As early as 2004, the then President of the German Bundestag, Wolfgang Thierse (SPD), quite rightly remarked that companies are “journeys without a homeland”. Large companies with several production sites in particular are flexible and invest where they expect the highest after-tax returns.
After all, the board members are legally obliged to safeguard and increase the assets entrusted to them in trust. Many DAX companies now generate the majority of their profits abroad, which is probably also due to the fact that Germany is a high-tax country for them.
Nevertheless, the German economy has fared quite well so far with its export-oriented business model. The international spread of production facilities and global supply chains ensured price competitiveness and made it possible to keep qualified and well-paid jobs in the domestic plants and corporate headquarters.
Probably no other major economy has benefited as much from the surge in globalization after the fall of the Iron Curtain and the integration of China into world trade as Germany.
But this strength makes you vulnerable when free world trade comes to a standstill due to national state intervention. The greatest danger comes neither from Russia nor from Chinese state capitalism’s urge to expand – but from the USA. Contrary to popular belief, US protectionism is not an invention of former President Donald Trump.
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Pressure to shift value creation to the US
The economic policy of the White House has long been aimed at using tariffs or other means of pressure to persuade global companies to relocate relevant parts of their value creation to the USA in order to preserve and create jobs there. Quite a few of the “hidden champions” of German medium-sized companies are faced with the question of having to relocate parts of their production to the USA in the future.
In the case of US President Joe Biden, the slogan ultimately aimed at self-sufficiency is not “America first” as was the case with his predecessor.
(Photo: AP)
In the case of US President Joe Biden, the slogan ultimately aimed at self-sufficiency is not “America first” as was the case with his predecessor. But with his gigantic subsidy program, camouflaged as the “Inflation Reduction Act”, he is pursuing nothing other than an industrial revitalization of the USA.
The legislative package envisages spending nearly $400 billion over the next decade on energy security and climate change programs. The goal: The USA wants to become a leader in key technologies and renewable energies and slow down the rise of China.
Therefore, subsidies in the billions should flow to those companies that produce in the USA. With his Aug. 14 tweet, Biden summed up his intentions with rare clarity: “Imagine a world where people would open the hood of their car and see the Made in America seal embossed on the battery.”
The second part of this strategy consists of deliberately weakening China’s strategically important semiconductor industry. Last weekend, the US authorities imposed a sales ban on products from ten Chinese telecommunications and security technology manufacturers because of “unacceptable risks” to national security.
>> Read more: The USA is making the “biggest investment of all time” for the climate – and triggering fears in Europe
Already at the beginning of October, the export of technologies for chip production in China was severely restricted. The risk that European manufacturers will also be hit by any sanctions if they do not “voluntarily” observe these US regulations is quite real.
Cross-border free trade
David Ricardo is considered to be the spiritual father of the idea of cross-border free trade. A good 200 years ago he showed that all countries involved in free trade benefit when each country produces what it can produce relatively cheaply and exchanges these goods for goods which other countries can produce relatively more cheaply.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
Two decades ago, the economist of the century Paul Samuelson put this dogma into perspective: “It is not true that unrestricted free trade benefits everyone everywhere.” On the contrary, a rapid technological catch-up by China in the USA could cause welfare losses. And it is precisely these losses that the US governments now want to prevent – regardless of allies.
“We must be aware that there is a risk that industrial jobs could disappear from Germany and Europe, which will then not come back so quickly,” warns SPD leader Lars Klingbeil.
And Vice Chancellor Robert Habeck emphasizes that “protectionism paralyzes innovation. It’s not so much about losing our old industrial heart as it is about the risk that the next wave of technological innovation won’t happen in Europe. Because the Inflation Reduction Act takes care of the cool new stuff.”
>> Read here: Economy complains about “overloading of trade talks”
An economics minister from the Greens warns against the protectionism of others, while apparently having fewer problems with his own; After all, it’s his party that is alien to free trade agreements.
Energy in Europe remains expensive
A further burden for the industry of the “old continent” is that energy will remain expensive in Europe in the long term. Chemical giant BASF expects gas prices in Europe to be around three times higher than in the US in the long term. Parts of local production would then no longer be competitive.
Tesla had actually planned to make its only European plant in Brandenburg the world’s largest battery factory.
(Photo: dpa)
In addition, the population in Germany is aging rapidly. This leads to a shortage of skilled workers and rising wage costs. In addition, sales increases in the USA are much easier to achieve thanks to a younger and growing company.
Protectionism is a sweet poison, for Biden and his successors. Thanks to subsidized “green investments”, the “Rust Belt” is to be transformed into a “Battery Belt”. And so it is hardly surprising that Tesla recently put its plans for a large battery factory in Brandenburg on hold and now apparently wants to invest in the USA.
Finally, the US government promises every buyer of an electric car a US$7500 tax credit – as long as the car was assembled in the USA. In addition, by 2026, 80 percent of the rare earths for the battery must have been mined domestically or in countries with which the United States has free trade agreements.
Biden wants to ensure that no dollar of state aid leaves the country. As a result, the bill for US taxpayers and car buyers is likely to be quite high. But that doesn’t help the European car locations.
>> Read here: Why Tesla is not yet building battery cells in Grünheide
None of this has anything to do with the previously established rules for fair trade. However, experience teaches that there is seldom more than one consolation prize for exceptional trade policy fairness. The EU will have no choice but to negotiate hard with the US about free trade so as not to become a big loser in the disguised trade war.
More: Trade dispute between the EU and the USA before escalation – Paris demands a tough reaction.