Decoupling from international trade would hit regions particularly hard

4. May 2023, Munich. The latest study by the Foundation for Family Businesses entitled “The economic damage of decoupling in Germany” shows that the price of strategic autonomy for the EU and the reshoring of value chains would be extremely high in Germany, particularly in the short term, and would primarily affect certain sectors and be highly concentrated regionally.

The study calculated scenarios for both the country as a whole and for its 400 individual districts. It was conducted by Gabriel Felbermayr, president of the Austrian Institute of Economic Research (WIFO), together with Dr Oliver Krebs, Zurich.

The advantages of the international division of labour outweigh the disadvantages

According to the authors, large family businesses would be particularly affected. In their case, the benefits of the international distribution of labour far outweigh the negative impact of interrupted supply chains or closed sales markets.

As such, Felbermayr recommends that legislators approach the issue of decoupling with great caution. It is crucial that the German economy be given time to adjust. Furthermore, he recommends that regional policy should soften negative effects – through public investment, promotion of the local labour market or measures to attract businesses to the region. This would particularly help family businesses, which are especially at risk due to their distribution across sectors and regions (clusters). For them, the loss of value creation due to decoupling is often two to three times greater than the average.

Rainer Kirchdörfer, member of the Executive Board of the Foundation for Family Businesses: “Lessons learned from the coronavirus pandemic and the Ukraine crisis have led politicians and businesses to re-evaluate supply chains and interdependencies. That’s a sensible decision. But as the study shows, the benefits of engaging in global trade are mostly unbeatable. However, it also shows how adaptable the players are in a social market economy governed by prices and not a supposedly omniscient state.”

Greatest dependence is not on China

The authors of the study only examined trade in preliminary and intermediate products. In the process, they broke down approximately three million sector-district connections. They used both OECD input-output tables and a variety of other data sources at the regional level. In addition, they also incorporated data from FamData, the database maintained by the Foundation for Family Businesses and the ifo Institute. The study measures the effects on real average income.

The models reveal that this would fall most sharply at the federal level if Germany were to decouple from the United States (minus 3 per cent), followed by China and the UK (minus 2 per cent each) and then Switzerland and Russia (minus 1.5 per cent each). On the export side, decoupling from the United States would be particularly costly; on the import side, the same would be true for China. The effects vary greatly across the sectors of the German economy and thus also across the regions in which they are concentrated. According to the data, the most sensitive sectors are retail, information technology and financial services.

Significant losses in real income in many districts

In many districts, real income would fall between 20 and 36 per cent as a result of decoupling from all overseas regions. The northwestern part of Germany would be particularly affected. Geographical proximity to the trading partner also plays a role, such as the proximity of southwest Germany to Switzerland.

In summary, decoupling would entail extremely costly and lengthy adaptation processes for companies, sectors and regions. The authors of the study believe that legal safeguards through trade agreements are the wiser way to protect consumption opportunities in Germany and its regions.