Thirty years after the Berlin Wall fell

Germans still don’t agree on what reunification meant

Discontent may even be growing




ON NOVEMBER 9TH 1989, as the Berlin Wall tumbled, Hans-Joachim Binder was on night shift at the potash mine in Bischofferode, a village in the communist-ruled German Democratic Republic. Mr Binder, a maintenance worker who had toiled in the mine for 17 years, had no idea of the momentous events unfolding 240km (150 miles) to the east. The first sign something was up was when most of his colleagues disappeared to investigate what was happening at the border with West Germany, just ten minutes’ drive away. Only three returned to complete their shift.

Less than a year later Germany was reunited, capping one of the most extraordinary stories in modern history. Not only had a communist dictatorship collapsed, releasing 16m people from the fear of the Stasi (secret police) and the stultification of censorship. Unlike any other country ever freed from tyranny, the entire population of East Germany was given citizenship of a big, rich democracy. As a grand, if ill-fated, gesture of welcome the West German chancellor, Helmut Kohl, converted some of their worthless savings into hard currency at the preposterously generous exchange rate of one Deutschmark to one Ostmark.

More than 1m Ossies took advantage of their new freedom by moving to the West, where most thrived. Official statistics no longer counted this group—who were disproportionally young, clever, female and ambitious—as East Germans. For those who stayed behind, however, the 30 years since the fall of the Wall have been a mix of impressive progress, often taken for granted, and sour disappointment.

A price to pay

The harm wrought by four decades of oppression and indoctrination could not be undone overnight. But a people brought up in a society where initiative was ruthlessly crushed had to adapt suddenly to the rigours of capitalism. Unsurprisingly, many could not. Mr Binder was laid off. So were hundreds of thousands of others who previously toiled in safe, dreary and unproductive state-backed jobs.

Despite attempts to save it, including large protests and a hunger strike, the potash mine was shut down—one of 8,500 companies in the east privatised or liquidated by the Treuhand, a new government agency. Mr Binder bounced around in odd jobs for a while, eventually winding up on Hartz IV, the stingiest of Germany’s unemployment benefits, where he languishes today. Like many East German women, his wife retrained and left for a job in the west. Asked how he feels about the reunification of his country, he shrugs. “My safe job was gone. For me, the GDR could have carried on.”

There was no manual to guide the absorption of east into west. The policies that failed people like Mr Binder were always going to be subject to fierce dispute. The surprise, as Germany approaches the 30th anniversary of the fall of the Wall, is the speed with which these debates have roared back into the public sphere. Newspapers and magazines are full of reassessments of the Wiedervereinigung (reunification); westerners are lapping up memoirs and polemics by eastern authors. Never before has Germany debated its reunification with such vigour. Why?

Many observers say the debate grew louder three or four years ago. The most obvious explanation is therefore the migrant crisis of 2015-16. Petra Köpping, the integration minister in Saxony, one of the five eastern states established at reunification, says that when she tried to explain to her constituents why the state was helping refugees, some replied: “Integrate us first!” Many easterners resented the resources being devoted to help newcomers when they felt left behind. They also disliked the labelling of their complaints as racist.

But the refugee crisis merely triggered a deeper shift, says Christian Hirte, the government’s special commissioner for east Germany. One idea, floated by Angela Merkel, who as chancellor is east Germany’s best-known export, is that the east is undergoing something comparable to the experience of West Germany in 1968, when children forced their parents to account for their activities in the Nazi period. Now, the argument runs, young east Germans seek explanations for what happened to their parents in the early years of reunification. “The long-term wounds were concealed because people were absorbed finding a place in the new society,” says Steffen Mau of Humboldt University in Berlin. “Perhaps you need 25 years to realise this.”

This summer Marie-Sophie Schiller, a young Leipziger who hosts a podcast called “East—A Guide”, had an “emotional” talk with her parents about their experiences after 1990. She was astonished to learn about their daily hardships and humiliations. Stefan Meyer, an activist who grew up in East Berlin, remembers watching his parents’ confidence ebb as they struggled to find their feet in the new country.

After 1990 “the whole software of life changed” for east Germans, says Markus Kerber, a bigwig at the interior ministry. Short-term pain was inevitable. Average labour productivity in the east was 30% of that in the west. Kohl’s decision to exchange Ostmarks at a 1:1 rate for Deutschmarks made swathes of firms uncompetitive overnight. Those that survived struggled with the western rules they had to import wholesale. By one estimate, 80% of east Germans at some point found themselves out of work.

Perhaps the Treuhand could have proceeded more gently, some argue today. Maybe the unified country should have developed a new constitution rather than simply extending the western one eastwards. The west might have learned from the more enlightened aspects of life in the GDR, such as free child care and encouraging women to work outside the home. Radical parties on left and right take such arguments to a ludicrous extreme, arguing that reunification was the “colonisation” of a bewildered people by an exploitative west.

Understanding required

Such views tap into a feeling among many easterners that they have struggled to take back control of their own destiny. Ms Köpping says east Germans hold barely 4% of elite jobs in the east. Many rent flats from westerners, who own much of the eastern housing stock. “Sometimes east Germans feel that they’re ruled by others, not themselves,” says Klara Geywitz, a Brandenburger running to lead Germany’s Social Democrats. Nor have east Germans stormed the national citadels of power.

Almost 14 years after she took office Mrs Merkel—and Joachim Gauck, president from 2012-17—remain exceptions rather than a vanguard. Rarely one to dwell on her origins, Mrs Merkel has lately begun to reflect publicly on the mixed legacy of reunification. “We must all…learn to understand why for many people in east German states, German unity is not solely a positive experience,” she said on October 3rd.




One obstacle to such understanding is that Germans view reunification differently. Half of west Germans consider the east a success. Two-thirds of east Germans disagree. Many westerners were oblivious to the upheaval their new compatriots endured. “On October 4th 1990 [the day after reunification], after a night of partying I carried on my life as normal,” says Mr Kerber. “Not a single east German had the same experience.”

In places western stereotypes of easterners have persisted, the Jammerossi (“complaining easterner”), ungrateful for the largesse showered on the east after unification, or Dunkeldeutschland (“dark Germany”), a cold-war term implying backwardness. More recent is the notion of the east as a cradle of neo-Nazism, bolstered by the strength there of the far-right Alternative for Germany (AfD). Portrayals of the east in Germany’s national (for which read western) media have often read like dispatches from an exotic, troubled land, where the far right are always marching in the streets or thumping immigrants.

Such accounts risk ignoring the huge strides made by east Germany since reunification.

Citizens were liberated from the humiliations of life in a surveillance state. They were allowed to choose their leaders, express their opinions and travel, to west Germany and beyond.

Economically, despite the hardships of the early years, the east soon began to converge with the west, and life improved drastically across a range of measures. Today some east German regions have lower unemployment rates than western post-industrial regions like the Saarland or the Ruhr valley.

West-east transfers of close to €2trn ($2.2trn) have reduced the infrastructure gap. (Today they run at around €30bn a year, mainly in the form of social-security payments.) Wages in the east now stand at around 85% of the level in the west, and the cost of living is lower. The life-expectancy gap has closed, the air is cleaner, the buildings smarter.

According to Allensbach, a pollster, 53% of east Germans are content with their personal economic situation, the same figure as in the west. “It all worked surprisingly well, but this story doesn’t fly in the east,” says Werner Jann of the University of Potsdam.

One of the best



Last year Andrea Boltho, Wendy Carlin and Pasquale Scaramozzino, three economists, contrasted east Germany’s post-reunification performance favourably with the Mezzogiorno in Italy, where GDP per person remains little over half that of the north. Perhaps the most apt comparison is with other parts of Europe that shook off communism.

East Germany’s per capita growth has outstripped most other eastern European countries (see chart), despite starting from a higher base. As Richard Schröder, a former East German dissident, notes, the application of western laws and practices saw off the threat of oligarchic corruption that has plagued many of Germany’s eastern neighbours.

Yet if east Germans do not always appreciate their good fortune, it is because their reference points have been Hamburg and Munich, not Bratislava or Budapest. Implicit in the promise of reunification was a pledge that east Germans could finally enjoy what they had so long envied in the west. For years they were forced to witness a lifestyle that remained out of reach, in the packets of coffee and sweets sent by relatives in the west, the western goods on display in Intershop outlets accessible only to those with hard currency, or the commercials on western television beamed across the border.

In 1990 Chancellor Kohl promised east Germans “blooming landscapes”. Instead they got deindustrialisation and mass unemployment. “In 1990 300,000 people came to shout ‘Helmut!’ on Augustusplatz [in Leipzig],” recalls Kurt-Ulrich Mayer, who helped establish Kohl’s Christian Democratic Union (CDU) in Saxony. “Four years later he came back, and we needed umbrellas to protect him from all the eggs and tomatoes.” Unlike Poles or Hungarians, east Germans had someone else to blame when things went wrong.

The convergence between west and east eventually ground to a halt. Today just 7% of Germany’s most-valued 500 companies (and none listed in the DAX30 index) are headquartered in the east. This starves municipalities of tax revenue and contributes to the east-west productivity gap, which has stood at around 20% for 20 years. Most assets liquidated by the Treuhand fell into western or foreign hands, hindering the development of an eastern capitalist class.

For many, the best way to get western lifestyles was to move west. Over one-quarter of east Germans aged 18-30 did so, two-thirds of them women. Rural parts of the east were especially affected. As towns and villages emptied and tax revenues slumped, schools were closed, shops shuttered and housing blocks demolished. The mass emigration of youngsters led to a plummeting number of births. Since 2017 net east-west migration has been roughly zero, but there has been no growth in the number of people moving east; the westward exodus has simply fallen to match it.

The east is also much older than the west. Since 1990 the number of over-60s there has increased by 1.3m even as the overall population has fallen by 2.2m. IWH, a research outfit in Halle, thinks the working-age population in the east will fall by more than a third by 2060. By 2035, 23 of Germany’s 401 Kreise (administrative districts) will have shrunk by at least a fifth, says Susanne Dähner at the Berlin Institute for Population and Development; all of them are in the east. In some districts, there will be four funerals for every birth. Instead of losing people to the west, eastern Germany will lose them to the grave.

The constitutional pledge of “equivalent living conditions” across Germany thus looks unattainable. The government tries to help so-called “structurally weak” regions, in the east as well as the west. But although investment in infrastructure or technical universities may help some towns, it cannot stop the demographic decline in many east German regions.

Coming to terms

The picture is much brighter in some eastern cities. Potsdam, Jena and Dresden have clusters of industry and tourism as well as cheap housing; some, like Leipzig (“Hypezig”, to irritated locals), have been booming for years. The “bacon belt” around Berlin benefits from the success of the capital, especially as older workers move out to the suburbs. Yet even as overall emigration to the west dries up, eastern cities are sucking educated people away from already struggling small towns and villages. That trend may continue, as only half of east German workers work in cities, compared with three-quarters in the west.

 

The changes in the east have social, cultural and political consequences which are now coming to the fore. Last February thousands of Dynamo Dresden supporters at an away game in Hamburg began an unfamiliar chant: “Ost [east], Ost, Ostdeutschland!” A video of the episode went viral, sparking a lively debate: were the fans expressing a dubious “eastern” variant of militant German nationalism? Or was this a cheerful reappropriation of an identity that for so long was taken to connote stupidity and closed-mindedness?

“Identity is key to understanding east Germany,” says Franziska Schubert, a thoughtful Green who represents Görlitz in Saxony’s state parliament. Fully 47% of east Germans say they identify as easterners before Germans, a far higher proportion than at the euphoric moment of reunification. (The equivalent is true for 22% of westerners.) Regional identity is hardly abnormal in Germany—ask the Bavarians—but in the east it can seem grounded in politics as much as culture or tradition.

When Jana Hensel, a writer, recently gave a talk to a school in her home town of Leipzig, she was astonished to find herself spending half an hour fielding questions from teenagers about an Ossiquote (a proposal to give east Germans preference in public jobs). “More than 25 years after the end of the GDR, students have become east German again,” she says. “If we’re not careful, we’ll lose another generation.”

The AfD has exploited the power of eastern particularism. Under slogans like “The east rises up!” the party has scored 20%-plus in eastern state elections, most recently in Thuringia on October 27th. There, and in recent elections in Brandenburg and Saxony, it was only voters over 60 whose support for the established parties ensured that the AfD did not come first.

In Saxony and Thuringia the AfD was the most popular party among under-30s. This is worrying in a part of the country where extremism has found fertile ground. More than half of Germany’s hate crimes take place in the east, though it has just 20% of the population and few immigrants.

But eastern identity is not the exclusive preserve of extremes. Many young easterners simply developed an “Ossi” identity after encountering ignorance or scorn in the west. Nor need it be only negative. Matthias Platzeck, a former Brandenburg premier now in charge of a commission for the 30th anniversary of reunification, says that the recent election in his state was the worst-tempered ever.

Nonetheless, he hopes for the emergence in the east of healthy self-confidence, built on the back of success stories—and a new focus on the many problems that span east and west. His commission’s informal motto, he says, is “as little state celebration as necessary, as much discussion as possible.” And since the Berlin Wall has gone, no amount of debate will land anyone in jail.

The politics of fiscal stimulus are problematic  

Central banks do not have the tools to tackle the supply side shocks facing the global economy

Megan Greene

30 October 2019, Berlin: German Chancellor Angela Merkel (R) and Minister of Finance Olaf Scholz arrive to attend the weekly cabinet meeting at the Federal Chancellery. Photo: Michael Kappeler/dpa
German finance minister Olaf Scholz and Chancellor Angela Merkel are in no rush to inject a fiscal stimulus into the German economy © Michael Kappeler/dpa


We have heard repeatedly this year that co-ordinated monetary easing is not going to be enough when the next recession comes. Fiscal stimulus will be necessary to maintain global growth. Unfortunately, this pronouncement reminds me of my childhood Christmas wishlist. For several years running, I put a baby brother at the top. But doggedly wishing for something is not enough to make it happen.

There is widespread agreement that central banks do not have the tools needed to address the kind of supply-side shocks the global economy is facing. The world is caught in a liquidity trap, with persistently low interest rates and a glut of savings. Fiscal stimulus would be one way to escape it.

But while the economics are sound, the politics are problematic. In the US, the 2020 election means bipartisan consensus on any major new initiatives is all but impossible. Fiscal stimulus in an election year is not unprecedented — a Democrat-led Congress and Republican president passed a programme in February 2008 amid signs of a sharp slowdown. But US growth in the third quarter this year was 1.9 per cent, slow but not alarming.

Prospects for fiscal stimulus may be limited even after 2020. Democrats and Republicans say infrastructure spending is needed, but for years have been unable to agree on how to pay for it. The recent Congressional Budget Office forecast that US deficits will top $1tn next year makes an agreement even harder.

The chances for significant fiscal stimulus in the eurozone are equally grim. Many look hopefully to Germany, which has a large current account surplus, reflecting an excess of national savings over investment. But Chancellor Angela Merkel’s centre-right Christian Democratic Union views the balanced budget as one of its crowning achievements. In August, finance minister Olaf Scholz suggested Germany could muster a €50bn fiscal expansion, but made it clear he is in no rush to do so.

This is partly because some risks to the German economic outlook — trade and Brexit uncertainty — could abate without public spending. It is also because, as a number of CDU members of parliament explained to me, German politicians are more worried about unemployment than growth. A mild recession would not be enough to trigger a fiscal response.

That would require a spike in unemployment, and so far the labour market remains robust.

Germany’s room for manoeuvre is also limited by its constitution, which prevents the federal government from running structural deficits of more than 0.35 per cent of gross domestic product outside times of crisis. This debt brake would cap stimulus at an estimated €5bn next year and €10bn in subsequent years — hardly a game changer.

France and Italy are still on the long, hard road back to fiscal credibility and have little room to spend. If things got really bad — we are nowhere near that — eurozone fiscal expansion could come in the guise of climate change initiatives.

Germany recently launched a €54bn programme to counter climate change. Eurozone governments and companies could ramp up the issuance of green bonds to finance environmental projects, which the European Central Bank is already buying.

When Chinese growth slowed in 2008 and 2015-16, authorities provided overwhelming stimulus that reflated the economy and buoyed global demand. This time, Beijing’s stimulus has been more targeted and domestically focused, diminishing spillover benefits.

I wouldn’t hold my breath for significant fiscal stimulus from the world’s largest economies.

The real question we should be asking is, what happens when it fails to materialise. There’s an old saying: hope is not a strategy. I wanted a baby brother. I have three sisters.


The writer is a senior fellow at Harvard Kennedy School

The end of Evo Morales

Was there a coup in Bolivia?

The armed forces spoke up for democracy and the constitution against an attempt at dictatorship



There are few more emotive words in Latin America than “coup”, and for good reason. From 1930 to the 1970s, the region suffered the frequent overthrow of civilian governments in often bloody military putsches. The victims were usually of the left.

In 1954 a moderate reforming government in Guatemala was ousted in the name of anti-communism by the cia. Other coups followed, including that of General Augusto Pinochet against Salvador Allende, a radical socialist, in Chile in 1973.

Since the democratisation of the region in the 1980s, coups have been rare. But the very idea has become a potent propaganda tool, especially for leftists. Scarcely a week goes by without Nicolás Maduro, Venezuela’s fraudulently elected dictator, claiming that he is threatened by one. Daniel Ortega in Nicaragua says the same. Dilma Rousseff, a leftist president in Brazil who spent her way to a second term in violation of the country’s fiscal responsibility law, also claims that her impeachment in 2016 was “a coup” even though it followed strict constitutional procedures.

The latest claim involves the fall of Evo Morales, Bolivia’s leftist president since 2006. He resigned on November 10th, fleeing into exile in Mexico. This prompted a chorus of denunciations of a coup from the Latin American left and even some European social democrats. This time, at least, the critics are wrong.

True, Mr Morales’s term was not due to end until January. His fall followed violent protests and a mutiny by the police, who failed to suppress them. The final straw came when the head of the armed forces “suggested” that he quit. But that is to tell only a fraction of the story.

Mr Morales, who is of Aymara indigenous descent, long enjoyed broad popular support. He imposed a new constitution, which limited presidents to two terms. Thanks to the commodity boom and his pragmatic economic policy, poverty fell sharply. He created a more inclusive society.

But he also commandeered the courts and the electoral authority and was often ruthless with opponents. In his determination to remain in power he made the classic strongman’s mistake of losing touch with the street. In 2016 he narrowly lost a referendum to abolish presidential term limits. He got the constitutional court to say he could run for a third term anyway. He then claimed victory in a dubious election last month. That triggered the uprising.

An outside audit upheld the opposition’s claims of widespread irregularities. His offer to re-run the election came too late.

Mr Morales was thus the casualty of a counter-revolution aimed at defending democracy and the constitution against electoral fraud and his own illegal candidacy. The army withdrew its support because it was not prepared to fire on people in order to sustain him in power. How these events will come to be viewed depends in part on what happens now.

An opposition leader has taken over as interim president and called for a fresh election to be held in a matter of weeks. There are two big risks in this. One is that ultras in the opposition try to erase the good things Mr Morales stood for as well as the bad. The other is that his supporters seek to destabilise the interim government and boycott the election. It may take outside help to ensure a fair contest.

That the army had to play a role is indeed troubling. But the issue at stake in Bolivia was what should happen, in extremis, when an elected president deploys the power of the state against the constitution. In Mr Morales’s resignation and the army’s forcing of it, Bolivia has set an example for Venezuela and Nicaragua, though it is one that is unlikely to be heeded.

In the past it was right-wing strongmen who refused to leave power when legally obliged to do so. Now it is often those on the left. Their constant invocation of coups tends to be a smokescreen for their own flouting of the rules. It should be examined with care.

Tariffs Aren’t the Only Driver of Auto Stocks

Hopes that the trade war is easing have buoyed the European auto sector in recent weeks, but another profit warning from Daimler is a reality check

By Stephen Wilmot



Trade-deal hopes have given investors a useful opportunity to bail out of European auto stocks. Daimler’s latest profit warning shows why they should seize it.

Europe’s auto sector has had a strong few weeks on the stock market as fears about a global trade war have eased.

Not only have the U.S. and China edged toward a deal, but the White House has also quietly backed away from its threat to slap a 25% tariff on imported cars, which would have been devastating for German brands popular among American consumers.

The Euro Stoxx Autos & Parts index is up almost 11% so far this quarter.

Tariffs aside, though, conditions are only getting tougher for Europe’s vehicle industry.

Daimler, which makes Mercedes-Benz DMLRY -0.89%▲ cars and Freightliner trucks, spelled out the problem in sobering investor days in London on Thursday and New York on Friday.

Investors had hoped that a brand new management team led by Chief Executive Ola Källenius,who took the top job from longtime boss Dieter Zetsche in May, would somehow reinvigorate the Daimler investment case after a string of profit warnings—possibly even by splitting the company up.

Instead, Mr. Källenius’s first big step has been to lay out the immense scale of the challenge.

Daimler stock fell 4.5% Thursday and was also down in early trading Friday.

This year has been “relatively difficult,” said Mr. Källenius, but next year will be even worse—and even after that the recovery appears highly risky.

The operating margin of the flagship Mercedes-Benz car division, which accounts for roughly half the company’s revenue, will fall to roughly 4% in 2020 from 5% this year.

Analysts had been expecting something close to 6%.

The company now says the margin only will recover to that level by 2022.

Even these downbeat forecasts seem dependent on punchy assumptions: No recession, sales growth approaching 3% and no tariffs.

If President Trump’s trade talks fall apart and China increases its tariffs on vehicle imports from the U.S. next month, as threatened, the Mercedes-Benz operating margin would barely exceed 3% next year.

Daimler exports sport-utility vehicles to China from its plant in Tuscaloosa, Ala.

There are two big reasons why margins are falling: the need to sell less profitable electric vehicles to meet new European emissions regulations that partially come into force next year and higher depreciation charges.

Daimler has been investing heavily in recent years, but the impact on its earnings has been masked because it has counted an increasing part of the bill as capital rather than current spending.

At some point it has to pay for that approach: Capital must be depreciated, while the proportion of capitalized costs can’t rise indefinitely.

Daimler needs to offset these pressures.

The main lever available is squeezing suppliers to cut material costs, but the company is also reducing staff numbers, particularly in the car division.

In total it said staff costs would be reduced by €1.4 billion ($1.54 billion), which will irk Germany’s powerful unions but equates to less than 1% of the company’s €167 billion in revenue last year.

Daimler is an extreme example, given its history of under-managing costs, but all car makers face the same formidable regulatory conditions in Europe and China.

For now, the U.S. is taking a longer road to electrification, easing the pressure on Detroit, but U.S. car makers are working toward the same ultimate destination.

Seeking refuge in scale, which gives car makers more leverage over suppliers, is one response—hence the merger plan under negotiation between Fiat Chryslerand Peugeot,and the platform-sharing deals between Volkswagenand Ford.

After the recent rush of trade optimism, the Euro Stoxx Autos & Parts index fetches roughly eight times expected earnings—close to an 18-month high. Now is a good time for investors to limit their exposure.

Whatever happens with Mr. Trump’s tariffs, next year’s emissions regulations will cause an almighty pileup.


If Firms Leave China, Will US Tariffs Follow?

By: Phillip Orchard


Stroll down the electronics aisles of any big box store in America, and you’re bound to see an array of products from companies that are moving manufacturing from China to Southeast Asia.

Much of the components in Apple’s AirPods, Google’s next Pixel phone, and Nintendo’s Switch, for example, are now made largely in Vietnam.

Sony has moved operations to Thailand, while Samsung is shifting notebook and smartphone production to Taiwan and Malaysia.

This is, to a large extent, the result of the U.S.-China trade war, which has sent firms scrambling to adjust their supply chains to minimize the effects of existing or scheduled U.S. tariffs.

But firms in China haven’t exactly been stampeding for the exits. Among other sources of hesitation is major uncertainty about where the White House’s trade war might expand to next.

After all, China has never been the sole focus of the United States; Washington kicked off the trade war in spring 2018 with metals tariffs applied almost globally, and it’s been gradually ramping up pressure on dozens of other countries.

Over the past few months, U.S. President Donald Trump has claimed that both the European Union and Vietnam are worse trade abusers than China.

On Oct. 25, the U.S. revoked special trade privileges affecting some $4 billion in exports from Thailand – a move similar to ones it also made this year against India and Turkey (and threatened against Indonesia and Kazakhstan).

Bottom line: Few low-cost manufacturing hubs are safe from U.S. pressure altogether. But trade pressure is hardly the same thing as a trade war, and Southeast Asia will largely be spared.

A Partial Exodus From China

Relatively few firms are abandoning China as a manufacturing base altogether.

Most companies that make things in China do so in part to ensure their ability to sell their products to Chinese consumers, who make up the world’s second-largest consumer market.

The fact that other major consumer markets – Japan, South Korea and Europe, in particular – have politely declined to follow the United States’ lead with tariffs on Chinese exports of their own further diminishes the need for firms to pull up stakes.

Moreover, though Chinese exports to the United States are finally starting to show sharp declines, U.S. consumers continue to eat a large portion of the costs of U.S. tariffs on China.

The reality is that moving operations is expensive, disruptive and time-consuming, so many firms are reluctant to do so – especially since at least some of the U.S. tariffs are likely to be lifted if and when Washington and Beijing eventually reach a trade deal.

Of course, the trade war has made abundantly clear the risks of being too reliant on any one place, along with the fact that many frictionless supply chain models have been optimized to the point of becoming excessively fragile and vulnerable to disruption.

And for firms in high-tech and advanced manufacturing sectors with national security implications, U.S. restrictions on China-made imports are quite likely to remain in place for the long haul.

As a result, we’re seeing an increasing trend of firms considering moving just enough operations out of China to be able to put the uncertainty of the trade war behind them and get on with business.

But even among those for whom relocating is worth the time and expense, there’s still the issue of finding a suitable alternative to China. There are two main problems with Southeast Asia and other low-cost hubs.

First, no single alternative hub boasts China’s combination of advantages.

Despite its rising labor costs and loss of some low-skill manufacturing to frontier markets, China remains uniquely attractive as a well-oiled export machine for goods further up the value chain.

Its infrastructure, near-bottomless pool of well-trained workers, and the abundance of financial incentives available from local governments keen to prevent large-scale job losses have helped offset the rising costs of production.

India, for example, has the bottomless low-cost labor pool, but not the infrastructure, streamlined regulatory schemes or tech sector experience needed to lure away firms en masse – and it’s too far from East Asia’s most important tech clusters to fit seamlessly into the industry’s tightly integrated supply chains, anyway.

Malaysia and, to a lesser extent, Thailand rate highly on infrastructure and tech sector expertise, but not on labor pool depth, and both are a bit too far from other regional hubs to be considered ideal.

Vietnam has the ideal location, the low labor costs and open access to consumers in its fellow Trans-Pacific Partnership members, but its weak infrastructure became quickly oversaturated after the trade war exodus began.

Infrastructure can of course be built, and regulatory and incentive schemes can be adjusted to meet exporters’ needs.

But these are long-term projects.

And there’s little that can be done to offset these countries’ geographic or demographic disadvantages.

Trade Pressure on Southeast Asia, Not a Trade War

The second main problem is the concern that U.S. tariffs might just follow exporters from China to the next low-cost export hub.

The U.S. tariffs on China are indeed starting to hurt Chinese exports.

U.S. imports from China have fallen 12.5 percent so far this year, compared to 2018.

But this has done little to benefit employment in U.S. manufacturing outside of a small number of industries.

On the whole, U.S. exports of goods have declined around 3 percent year on year since the beginning of 2019, and U.S. manufacturing activity has contracted for two consecutive months, according to the Institute for Supply Management. (Some of this is due to the global slowdown more than the trade war.)

Other low-cost manufacturers, meanwhile, have generally benefited from the trade diversion.

Vietnam, for example, has been the clear winner at this point, with its exports to the U.S. surging some 40 percent year on year.

U.S. Import Growth by Country
(click to enlarge)


If the overriding goal of the Trump administration's tariffs is to revive the lost glory of labor-intensive U.S. manufacturing, then it stands to reason that eventually it would have to expand tariffs to other low-cost manufacturers running large trade surpluses with the United States as well. (The U.S. would probably also have to wage war on automation.)

To be sure, some in the Trump administration have certainly advocated for a much sharper turn toward autarky.

But that was always politically unrealistic. And if that were indeed the overriding goal, we probably wouldn’t be seeing the White House prepping the public for a deal with China that will almost certainly relax some tariffs.

And we wouldn’t have seen the Trump administration settle for largely cosmetic changes in its renegotiated trade deals with Mexico, South Korea and Japan.


(click to enlarge)


Rather, the two main goals of the tariffs are to pressure China into immense structural reforms and to contain China's accumulation of power more broadly.

We’re doubtful of the ability of tariffs to really do much toward either goal and think that the United States will eventually move away from tariffs as its favorite tool for resetting its trade relationships.

But the belief that China must be pressured to change one way or another and/or that China poses an intolerable threat to U.S. strategic interests is widespread on both sides of the aisle in Washington – far more so than the base of support for tariffs aimed at reshoring low-cost manufacturing jobs.

And expanding the trade war in full force to Southeast Asia and low-cost hubs elsewhere would conflict with both of these larger goals.

This doesn’t mean countries like Thailand, Vietnam and India are immune to U.S. pressure altogether.

The U.S. has long sought to nudge exporters everywhere to comply with global trade rules on issues like currencies and subsidies, whether with stick or carrot.

To maximize its campaign against China, the United States also has strong incentives to crack down on Chinese transshipments through regional hubs.

Perhaps the biggest risk for tech sector firms is that the U.S. expands measures aimed at mitigating supposed Chinese technological threats to U.S. national security to high-tech manufacturing operations elsewhere in the region – particularly Taiwan, countries vulnerable to Chinese intelligence, or countries with governments considered too cozy with Beijing.

Otherwise, U.S. trade measures targeting regional states will be relatively light, aimed at addressing narrow issues that are largely resolvable in negotiations. (The U.S. move against Thailand, for example, affects just 15 percent of Thai exports to the U.S. and was driven ostensibly, at least, by correctable human rights issues in the seafood industry.)

Most important, none of these countries has the capacity to fundamentally threaten the United States’ core interests economically or strategically.

Quite the contrary, in fact.

To establish long-term incentives to persuade China that it’s in its best interest to play by established rules and to undermine its coercive power regionally if it doesn’t, the United States will have greater reason to work with the region, not against it.