Global sourcing- The rules have changed

Author: Wilfried Krokowski – April 2022

The last 50 years have been characterized by a liberal and cosmopolitan trade policy. Hardly any country has benefited from this as much as Germany. Countries such as Hong Kong, South Korea, Taiwan, India and, most recently, China have developed economically at a breathtaking pace, and their populations have benefited. Consumers in Western countries have been able to increase their standard of living at an unprecedented rate. The automobile, electronics from televisions to smart phones, year-round fruit and food offerings to affordable family travel to faraway lands and inexpensive clothing were the result. Economically, no generation has ever been as well off as this one, and that is the result of global industrial and economic policies. The WTO (World Trade Organization) opened the borders and thus ensured a worldwide flow of capital. Foreign investment by German companies reached peak levels, and there was no end in sight. But this development has now stopped, the rules of the game have changed. 

While the years 1970 to 2020 were characterized by open trade and economic globalization, the limits of this globalization are now becoming apparent. On the one hand, in the area of sustainability (exploitation of resources and raw materials, neglect of environmental protection at the expense of the overall population and climate protection) and, on the other hand, in the geopolitical area. With Donald Trump, Xi Jinping and Putin, priorities on the world stage have changed. China has evolved over the past 40 years from a mere “workbench of the world” to a global political power. The days of friendly and restrained soft-pedaling on the part of China are definitely over. China is striving for military, economic and technological strength and is increasingly deploying its power in regions such as Asia, Africa, South America and Eastern Europe. If China was a supplicant to Russia 50 years ago, Russia under Putin is now a supplicant to China. Donald Trump has recognized this and is trying, almost too late, to initiate initial countermeasures, which unfortunately have been characterized by a very unfortunate approach. Europe believed until recently in the ideal of a humane world through free trade, and in doing so has only made its economic opponents such as China and Russia stronger. The struggle for world power between the USA and China has thus begun.

The fact that we are in the time of the new geopolitical world order is also shown by the studies and considerations of the BDI with its policy paper on China from January 2019 (Partner and system competitor – How do we deal with China’s state-controlled economy? ) as well as the study of the Bertelsmann Foundation from December 2020 with the topic: what China’s industrial policy means for the German economy – scenarios for “Made in China 2025” using the example of German mechanical engineering or also the research report of the Institute of the German Economy by Jürgen Matthes from 2020 on the topic: European trade policy and China – steps towards a new balance with fair competition. Below are some quotes from the reports and studies:

Summary of the report by Jürgen Matthes: 

“China is an important trading partner of the European Union and also a new system competitor. From a European perspective, the main concern is the economic distortions of competition caused by Chinese state capitalism, which are increasingly having an impact on world markets. However, the multilateral trade regime has considerable gaps in the areas of industrial subsidies and state-owned enterprises. Various constructive attempts by the EU and the U.S. to reform the rules of the World Trade Organization (WTO) continue to meet resistance from China. In bilateral negotiations, China has also so far made hardly any concessions on industrial subsidies, despite massive pressure from the USA in particular.  Therefore, the EU must also act unilaterally.” 

Central statements of the BDI study: 

  • A system competition is emerging between our model of a liberal, open and social market economy and China’s state-dominated economy. Politics, society and business in Germany and Europe need a broad public discussion and orientation on this challenge.  
  • China is and will remain a dynamically growing market, a driver in the global economy and a key sales and procurement market for German industry. German industry wants to take advantage of the opportunities offered by economic exchange with China. At the same time, however, the challenges facing China cannot be ignored.  
  • German industry remains interested in close economic exchange with China and rejects targeted and politically forced economic disengagement.  Nevertheless, from the point of view of German industry, it generally makes sense to maintain diversified trade relations and to make investment decisions. Overdependence on a single market is always associated with political and economic risks, which must be minimized.

Main findings of the Bertelsmann study: 

  • With the industrial policy initiative “Made in China 2025” launched in 2015, the People’s Republic of China hopes to become a leading technology nation. The selected high-tech industries also include sectors in which German companies are traditionally strong and which are of great importance to Germany as an export nation, including mechanical engineering. 
  • The more success China has with its industrial policy, the more machinery and equipment it will export to third countries. For the German economy, focusing exclusively on participating in China’s economic growth could be accompanied by major dependencies and declining exports. 
  • Companies, as well as associations and politicians, are called upon to actively address regulatory and industrial policy framework conditions in China and in Europe in order to actively shape developments in the coming years. A particular focus should be on the diversification of markets.

All these studies and reports clearly show us. A change in thinking must take place. The invasion of Ukraine by the Russian military in particular clearly shows that the world has changed. The world is reordering itself and political strategies, however right or wrong they may be, are gaining the upper hand. The economy must also face up to this. 

Of course, we cannot leave well-trodden economic paths overnight, at least not without lasting consequences for our economy and, directly linked to this, for our standard of living. It is therefore not a question of “getting rid of globalization”, but rather of rethinking the paths we have taken and reorienting ourselves in the light of globalization. 

In concrete terms, this means for our industry: 

  • Slow and targeted reduction of economic involvement in China. 
  • No sell-out of medium-sized know-how carriers (companies) to Chinese investors (keyword: KUKA and Putzmeister). 
  • Stronger diversified trade relations with countries from Asia, Eastern Europe and Africa.  Africa will play a special role in this context. Here, it is also important to put a stop to China’s currently very dominant influence in some African countries. 
  • More production in Europe and more in-sourcing than out-sourcing, which at the same time compensates for a declining export share through a growing domestic market. 
  • Locate more high-tech companies with production and development in Europe, as TESLA and INTEL are currently doing. No more high-tech investments in China 
  • A Western European energy and raw materials strategy worthy of the name. 

Everyone has to make their contribution to this. Only in this way will we succeed in regaining, in the medium and long term, the economic and political status we have lost in recent years. Between 1970 and 2020, we have had to reduce our share of the global economy from around one third to less than 15 percent. A creeping process that has significantly strengthened China’s claim to power today.

 

Wilfried Krokowski

Laura Venema
29.03.2022
von Laura Venema