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162. What if? The Effects of a Hard Decoupling from China on the German Economy
- Author:
- Julian Baqaee, Julian Hinz, Benjamin Moll, Moritz Schularick, Feodora A. Teti, Joschka Wanner, and Sihwan Yang
- Publication Date:
- 01-2024
- Content Type:
- Policy Brief
- Institution:
- Kiel Institute for the World Economy (IfW)
- Abstract:
- How would the German economy cope with a hard economic decoupling from China? The authors study a scenario where the global economy fragments into three distinct blocs: the G7 economies and their allies, China and her allies, as well as neutral countries. German trade with China would have to be entirely rerouted to countries within the "Western" block and neutral countries. The authors quantify the costs of such a worst-case hard decoupling using the (Baqaee and Farhi 2021) multi-sector model of the world economy. The key finding is that a total cut-off of trade relations with China would have severe but not devastating effects on the German economy. The welfare loss for Germany (relative to a no-cut-off baseline) would be around 5 percent of Gross National Expenditure (GNE) over the first few months and around 4 percent over the first year, plus additional short run costs due to business-cycle amplification effects. In the medium and long run, the costs would fall to a permanent loss in the 1–2 percent range. Less extreme decoupling or gradual de-risking scenarios (“small yard, high fence") would incur smaller costs. The single most influential assumption relates to the “trade elasticity,", i.e., the ease and speed with which trade can be reorganized away from China to neutral countries and within the “Western” block. The authors´ findings, in particular the critical dependence of economic costs on the time horizon over which adjustments take place, provide some rationale for embarking on a gradual de-risking trajectory to avoid a costly and politically contentious hard decoupling dictated by geopolitical events.
- Topic:
- Globalization, International Trade and Finance, Sanctions, Geoeconomics, Decoupling, and De-Risking
- Political Geography:
- China, Asia, and Germany
163. Mild Deglobalization: Foreign Investment Screening and Cross-Border Investment
- Author:
- Vera Z. Eichenauer and Feicheng Wang
- Publication Date:
- 03-2024
- Content Type:
- Working Paper
- Institution:
- Kiel Institute for the World Economy (IfW)
- Abstract:
- Openness to foreign investments is associated with risks. To mitigate these risks, many high-income countries have strengthened the control of foreign investments over the last decade in an increasing number of sectors considered critical. Investment screening distorts the market for cross-border investments in controlled sectors, which might lead to unintended economic effects. This is the first cross-country panel study to examine the economic effects of investment screening mechanisms. We combine deal-level data on cross-border mergers and acquisitions (M&A) for the period 2007–2022 with information on sectoral investment screening. Using a staggered triple difference design, we estimate a reduction of 11.7 to 16.0 percent in the number of M&A in a newly screened sector. The effects are driven by minority acquisitions and deals involving a foreign government or state-owned enterprises or US firms as investors. There is no reduction in the number of deals within the EU/EFTA, most of which are not subject to screening. The findings call policymakers’ attention to weighing the benefits of national security and the economic costs of introducing investment screening.
- Topic:
- Globalization, International Trade and Finance, National Security, Foreign Direct Investment, Investment, Geoeconomics, Global Capital Allocation, and Deglobalization
- Political Geography:
- China, Europe, and United States of America
164. What role for Chinese FDI in Africa? New survey evidence from Ethiopia and Ghana
- Author:
- Charles Ackah, Alemayehu Geda, Holger Görg, and Federico Merchan
- Publication Date:
- 04-2024
- Content Type:
- Working Paper
- Institution:
- Kiel Institute for the World Economy (IfW)
- Abstract:
- Foreign investments bring in not only new employment but also novel technology, managerial skill and know-how, that may also dissipate into the local economy. It is not clear whether this effect differs by the nationality of source countries, in particular between Chinese and non-Chinese firms. Based on a firm level survey on Ethiopia and Ghana, we found that all types of firms are engaged in limited R&D and innovation activity and their transfer to host countris in both countries. There is little difference between Chinese and non-Chinese foreign firms in such technology and managerial skill transfer once controlling for firm size and industry characteristics in the majority of metrices (R&D activities, horizontal & vertical spillover, directly adopting techniques). However, we found for Ghana that Chinese firms have more suppliers but are less likely to transfer technology to them. Chinese firms are more likely to transfer managerial skills than non-Chinese firms in Ghana though not in Ethiopia. Also, there is little evidence that foreign firms transfer technology via horizontal or backward spillovers in either countries. Finally, Chinese firms are much more likely to receive host country policy support than other foreign firms in Ghana but not in Ethiopia.
- Topic:
- Science and Technology, Foreign Direct Investment, Economy, and Technological Transfer
- Political Geography:
- Africa, China, Ethiopia, and Ghana
165. Foul Play? On the Scale and Scope of Industrial Subsidies in China
- Author:
- Frank Bickenbach, Dirk Dohse, Rolf Langhammer, and Wan-Hsin Liu
- Publication Date:
- 04-2024
- Content Type:
- Policy Brief
- Institution:
- Kiel Institute for the World Economy (IfW)
- Abstract:
- China makes extensive use of subsidies in order to take a leading role on the global markets in the green technology sectors of electric vehicles, wind turbines and railway rolling stock. According to DiPippo et al. (2022) and recent OECD studies, the industrial subsidies in China are at least three to four times or even up to nine times higher than in the major EU and OECD countries. According to a very conservative estimate, industrial subsidies in China amounted to around EUR 221 billion or 1.73% of Chinese GDP in 2019. According to recent data of 2022, direct government subsidies for some of the dominant Chinese manufacturers of green technology products had also increased significantly - the electric car manufacturer BYD alone received EUR 2.1 billion. The authors point out that Chinese companies are benefiting from further support measures, including subsidized inputs, preferential access to critical raw materials, forced technology transfers, the strategic use of public procurement and the preferential treatment of domestic firms in administrative procedures. The authors recommend the EU to use its anti-subsidy proceeding against BEV imports from China to enter into negotiations with the Chinese government and persuade it to abolish public support measures that are particularly harmful to the EU.
- Topic:
- Globalization, International Trade and Finance, Foreign Direct Investment, European Union, Business, Renewable Energy, Industry, Subsidies, and Electric Vehicles
- Political Geography:
- China and Europe
166. The Motives for Chinese and Western Countries’ Sovereign Lending to Africa
- Author:
- Eckhardt Bode
- Publication Date:
- 05-2024
- Content Type:
- Working Paper
- Institution:
- Kiel Institute for the World Economy (IfW)
- Abstract:
- This paper is one of the first to show systematically that the motives for sovereign lending to African countries differed considerably between China and Western countries during the last two decades. While Chinese lending mainly served its own economic or geopolitical objectives, which is well-known from the existing literature, Western countries’ lending also pursued objectives that appear to be at odds with their self-interests but whose precise nature is not yet well-understood. Using a new, da-taset on loans from China, Western countries and multilateral organizations to African countries, I empirically examine a broad variety of potential motives, aim at separating the motives pursued by the national governments from those pursued by their lending agencies, and employ an estimation strategy with increasingly complex fixed effects that yields additional interesting insights into the specificities of the motives.
- Topic:
- Economics, Emerging Markets, International Trade and Finance, Financial Crisis, Geopolitics, and Sovereign Lending
- Political Geography:
- Africa, China, and Global West
167. African Sovereign Defaults and the Common Framework: Divergent Chinese Interests Grant Western Countries a “Consumer Surplus”
- Author:
- Eckhardt Bode
- Publication Date:
- 05-2024
- Content Type:
- Policy Brief
- Institution:
- Kiel Institute for the World Economy (IfW)
- Abstract:
- • China has become a major player in sovereign lending towards Africa during the past two decades but has recently been faced with increasing defaults. A new African debt crisis is looming. • Differences in the motives of sovereign lending between China and Western creditor countries contribute to preventing effective global sovereign debt management under the “Common Framework for Debt Treatment” in this looming African debt crisis. Chi-nese lending during the past two decades was motivated primarily by its own economic interests while most of the Western countries’ lending appears to be at odds with their self-interests but is not yet well-understood. • Debt settlements under the Common Framework that involve China are less generous than past settlements with the Paris Club alone. This is an obstacle to a rapid and sus-tainable economic recovery of financially distressed African countries. • Western countries derive a kind of “consumer surplus” from the agreements under the Common Framework because they are prepared to make greater concessions than Chi-na. They could transfer this hypothetical surplus as additional (conditional) Official De-velopment Assistance to the defaulted African countries to alleviate social hardship.
- Topic:
- Emerging Markets, International Trade and Finance, Financial Markets, Lending, Economic Crisis, Sovereign Debt, Consumer Behavior, and Geoeconomics
- Political Geography:
- Africa and China
168. EU-China Trade Relations: Where Do We Stand, Where Should We Go?
- Author:
- Alexander Sandkamp
- Publication Date:
- 05-2024
- Content Type:
- Policy Brief
- Institution:
- Kiel Institute for the World Economy (IfW)
- Abstract:
- • In the aftermath of the Covid-19 pandemic, China’s share in European trade has fallen continuously. Nevertheless, the country remains the EU’s largest source of imports (20.5 percent in 2023) and its third largest export destination (8.7 percent). • This apparent dominance of China is put into perspective when incorporating intra-EU trade. For example, Germany – Europe’s largest economy – sent 6.1 percent of its ex-ports to China, but 55 percent to EU members states. For imports, the Chinese and Euro-pean shares are 11.5 percent and 52.7 percent, respectively. • Decoupling the EU from China (i.e. almost eliminating bilateral trade) would permanent-ly reduce European real income by 0.8 percent in the long-run. In terms of gross domes-tic product in 2023, the EU would forego 136 billion EUR of value added every year. Short-term effects are likely to be stronger. • China dominates global production of important products such as laptops and mobile phones as well as raw materials including Germanium and Gallium that are critical for the green energy transition. A trade disruption might thus both delay the energy transi-tion and increase its costs. • To reduce specific dependencies, the EU should intensify its efforts to diversify procure-ment by increasing the attractiveness of alternative suppliers. Finding the courage to move forward in the negotiation of free trade agreements with potential strategic part-ners such as Australia and the Mercosur countries would strengthen the EU’s geopolitical position and increase prosperity among partners.
- Topic:
- Globalization, International Trade and Finance, European Union, Geoeconomics, and Decoupling
- Political Geography:
- China, Europe, and Germany
169. When the Exception Overtakes the Rule: COVID-19, Security Exemption Clauses, and International Investment Agreements
- Author:
- Kayla Maria Rolland
- Publication Date:
- 02-2024
- Content Type:
- Journal Article
- Journal:
- The Goettingen Journal of International Law
- Institution:
- The Goettingen Journal of International Law
- Abstract:
- In the trade and investment law regimes built in the post-war period, “security exemption clauses” were included within trade and investment agreements as a safety valve, permitting States to deviate from their commitments in the event that their security interests were implicated. Initially, these clauses were understood to be narrowly limited to instances of war and interstate conflict. With the rise of the national security state in the decades since, however, the concept of security interests has ballooned to encompass an ever-growing set of issues, with some fearing that the rules may become irrelevant. This has been particularly facilitated through “third generation” security exemption clauses and their inclusion of self-judging language. The COVID-19 pandemic in particular adds a new dimension to this phenomenon. As a case study analysis of the text of the Chile-Hong Kong, China SAR bilateral investment treaty (BIT) will demonstrate, it may be feasible for States to invoke security exemption clauses to justify measures taken in response to the COVID-19 pandemic in some contexts, particularly with third generation, self-judging security exemption clauses. The expanding notions of security exemption clauses have significant implications for the investor-State dispute system as a whole.
- Topic:
- Security, International Law, International Trade and Finance, Treaties and Agreements, COVID-19, and International Investment Agreements
- Political Geography:
- China and Global Focus
170. China as the second nuclear peer of the United States: Implications for deterrence in Europe
- Author:
- Jyri Lavikainen
- Publication Date:
- 02-2024
- Content Type:
- Policy Brief
- Institution:
- Finnish Institute of International Affairs (FIIA)
- Abstract:
- China’s nuclear build-up will make it a nuclear peer adversary of the United States in the 2030s. The US will have to deter both Russia and China, as well as other regional adversaries, with forces geared to engage in one major war at a time. If two major wars occur either simultaneously or sequentially, US military capability will be put under great stress. In the event of a second war, the US may find itself in a situation of conventional military inferiority, which it might have to compensate for with greater reliance on nuclear weapons. Since the US remains the ultimate guarantor of European security, its deterrence challenges elsewhere affect European security as well. Thus, even the possibility of war in the Indo-Pacific is a European security issue. European NATO allies can help mitigate the two-peer problem by permanently taking on a greater share of the burden of Europe’s conventional defence. At the same time, the effectiveness of NATO’s nuclear capability must be enhanced. A strategic defeat for Russia in the war in Ukraine would postpone Russia’s ability to pose a military threat to Europe. Ukraine’s NATO membership would further serve to reduce the threat of another major war in Europe.
- Topic:
- Security, NATO, Nuclear Weapons, and Deterrence
- Political Geography:
- Russia, China, Europe, and United States of America