Globalization

In October 2021, 136 countries and jurisdictions agreed on the introduction of a global effective minimum tax (OECD 2021). The plan is to impose a minimum tax rate of 15 percent on the global profits of multinational corporations (MNCs). If an MNC’s effective tax burden in a country is less than 15 percent, additional taxes will be collected until the ratio of tax payments to profits reaches a level of 15 percent. This is to affect all MNCs whose global consolidated revenue is at least €750 million.

Since the outbreak of the Covid-19 pandemic, the configuration of international supply chains has received increased public attention. Pandemic-related disruptions in production and transportation have led to questions about the reliability of international production networks. Moreover, the war in Ukraine and the associated sanctions against Russia have cast a new light on the geopolitical significance of economic interdependencies with autocratic regimes. How do firms react to these developments, and have they already adjusted their sourcing strategies? In this policy brief, we present the results from a representative survey of more than 4,000 firms in Germany, providing insights into how companies have responded to supply chain disruptions and which priorities they are setting for the future.

In recent decades, China has risen to become Germany’s most important trading partner for international trade in goods. Has Germany become too dependent from trade with China? An analysis using direct and indirect value-added linkages along the supply chain shows that China plays an important, but by no means dominant role for Germany as a supplier or destination market. However, in a survey conducted by the ifo Institute, 46% of German firms in the manufacturing sector state that they currently depend on important intermediate inputs from China. Of those, almost half of the firms are planning to reduce imports from China in the future. The most frequently mentioned reasons for reducing imports from China are the desire to decrease dependencies and increase diversification, increased freight costs and disruptions in transportation, as well as political uncertainty. An analysis at the product level shows that the German economy depends on several critical industrial goods and raw materials from China.

This Policy Brief analyses the long-run effects of an economic decoupling between the political West (i.e. the EU, the US and their allies) and the East (first and foremost Russia and China). A decoupling of Russia from the US and its allies would have much more severe long-term impacts for real income in Russia (minus 9.7 percent) than in the US and its allies (minus 0.2 percent). The reason for the uneven distribution of costs lies primarily in Russia’s low economic importance compared with the US and its allies.

In an increasing number of sectors, concerns are rising that foreign firm participation may pose risks to public order. Many developed countries have adopted or extended their investment screening mechanisms to control inward foreign direct investment in strategically important sectors over the last years. This paper documents the development of investment screening in OECD and EU countries and provides the first discussion from an economic perspective. We review existing and propose new explanations for the adoption of investment screening. Our exploratory quantitative analysis suggests that countries with higher levels of technological development and with a stricter regulatory environment for foreign investment are more likely to introduce investment screening. Contrary to the popular wisdom, we do not find evidence that higher Chinese inward investments are associated with the implementation of investment screening.