The “Wandel durch handel” era is now finished. Basically, the WdH (abbreviation of Wandel durch handel) doctrine means change through trade was the backbone of German foreign policy after WWII.
With the massive energy shock caused by the War in Ukraine and the growing competition of China on the market of electrical vehicles. The German economic and institutional model based on a strong industrial sector, a largely pro-free-trade position, and a neutral geopolitical stance on foreign affairs is now largely outdated.
In a recent study published written with António Afonso and Valerie Mignon, we show that trade between China and Germany was always subject to good political relationships with China. The article is available on the website of China Economic Review. We provide empirical evidence that political relationships with China strongly matter in explaining the dynamics of current accounts and exchange rates.
Besides, Barry Eichengreen explains why the German institution may no longer be relevant in the current context on Project Syndicate.
Some selected abstracts:
“In the aftermath of World War II – a period of upheaval and crisis but also of renovation and opportunity – what was then West Germany developed a set of economic and political institutions ideally suited to the conditions of the time. To capitalize on its existing prowess in quality manufacturing, policymakers put in place successful vocational training and apprenticeship programs that expanded the supply of skilled mechanics and technicians. To exploit rapidly growing world trade and penetrate global export markets, German industry doubled down on the production of motor vehicles and capital goods, fields where it had developed a pronounced comparative advantage.”
“To take one example, German banks, which rely on their existing customer relationships, are most comfortable when lending to long-established firms doing business in long-established ways. In turn, those firms perform best when they have long-standing relationships with banks on which they can rely for finance.”
“The bad news, then, is that there is a serious mismatch between Germany’s current economic situation and its institutional inheritance, and that there are major obstacles to altering the latter to realign it with the former. The good news is that a crisis that prompts a wholesale rethink of that institutional inheritance could conceivably break the logjam. Maybe this is just the crisis that Germany needs.