The scarcity of goods makes economic action necessary. In a market economy, prices are the most important control instruments for ensuring that scarce goods are used in the best possible way. Because flexible prices signal different degrees of scarcity.
But no one had expected what purchasing managers and consumers had to experience in the coming year. Because material bottlenecks and empty shelves were once typical for the countries of the Eastern Bloc, which collapsed over 30 years ago, not least for this reason. It was all the more surprising that in a short period of time, numerous goods that industry and craft needed for their production suddenly became scarce in Germany: raw materials, building materials, preliminary products, packaging and, above all, semiconductors.
These abrupt shortages not only led to price volatility, but also to the fact that ordered goods could not be produced because components were simply not available. According to an Ifo survey, three out of four German industrial companies complained of delivery bottlenecks in November. In addition to clothing manufacturers, Germany’s key industries of automobiles, mechanical engineering and electrotechnical equipment suppliers were particularly hard hit, with 85 to 90 percent of manufacturers complaining about a lack of preliminary products.
And three out of four retailers are also missing goods in the Christmas business, which is often decisive for the annual result. Toy and bicycle dealers are particularly affected, almost all of whom report delivery problems.
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How could this happen?
Exaggerated division of labor
The Japanese Taiichi Ohno, who revolutionized production at Toyota in the 1970s, is considered the spiritual father of modern just-in-time production. In order to minimize storage costs, supplied parts were ordered in such a way that they could be installed immediately after delivery.
Most industrial companies later copied this just-in-time idea – trucks and freight trains became rolling warehouses. With the integration of the former Eastern Bloc and a short time later also of China and other Asian emerging countries into world trade, the supply chains became longer and longer and – as is now evident – increasingly fragile. This allows the conclusion that the international division of labor may have exceeded its optimum.
The causes for today’s deficiencies are diverse, but ultimately all delivery problems are in fact directly or indirectly related to Corona and / or China. After the outbreak of the pandemic in early 2020, the Chinese government initially imposed a total lockdown on economically important regions. Factories and ports were closed.
The world began to feel the consequences a few weeks later, when supplies from the “workbench of the world” failed to materialize, first in the major European ports and then in the factories.
When the coronavirus reached Europe, the factories closed here too. Orders for pre-products were canceled as few expected the initial lockdown to be followed by such a rapid recovery. The strong recovery in demand could therefore in many cases not be met, also because containers were suddenly missing and long queues formed at important ports.
These problems were exacerbated by rigorous anti-corona measures in China. As soon as even a single corona case was reported in a port, it was closed for many days.
Germany is extremely dependent on supply chains
Now no other large industrial nation is so closely involved in the international division of labor and dependent on functioning global supply chains as Germany. Because it was only thanks to consistent outsourcing and permanent increases in efficiency that German industry was able to maintain a very high proportion of added value and a large number of jobs in the high-wage country of Germany.
It is therefore obvious that Germany, with its export-oriented business model, is particularly hard hit by the current upheavals, so that several economic research institutes had to revise their expectations for Germany downwards this week.
At most, supporters of conspiracy theories are likely to believe that Corona and the economic upheavals are the result of a grand plan by the Central Committee of the Chinese Communist Party. Nonetheless, it can be assumed that China’s leadership is observing very closely what global turbulence and high macroeconomic damage their country can cause simply by closing the country’s ports, hoarding containers or restricting the production of rare earths or intermediate products.
The current crisis shows that China’s government has a very sharp weapon with its trade policy, which until recently the political leadership probably did not suspect of the global economic threat and pressure potential it possesses.
It would be naive to believe that China’s leadership should not be allowed to use this economic weapon specifically against Europe simply because it would damage its own national economy.
China has a powerful weapon at hand
One should not expect China’s leadership to behave strictly based on economic criteria, especially not when – as with Taiwan – national and geopolitical goals are at stake. Deterrence, which saved the world from nuclear war in the second half of the last century, only leads to a relatively stable equilibrium if both sides behave rationally and include their own damage in the decision-making process.
The example of Australia shows, however, that China’s leadership is willing to accept bottlenecks in its own energy supply and thus economic losses in order to harm Australia. For example, coal deliveries from Australia are often processed in Chinese ports with a delay of weeks – even though this coal is urgently needed in China’s provinces.
A good dozen Australian industries are affected by import tariffs, boycotts or negative campaigns by China because the Australian government interferes in domestic affairs of the Chinese nation according to the Chinese interpretation. As evidence, international campaigns at least tolerated by the government in favor of Taiwan and Hong Kong against the suppression of the Uyghurs or the origin of the coronavirus attributed to China are cited.
Based on this approach, it is possible to estimate the problems Germany could expect if the federal government followed up the words in the coalition agreement with deeds. There the SPD, Greens and FDP promised to take a harder line on China.
Beijing’s answer was not long in coming. Taiwan, Hong Kong and Xinjiang are internal Chinese affairs, said a government spokesman in the direction of Berlin.
Risky dependency or expensive autonomy
The German economy is thus faced with the dilemma of either having to live with massive upheavals in China trade that are possible at any time or of redesigning the supply chains, building up storage capacities or even manufacturing important preliminary products domestically – at the cost of significantly higher costs.
The economic calculation is therefore, are higher costs worthwhile, with which the dependency on China can be reduced noticeably, or do you accept the risk of temporary production downtimes?
The new federal government must therefore answer the question of what economic costs it will be prepared to bear if it intensifies its tone towards China. After all, a further weakening of the growth potential would be pretty much the last thing the German economy, sandwiched between aging, decarbonization and the consequences of the coronavirus, could use. So – in the words of Bertolt Brecht – will the food come first, or first the morals?
One thing is certain: 2022 will not be an easy year in political and economic terms.
More: McKinsey companies have done too little to make supply chains more stable