The German Industry Strategy 2030: Inconsistent and Dangerous!
Dr. Andreas Freytag is Professor of Economics at the Friedrich-Schiller-University Jena, Honorary Professor at the University of Stellenbosch, and Visiting Professor at the Institute of International Trade, University of Adelaide. He is also Director of G20 Trade and Investment Research Network. He is a DAAD/AGI Research Fellow in October and November 2023.
Dr. Freytag obtained his diploma from the University of Kiel and his doctorate as well as his Habilitation from the University of Cologne. He has published a number of books and articles in first-class peer-reviewed journals on economic policy, international trade policy, development economics, and international policy coordination. He contributes to blogs and for over ten years had a weekly column on wiwo-online, a German magazine.
During his time at the AGI, Andreas Freytag will focus on the substance and path of tightened transatlantic relations against the background of the systemic competition between the West and autocratic states. The latter comprise some emerging economies, including Russia and China. This escalation has geo-political and geo-economic consequences and makes it necessary to strengthen the ties between transatlantic partners as well as to reach out jointly to attract third countries to the Western values.
To maintain Western leadership in standard-setting as well as helping developing countries to enforce universal human rights and environmental standards, there needs to be a coordinated and broad-based strategy to (1) react to Chinese et al. attempts to define and set standards, which become binding for third countries’ companies. Similarly, (2) due diligence legislation may also be more effective if coordinated across the Atlantic. Although not in the center of analysis, another (3) aspect deals with the transatlantic trade relations as such, which are also in need of a revitalization.
This project focuses on the geo-economic aspects of systems competition although it is difficult to disentangle economic and political relations. It analyzes ways to intensify the transatlantic relations with the objective to maintain economic welfare as well as to position the Western partners better to counter autocracies’ attempts to gain influence in the world economy.
In March, the German Federal Minister for Economic Affairs and Energy, Peter Altmaier, presented the so-called National Industry Strategy 2030: Strategic guidelines for a German and European industrial policy (henceforth called Strategy 2030) as a rational response to the eminently important question of how to maintain prosperity in a dynamically changing globalized world.
The Strategy 2030 is an attempt to identify priorities for Germany and for Europe. It has the following distinctive objectives:
- The share of manufacturing in GDP should increase to 25 percent in Germany and 20 percent in the European Union. The Ministry announced it will fight for every industry job in Germany whether “old” or “new,” whether “dirty” or “clean.” The question remains how this objective should be achieved; the Ministry excludes tariffs as a tool. The second question is: why 25 percent? Why not 27 percent?
- Value added chains should be entirely within the European Union, which in turn implies that European companies should start a huge process of in-sourcing and on-shoring. The costs of such a policy for European producers, foreign owners of factories of production, as well as consumers all over the world can only be estimated—but they would be substantial.
- The government is determined to create national and European champions. For this purpose, European competition law should be changed so that mergers can be much easier. The assumption that only huge companies survive in global competition is proven wrong by hundreds of thousands of Mittelstand companies in Germany and Europe on a daily basis.
- The state should prevent take-overs of European firms by foreign investors if these are state-owned or heavily subsidized. This suggestion is directed at Chinese investors who are often accused of wanting to get hold of technologies in order to gain a competitive edge over European or other Western companies. Although this claim seems credible, such investment restrictions require much care and oversight. In particular, the suggestion to nationalize firms in such cases must be viewed very critically.
- Finally, the Ministry advocates a targeted R&D policy. There is already a quite well-funded set of domestic and European R&D policies, so this seems to be the most realistic, but also redundant, objective.
Many observers have taken a very critical stance, among them former government official Jeromin Zettelmeyer from the Peterson Institute or authors from the Kiel Institute of World Economics. Their critique is persuasive and balanced. Others are much more outspoken—there has even been the claim that the suggested policy is closer to the economic policy model of the former East Germany than to the West German model of “Social Market Economy.”
Although this claim is exaggerated, the Strategy 2030 is a novelty in German economic policy. Never in the Federal Republic’s history has the German Federal Minister for Economic Affairs so openly expressed a desire to restrict competition and to nationalize private companies. Against this background and despite the reference to Ludwig Erhard (the Federal Republic’s founding economics minister) in the foreword, the Strategy 2030 marks quite a substantial step away from policy concepts of the past, at least in theory. It places a significant weight on the state as the main actor responsible for industries’ success and failure.
Both economic reasoning and political economy arguments show that the government’s capacity to successfully steer the economy is overestimated by the Strategy 2030. There is an assumption in the report that the government can know the right size for each industrial sector, the best-qualified participants in value added chains, the optimal size of companies, or important technologies of the future. The Hayekian argument that central government agencies are regularly unable to process the enormous amount of market-generated information (“pretense of knowledge”) must not be forgotten. In addition to the economic perspective, it has to be kept in kind that initiatives such as the Strategy 2030 immediately invite rent-seeking actors. For instance, any deviation from the competition principle will invite new firms and sectors demanding the same treatment. The well-organized German rent-seeking society may already be preparing for the looming feast.
Although the Chinese challenge must not be underestimated—not only with respect to intellectual property—there are much more promising policies to react to this and other challenges of the world economy. Germany’s infrastructure of all kinds needs a bold improvement. Unfortunately, the structure of public spending is biased toward the past as it focuses on generous old-age packages and ineffective but expensive social spending instead of on infrastructure; this must be reversed. The bureaucratic burdens have grown in recent years despite much political lip service. Last but not least on the list, there are still many shortcomings in research and education policy. On the international level, Germany should focus on a reform of the World Trade Organization and do everything to maintain and strengthen multilateralism. The Strategy 2030 is obviously doing the opposite; Zettelmeyer quite correctly calls it economic nationalism.
In reaction to the sharp criticisms, the Minister has claimed that he wanted to initiate an open discussion. And indeed, one may hope that this discussion quickly buries the Strategy 2030. Instead, a rejuvenation of the “Social Market Economy” would be the best answer to Chinese and other challenges.