The IMPULS Foundation of the VDMA has commissioned an expert report from the Kiel Institute for the World Economy (IfW Kiel), which runs through a scenario in which the EU is sealing itself off more strongly through the use of so-called non-tariff trade barriers, i.e. through regulations or production standards that make market access more difficult for foreign suppliers, in order to achieve a relocation of foreign value-added steps. The result: If Germany makes cooperation with foreign suppliers more difficult in response to the coronavirus crisis, for example to make supply chains supposedly more resilient by bringing back value-added steps from abroad, this has massive disadvantages for everyone involved.

"The coronavirus crisis has shown the vulnerability of international supply chains. Drawing the conclusion that bringing production back to the home countries is extremely expensive and therefore the wrong approach," says IfW President Gabriel Felbermayr. "It would be more expedient to improve the resilience of the economy, for example through greater diversification with regard to suppliers, increased warehousing or the expanded use of recycling. A very restrictive due diligence law would be rather counterproductive. "

The effects of a lockdown in detail

The report's calculations are based on the assumption that Germany or the EU doubles these hurdles. According to the calculations, such a lockdown would lead to an annual decline in real income of 3.3% in Germany. Measured against German gross domestic product in 2019, income would therefore be €114 billion lower.

The chart shows the real income losses in Germany, the EU and the rest of the world as a percentage. (Note: Average of all affected countries, weighted by GDP. EU without Germany. RoW stands for Rest of the World. Source: IfW-Kiel's own calculations).

© IfW graphic

If there is a trade war and foreign countries react as expected with retaliatory measures, income will fall by as much as 6.9%. If Germany even seals itself off from other EU countries, gross domestic product is permanently 9.1% below the level without additional trade barriers year after year.

Income also falls in the rest of the EU and worldwide in all three cases. This is particularly clear in the case of retaliatory measures. Real income in the EU (excluding Germany) then falls by an average of 4.9 % and worldwide by 1.5 %.

German mechanical engineering would suffer disproportionately

The mechanical engineering sector in Germany sources almost 43% of its primary products either directly or indirectly from abroad. Due to this strong international interdependence, it would suffer disproportionately from a lockdown, around three times more than the German economy on average. Its production would fall by 14.3% annually if the EU were to impose a lockdown and by 19.5% if foreign countries were to respond with retaliatory measures. This would correspond to a loss of turnover of around 50 billion euros. If Germany also unilaterally seals itself off from the EU, production in the mechanical engineering sector will fall by 25%, which corresponds to a good 60 billion euros less turnover.

"The German economy will lose out if we try to turn back the clock on globalization," says Henrik Schunk, Chairman of the Board of Trustees of the IMPULS Foundation and Vice President of the VDMA. "Germany's business model in general and the mechanical engineering industry in particular is based on open borders, exchange and networking. These are the guarantees of success that we must preserve for our technological leadership and global market success."

High legal risks

According to the IfW, a due diligence law that would expose companies to high legal risks when selecting suppliers would counteract efforts to improve supply security. "This would make it more difficult for companies to diversify their supplier network. This would make it less crisis-proof and more expensive. The law should therefore be designed in such a way that security and prosperity are not jeopardized," says Felbermayr.

"Companies should only be held responsible for their own misconduct in their obligations and not for the responsibilities of states and a confusing chain of suppliers across several levels. In any case, civil liability in Germany for the misconduct of independent third parties abroad must be prevented. Increased bureaucracy and national solo efforts must be avoided," says Schunk. "With this in mind, the VDMA is happy to participate in the industry dialog with the German government."

Everyone involved loses out due to supply chain compartmentalization

Study author Alexander Sandkamp emphasizes: "Without an international division of labour, all trading partners end up poorer and the cake we can distribute becomes smaller. Weaker growth also affects people who receive social benefits or state transfers such as pensions, unemployment benefit or child benefit. Savings would probably also have to be made in the healthcare system."

It is true that a lockdown in Germany and the EU could slightly mitigate the consequences of a production shock in supplier countries, such as that caused by the coronavirus crisis, and the economy would possibly slump somewhat less severely. Albeit from a much lower level. As a result, even after a shock, an isolated German economy would be in a much worse position than with free trade.

Diversification through free trade reduces economic risk

In addition, there are fewer opportunities for adjustment in a regional economy, meaning that conceivable domestic shocks to the domestic economy have greater negative effects on welfare than in the case of international diversification through free trade. Furthermore, not every good can be produced locally in a regional economy. Dependencies on individual primary products and raw materials therefore also remain in a world of limited trade.