The Russian war of aggression against Ukraine has exposed not only political but also economic weaknesses in Germany. And it has already raised early fears of a similar confrontation between China and Taiwan. So, what can we learn from the war against Ukraine for a possible China-Taiwan conflict? An analysis from an economic perspective.

What’s at stake?

Excessive dependence on Russian energy has emerged as a major problem for German and European foreign policy effectiveness. Forty-one percent of EU gas imports in 2021 came from Russia, representing a significant cluster risk.

The good news is that adjustment is possible. That’s because, by mid-June 2022, EU gas imports from Russia had dropped to about 20 percent. Nevertheless, Germany will have to reduce its gas consumption by about 25 percent if it does not want to be blackmailed over empty gas storage facilities this winter.

However, direct investment and trade flows between the EU and China are much larger than between the EU and Russia. Nevertheless, the macro effects of a trade war with China would not be critical. The Ifo Institute estimates the loss would be less than 1 percent of German GDP.

Much more relevant is the cluster risk in certain critical areas. While in Russia’s case, that risk is in energy, in a conflict between China and Taiwan, it would be microchip dependencies, where Taiwan is the world market leader, or the need for batteries and certain raw materials from China that pose risks.

What to do?

To avert damage to the European and especially the German economy, a rapid political and economic response is needed. This includes, first, diversifying the private sector, which cannot rely on politics to sort everything out.

This does not mean no longer doing business with China, but it does mean developing alternative suppliers in countries other than China and Taiwan. Second, stockpiling certain critical goods would increase resilience. Overall, then, the intensification of geopolitical conflicts means an increase in costs and a loss of prosperity, but one for which we must prepare to reduce major risks.

Read More on the China-Taiwan conflict and the potential impact on the EU

The Curious Case of Taiwan: Will the EU get its Chips Together?

The Crisis in the Taiwan Strait: Another Slap in the Face for Globalization

A Gloomy Outlook for EU-China Relations: Divergence, Distancing, Decoupling (globaleurope.eu)

About the Author

Dr. Guntram Wolff, Director and CEO, German Council on Foreign Relations

Guntram Wolff serves as director and CEO of the German Council on Foreign Relations (DGAP) since August 2022. He was director of Bruegel until June 2022, a Brussels-based institute on economic policy in Europe, and teaches at the Solvay School of Economics and Management of the Université Libre de Bruxelles. His research and publications focus on European political economy, climate change and geoeconomics, as well as monetary and fiscal policy.

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