflects purchasing power: the income of a household divided by the consumer price index.

Warning to politicians

Felbermayr and his co-author Oliver Krebs write that a decoupling would have adverse effects on the economy. “Politics must therefore approach the issue with great caution, even with measures that do not come close to completely decoupling individual supplier countries or sectors.” The scientists expressly refer to the strategic autonomy that the EU is striving for.

The scientists’ hypothetical scenario is based on the assumption that industry in the EU would produce exclusively within the Union and would neither export nor import primary and intermediate products.

Such a decoupling of the production chains from the USA would therefore reduce real income in Germany by three percent in the short term, and a decoupling from China or Great Britain by two percent each. According to the model calculations, the effects would hit individual economic sectors and regions differently. According to the study, the German economy could compensate for some of the losses in the long term.

Be careful with these industries

The food, chemical, automotive and construction industries are particularly sensitive. The two scientists also modeled the probable effects for countries whose relations with the EU are not or only slightly affected by political controversies, including Switzerland. According to the study, if the intermediary trade with Switzerland were to be interrupted, this would primarily harm neighboring Baden-Württemberg.

The experiences of the Corona and Ukraine crisis have led politicians and companies to reassess supply chains and dependencies, commented Rainer Kirchdörfer, Executive Director of the Family Business Foundation. “That is sensible.” But the study shows: “The advantages of global trade are usually unbeatable.”

The author of the study, Felbermayr, is one of the best-known economists in the German-speaking world. He was at the Munich Ifo Institute for many years and headed the Kiel Institute for the World Economy from 2019 to 2021. He has headed the Austrian Institute for Economic Research since 2021.