European companies are hoarding primary products from China. Their warehouses are packed with manual transmissions for bicycles, microchips for electric motors, with all sorts of components that they can only get from the People’s Republic. “Companies order in large quantities, as much as possible and everything they can get,” says Andreas Breinbauer, head of the “Logistics and Transport Management” course at the BFI Vienna University of Applied Sciences.
Because the global supply chains have become unpredictable since the corona pandemic. The goods did not arrive at all or arrived late. “You’d rather order more for fear of not getting anything at all,” says Breinbauer.
The children’s bike manufacturer Woom confirms this trend. “In order to ensure reliable delivery dates, we have set up appropriate storage areas,” says spokeswoman Belinda Ableitinger. “A bicycle consists of more than 50 individual components, if just one is missing, it cannot be completed.” The delivery times for the components would vary from a few weeks to two years.
Russia’s war exacerbated the supply chain problem, and now China is hinting at an attack on Taiwan as well. Is this the end of globalization?
What began with China in the 1980s could end with China. With the economic opening under party leader Deng Xiaoping, world trade really picked up speed. Since then, globalization has increased exponentially. While global exports were still around 2 trillion US dollars in 1985, in 2019 they were almost 19 trillion US dollars.
Outsourcing to Asia
Globalization came at just the right time for Europe. Environmental organizations became more important, so it was quite fitting that environmentally harmful production could be outsourced to Asia. Just like productions with questionable working conditions like in the 19th century in the textile industry or in mining. “At the same time, large sales markets emerged in China,” says Breinbauer. He refers to the German automotive industry, which sells 30 to 40 percent of its trading volume in China.
And the peace was also secured. Who would want to attack someone who trades with them? But then came the coronavirus pandemic, Russia’s bloody war against Ukraine, and China’s suggested attack on Taiwan. And the question that leaves Europe perplexed: what now?
“Europe will still be able to cope with the loss of trade relations with Russia and the renunciation of Russian gas and oil,” says Harald Oberhofer, a professor at the Vienna University of Economics and Business. “China, on the other hand, is the second largest economy in the world, which cannot be ruled out so easily.” Should a break in trade relations be necessary, Europe would have to strengthen its ties with South America and Africa. However, Oberhofer points to the failed Mercosur free trade agreement, which collapsed after fierce resistance within Europe. And in Africa, China was faster. “We’ve already lost to China there,” says the economist.
In any case, Europeanization would be a massive step backwards in terms of prosperity. But environmental policy would no longer work either. “We cannot produce enough technologies to produce materials for e-mobility or wind turbines, for example,” says Oberhofer.
The Green Addiction
Globally, most metals are mined in China, especially those needed for Europe’s transition to green technologies. “China is the world market leader for around 20 mineral raw materials,” says Frank Melcher, senior geologist at Montanuni Leoben. “The EU drew up a list of 27 raw materials that all have to be imported. Three quarters of them come from China.”
China has gigantic deposits in Inner Mongolia and has a monopoly on various raw materials (see graphic). The expansion of renewable energies and microelectronics for the automotive industry is closely linked to China. And sectors such as mobile phone production no longer take place in Europe.
Klaus Weyerstrass, economist for world economy at the Vienna Institute for Advanced Studies (IHS), is more confident. The EU should revitalize transatlantic economic relations. “The USA is a reliable partner,” he says. In addition, Europe could strengthen relations with other Asian countries.
In any case, it is essential to build up capacities, such as Intel’s chip factories in Magdeburg or Infineon’s in Villach. “With the shift back to Europe, the transport routes would also be shorter,” he says. Failures of global supply chains would no longer affect European companies.
The German Ifo Institute recently calculated the extent to which a decoupling from China would have an impact, using Europe’s economic engine Germany as an example. Accordingly, Germany’s real gross domestic product (GDP) would increase by 0.52 percent in the long term. The real GDP of the rest of the EU would fall to a lesser extent at 0.38 percent. In this scenario, the study assumes increased trade flows with the rest of the world. Germany would increase its EU imports by 2.25 percent, the volume of goods from the US would increase by 9.05 percent, and from the rest of the world it would be an increase of 9.67 percent.
In the event of a comprehensive relocation to Germany, German GDP would fall by almost 10 percent. “De-globalization could not only lead to higher unemployment and lower growth, but ultimately also endanger the country’s political stability,” warn the authors of the paper.
The global glow is fading
Globalization got its first kink in the economic crisis of 2008/09. Global exports collapsed by a quarter but recovered. But global trade relations had lost their luster. India’s Prime Minister Modi proclaimed the new era of “independence” in 2020, Japan put together a support package for companies that relocate their production back home in the same year, China has recently also focused on domestic consumption and internal Chinese supply chains and Donald Trump won with his Motto “America First” the US presidential elections.
The New Silk Road trade project between Asia and Europe, launched by China in 2013, seems like a relic from bygone times that got off to a successful start despite increasing global skepticism. “Before the corona pandemic, six to eight percent of shipments were shifted from sea to rail,” says Andreas Breinbauer.
And even today, despite the corona pandemic, Russia’s war and China’s threats, the rail connection from China through Russia to Europe is still open. However, it is used less and less. “There are estimates that by the end of April the transport volume on the northern route had fallen by 30 to 40 percent,” he says.
On Thursday, German Chancellor Olaf Scholz called on German companies not to make themselves too economically dependent on China. Reducing dependency on imports will be part of the national security strategy, he said.
Sounds like a turning point or like a trip where you’re glad to be back home: once globalization and back.