In focus
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For decades, nearly everyone profited from global trade. Now that the dependencies are becoming visible, business and politics have to weigh cost against security.
Globalisation: almost everyone benefits
“Change through trade” was the motto of the second half of the 20th century. The idea was that trade would also change political systems. With globalisation, trade took on a whole new dimension. Since 1990 at the latest, the global division of labour pushed production costs down, and world trade grew rapidly. Goods were made where it was cheapest, and the whole world was supplied. Ideological differences remained, but they took a back seat to economic gain. When almost everyone benefits, there is no reason to change the status quo. Europe, and Germany in particular, benefited especially. Russia supplied cheap energy, China many new customers and the US digital technology, from hardware and software to the cloud. Everyone more or less stuck to the rules of the World Trade Organization (WTO).
Those days are gone: the dependencies
Competition on costs and innovation has concentrated production in a few regions. Today they hold quasi-monopolies, for example in photovoltaics or rare earths, and Europe has become largely dependent on them. As long as the two sides are geopolitically aligned, that is no big problem. If that changes, dependence becomes a risk. The past few years have shown this clearly: Russia’s attack on Ukraine and the sanctions against Russia, the erratic trade policy of the US under Donald Trump, and China’s growing economic pressure. In the worst case, even technologically important or vital products such as medicines could become scarce.
The rulebook that held world trade together for so long is also losing its force. The WTO’s dispute settlement system has been largely blocked for years, and some countries, including the US, increasingly invoke national security to get around the rules. Trust that everyone plays by the rules is fading. The result: more bilateral agreements and more tariffs.
Between cost and security
Economic policy increasingly means weighing trade-offs. On one side are national goals such as digitalisation or the green transition, and the cost pressure of international competition. On the other are geopolitical interests such as less dependence on foreign governments. This conflict means one thing above all, at least in the short term: higher prices. The reason: tariffs meant to reduce dependencies or put pressure on other countries are often paid for in the end by consumers at home.
Companies face the same conflict. Many say they want to become more independent, yet they keep investing in countries such as the US and China, or even invest more, to produce close to those markets. They knowingly accept the risks of high dependence, because the high production costs and long approval procedures in Europe weigh more heavily. Genuine reshoring, bringing production back home, has therefore remained the exception so far. For a long time, trade was mainly about low costs. Security and independence come at a price.
Quick questions
What does “change through trade” mean?
“Change through trade” is the idea that economic ties also bring countries closer politically and, over time, change their political systems. Those who do business with each other have something to lose if conflicts arise. In the second half of the 20th century, the idea shaped above all German policy towards Eastern Europe and, later, towards Russia and China. Whether trade actually brings political change is disputed.
Why is dependence on individual countries a risk?
Anyone who depends on a few suppliers or regions relies on their politics and reliability. As long as both sides are geopolitically aligned, that is not a problem. If that changes, goods can stop arriving, prices can rise, and exporting countries can use their position to apply economic pressure. The fewer alternatives there are, the greater the risk. The pandemic, sanctions and trade conflicts have shown this.
Has the WTO lost its importance?
It has lost influence, but it is not irrelevant. The World Trade Organization still sets the rules for world trade. However, its dispute settlement system has been largely blocked for years, because members cannot agree on new judges. As a result, countries increasingly rely on bilateral agreements and tariffs.
How do tariffs work, and who pays them in the end?
Tariffs are duties on imported goods. They are meant to protect domestic producers or create political pressure, and they bring in revenue for the government. First, they are paid by the importer, that is, a company in the country that levies the tariff. Who ends up footing the bill depends on how the costs can be passed on: if consumers have no alternative, they buy even at a higher price. If they can switch, retailers or exporters have to cut the price. If the other country responds with counter-tariffs, domestic exporters are hit as well.
What do “deglobalisation” and “reshoring” mean?
Deglobalisation means that global economic integration is declining, for example through more tariffs and trade restrictions. There are also strategies that deliberately aim to reduce dependencies. Reshoring brings production, supply chains or payment links back to the home country; nearshoring moves them to nearby countries; friendshoring moves them to politically allied countries. Friendshoring is now being called into question, however, by the erratic trade policy of the US towards Europe, even though the two were long considered allies. Diversification, that is, spreading suppliers and sales markets more widely, also limits dependencies.
Are reshoring measures actually being implemented in the EU and Germany?
Partly. The EU has launched programmes to support chip production and critical raw materials, in order to limit dependence on individual countries. Chinese stakes in European companies or critical infrastructure are to be screened more strictly and restricted further. Public tenders are meant to go to “Made in EU” products. Germany, for example, is gradually removing Huawei products from its telecommunications network. At company level, genuine reshoring remains the exception so far.
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