Interview withHolger Görg

"The debate about the West's dependence on China is exaggerated"

Economist Holger Görg cautions against the potential impact of a fragmented global trade system. At the same time, he remains optimistic that such fragmentation won't materialize, despite early indications observed by the WTO.

"The debate about the West's dependence on China is exaggerated"

Mr. Görg, economists from the World Trade Organization (WTO) observe initial signs of trade fragmentation, i.e., the splintering of world trade. Do you share this view?

I don't see fragmentation in the numbers yet, and the WTO only speaks of initial signs. Regionalization in trade is nothing new. Trade has always been largely regional. EU member states, for example, conduct over 60% of their trade with other EU member states. However, there is a real risk of trade fragmentation due to geopolitical tensions.

What triggered these tensions? Is it solely due to the Russian war on Ukraine and China's threats to Taiwan? Or are there other factors at play?

The Russian invasion has forced companies to rethink their supply chains. But even without this war and tensions over Taiwan, there would have been a political block formation, which also impacts global trade.

Why is that?

The era of having the United States as the sole dominant economic, political, and military world power is over. China now also aspires to take a leading role in these areas, which leads to conflicts. That said, the discussion about the West's dependence on China is exaggerated.

Holger Görg is Professor of International Economics at the Christian-Albrechts-University in Kiel and the Director of the Research Center "International Trade and Investment" at the Kiel Institute for the World Economy (IfW Kiel). Additionally, he serves as the Director of the Kiel Center for Globalization. From 2021 to 2023, he held the position of interim President at IfW Kiel. Görg has worked as an advisor for various organizations, including the World Bank, the European Commission, the United Nations Industrial Development Organization, the UN Economic Commissions for Europe and Africa, and several governments.

Can you elaborate on that?

Exchanging many goods with a particular trading partner, such as the European Union with China, is not inherently a problem or dependency. The question is whether there are short-term alternative procurement routes for various product groups. Real dependence only exists where there are no alternatives. When viewed from this perspective, the dependence on China is significantly smaller than often portrayed by politics or the media. The discussion should be less politicized.

So, you don't think it makes sense for companies to look for alternative suppliers now to potentially reduce the import quota from China?

Companies should carefully examine the status of their supply chains. From conversations with entrepreneurs, I understand that they are doing so. Interestingly, we don't see any decrease in trade with China in the numbers so far. For example, between July and August 2023, Germany's total exports fell by 1.2%, but German exports to China increased by 1.2%.

In the summer, Taiwanese semiconductor manufacturer TSMC announced plans to build a plant in Dresden with other companies. How do you assess such steps in terms of diversifying supply chains?

This isn't genuine diversification and only moderately reduces dependencies for the German economy. While the plant may be in Germany, it requires many imports from Taiwan and China for production.

Let's return to the potential block formation in world trade. The International Monetary Fund (IMF) warns that in the case of strong fragmentation, global economic output could shrink by up to 7%. How do such significant effects arise?

China is a very efficient producer. Therefore, decoupling the West from China would economically be a bad idea. Companies have established supply chains that are most effective. If supply chains change for political reasons, it inevitably leads to efficiency losses and, consequently, more expensive production, which affects the economy.

Higher production costs are likely to lead to higher inflation, don't they?

That's correct. If there is strong fragmentation in world trade, it will fuel global inflation.

Fragmentation is also likely to have implications for environmental protection. Less trade between the West and China and perhaps more with geographically closer countries may seem environmentally friendly due to shorter transport routes. However, this is deceiving. Why?

For several reasons. Firstly, it is not guaranteed that supply chains will become shorter. If trade relations with China are replaced in the future by trade with, for example, India or the Southeast Asian ASEAN countries, there is nothing to be gained in this regard. Secondly, investments and trade invariably result in the influence of one partner's environmental standards on the other. Companies exporting to the EU, for instance, must adhere to our environmental regulations and our Supply Chain Act. And a third aspect is that more efficient environmental technology spreads faster and more extensively in a globalized world.

At the beginning of our conversation, you mentioned that you do not see any signs of fragmentation in world trade. Do you believe this will remain the case, or will there be more significant block formation or even deglobalization?

I don't have a crystal ball, but I am quite optimistic that this scenario will not materialize. The economic efficiency losses are so high that all parties involved will hopefully keep a cool head.