Germany’s Trade Surplus: It’s Structural, Stupid!
Just when we thought that the long-discredited economic doctrine of mercantilism has died, it seems to have made a comeback. Indeed, even though widely accepted economic theory holds that trade is not a zero-sum game, leading policymakers such as the US president appear to believe that trade is a battle over the world’s resources like any other. Importantly however, even voices that have long argued for the undisputed benefits of free trade have recently jumped on the bandwagon of criticizing Germany for its trade surplus. The Economist, for instance, recently exclaimed that German policymakers “need to understand that Germany’s surpluses are themselves a threat to free trade’s legitimacy.” The German case is rather specific and thus warrants a careful analysis, lest we risk that fundamentally flawed arguments against free trade make their way into the mainstream. To be sure, there is a problem to be fixed but its root cause is not free trade, nor can its solution be free trade’s curtailment.
First a bit of context. Germany has over the last months and years been criticized for running considerable trade surpluses. A nation reports a trade surplus when it exports more goods than it imports. In Germany’s case, the positive difference between exports and imports has become rather huge – in 2016, it amounted to almost $300 billion. Not even China, with its surplus of $196 billion, reached the German heights. The United States, on the other hand, ended 2016 in a trade deficit of $481 billion. Perhaps the least accurate assessment of the situation has been provided by the American president. His arguments, rarely spanning beyond 140 characters, maintain that Germany has been able to sell much more than it buys because of currency manipulation. Such arguments from the mercantilist tool box, in which selling much and buying little is a virtue, are easily countered. Most importantly, Germany uses a currency which is managed by the European Central Bank – the euro. Thus, Berlin has next to zero influence over how many euros get printed.
Another argument holds that because a surplus is a result of excessive saving and inadequate investment, Germany should invest more, improve its infrastructure, and thus correct its purported trade imbalance. Although it is true that nations that prize saving over investment are more likely to see their exports beat their imports, it is strange that an outside commentator should advise the Germans on what they should do with their money. In fact, if the German government does not invest money in its infrastructure, education, and so on, it will ultimately be the German economy that will suffer, thus naturally producing fewer exportable goods. In any case, it is a choice the German people and their government have to make themselves.
Similarly misplaced is the argument that because of their historically harmonious relationship with trade unions, German businesses manage to keep wages too low. Again, it is up to the German businesses and workers to agree on what they believe are appropriate wages. Judging based on the German standard of living and the performance of German companies, the German model seems to have worked quite well for both the workers and their companies. Instead of criticizing the harmonious relationship, foreign policymakers would be better off trying to emulate it or come up with a successful model of their own.
To be sure, the Germans, too, have attempted to explain their large surplus using incomplete arguments. First, it has been argued that German surpluses are a mark of prudent policy, for the German population is ageing and thus in need of saving. But the German society is not ageing much faster than its neighbors and the recent influx of immigrants could slow down the process because most immigrants are young and tend to have more children than native Germans.
Second, defenders of Germany's position are prepared to admit that the euro is too cheap but parry that it is the European Central Bank, not the German government, who manages the common currency. That is a true statement but it omits the fact that the German economy is poised to benefit from a common European currency almost regardless of what policy the European Central Bank pursues. Creating one currency for a group of countries among which Germany is the top economic performer will always mean that the common money will be too cheap for Berlin, and thus will enhance German exports by making them more affordable. In other words, we are dealing with a structural problem that stems from the system itself. Playing blame game and searching for the culprit is a lost cause.
By no means am I suggesting that the euro is the sole reason why German exports perform so well. Undoubtedly, the various reforms (Hartz, Agenda 2010) that the German government has undertaken as well as the proverbial quality of German products play a role. A common European currency, however, is at least as important as the other factors combined. The chart below displays the development of Germany’s current account balance, a measure of trade with other nations. Right around 2002, when the euro notes started circulating, one notices a gradual uptick that has led to today’s massive surpluses. Again, other factors such as German reunification and the 2008 financial crisis likely affect the way the chart below looks but the introduction of the common currency is clearly discernible.
Although the Germans are not actively (mis)using the current financial architecture of the Eurozone to benefit themselves, benefit they necessarily do. Just because Berlin’s behavior is not at the root of the current situation does not mean that Germany does not possess the means and the political capital to change it. Acknowledging that Germany is helped by the common currency could lead to admitting that others are hurt by it and ultimately, to reforming the European Union. Only then could the structural imbalances that presently characterize the European project be alleviated. Failing to do so could no longer be labelled as an accident of history that no one foresaw.