Taiwan crisis threatens supply chains: companies are questioning their China strategy

In view of the Taiwan conflict, the economy is threatened with the next crisis, in the worst case a trade war with China.

Taiwan crisis threatens supply chains: companies are questioning their China strategy

In view of the Taiwan conflict, the economy is threatened with the next crisis, in the worst case a trade war with China. However, German companies cannot avoid this in the short term. Their hopes now rest on diplomacy.

What was unthinkable suddenly became conceivable, as Ulrich Ackermann, head of foreign trade at the mechanical engineering association VDMA, puts it. "The war in Ukraine frightened many companies," he tells ntv.de. In view of the impending escalation of the Taiwan crisis, many companies are currently thinking about their future China strategy. "Among other things, this involves the question of what a short-term collapse of the Chinese market would mean for one's own company, and how the company can prepare for the consequences of the US and China drifting apart."

The problem with this: the time. "In the short term, there are no alternatives for companies," says Ackermann. Companies are already reorganizing their supply and value chains due to the disruptions caused by the corona and transport and logistics difficulties. "Especially in the Asia-Pacific region," explains a spokeswoman for the Association of the Electrical and Digital Industry (ZVEI) ntv.de. "But establishing new customer and supplier relationships takes time."

The approximately 250 German companies that are active in Taiwan are also observing the current development in the conflict very closely, as the head of the German Chamber of Foreign Trade in Taipei, Axel Limberg, reports to ntv.de. "Especially since economic sanctions have already been announced by the Chinese side."

Taiwan is an important pre-supplier in global supply chains, for the German industry especially in electronics and semiconductors. "In our high-tech world, a component from Taiwan is installed in almost every electronic product," said Dirk Jandura, President of the Federal Association of Wholesale, Foreign Trade and Services (BGA), the "Handelsblatt". "An escalation of the Taiwan conflict would therefore have far-reaching consequences."

Companies in Germany therefore keep a close eye on the supply chains with Taiwan, according to Limberg. "Distortions in global supply chains caused by the corona pandemic and the Russian war in Ukraine are already causing companies to be unable to maintain production because important primary products are missing." According to the Head of the Chamber of Foreign Trade, the logistics problems on site could be absorbed - for the time being - primarily by relocating shipping routes. "Trade in goods via the important air route is currently working."

The biggest losers in a trade war with China in Germany would be the automotive industry, companies that manufacture transport equipment and mechanical engineering, as the IFO Institute explains. These sectors would therefore have the greatest loss of added value. In view of this, the economy is calling for dialogue. A spokeswoman for the German Association of the Automotive Industry (VDA) demands from ntv.de: "All those involved must now work together to avoid further escalation. Above all, diplomatic talks must be continued and intensified." The electronics and digital industry sees both the neighboring countries in the Asia-Pacific region and the EU as having a duty here. "Sanctions would have massive economic consequences and should only ever be used as a last resort," said the ZVEI spokeswoman.

"The price for a complete decoupling from China would be enormously high, because this market cannot be replaced," warns the association. China is by far Germany's most important trading partner. Last year, goods worth around 245 billion euros were exchanged between the two countries. According to an analysis by the IFO Institute, a trade war would cost Germany almost six times as much as Brexit - assuming the EU and Germany decouple from China and the country reacts with retaliatory measures.

In order to free oneself from dependency, co-author Florian Dorn proposes strategic partnerships and free trade agreements with like-minded nations such as the USA. Co-author Lisandra Flach recommends companies not to turn away from important trading partners "unnecessarily", but to rely on advance payments from other countries at the same time.

According to the researchers, an economic decoupling from China and other authoritarian states would mean major losses in prosperity for Germany. On the one hand, sales markets would disappear, on the other hand, preliminary products and raw materials for German industry would become more expensive. Higher import duties and other trade barriers on both sides would therefore reduce German gross domestic product by 0.81 percent, which would cost a considerable proportion of overall economic growth.

According to the study, in the event of a comprehensive relocation of industrial production to Germany, the German gross domestic product would collapse by almost ten percent. "Deglobalization could not only lead to higher unemployment and lower growth, but ultimately also endanger the political stability of the country," the authors believe.

Ackermann from the VDMA calls on the EU and the federal government to see China as an economic competitor and system competitor and to act accordingly, "by demanding equal competitive conditions, for example". In order to be able to survive in system competition in the long term, competitiveness must be increased. "The expansion of research and development, education and infrastructure as well as the reduction of bureaucracy are the keywords here."

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