Economic Policy Foreign Trade and International Economic Relations

Curse of the Trade Surplus

This text was published in Handelsblatt Global Edition on February 13, 2017.

The criticism of Germany’s trade surpluses by the U.S. government has caused collective indignation here at home. Much of the criticism is not fair. Accusations that Germany manipulates the euro and misuses the European Union for its own interests are unwarranted. But there is also a kernel of truth that our European neighbors have been voicing for a long time: Germany’s trade surplus is tantamount to protectionism. That’s a harsh reproach – is it true? 

There is a broad and emphatic consensus that Germany’s current account surplus of some EURO 270 billion, or almost 9 percent of its economic output, is far too high. The indignation in Germany is inappropriate; the blind denial that we have been hearing in recent days is counterproductive. We need an honest analysis of the problem that could provide the political establishment with recommended actions. Strong exports or the weak euro aren’t in themselves the problem. Because German exporters are extremely innovative, productive and flexible; the surpluses were already huge when the euro was much stronger.

The real problem is the low level of imports, caused by limited private investments in Germany and a high rate of private savings. Many foreigners consider these factors to be a sign of protectionism in German economic policy. This protectionism is less a direct discrimination toward foreign companies and countries of the kind the United States is now threatening to implement, but is rather a preference of a few small sectors of German society at the expense of other groups.

For example, some service sectors in Germany are highly regulated in a way that protects a few privileged interests at the expense of many workers in the sector, who end up in menial jobs at low wages. International institutions and experts have been calling upon the German government to get rid of these restrictions but their pleas fell on deaf ears.

In the area of tax, small firms are often at a disadvantage to large companies that shift their tax liabilities to foreign countries and reduce their tax burden. In Germany, earned income is heavily taxed while income on investments is subject to low tax rates by international standards. Moreover, a few privileged groups benefit at the expense of the majority of citizens – for example, hotel owners who pay a reduced value-added tax on overnight stays. A third example is the labor market where, in the last 25 years, the discrepancy in wages has widened considerably and created an unusually large low-wage sector in Germany. In 2010, when Christine Lagarde was the French finance minister, she accused Germany of “wage dumping” – something that is certainly not true for exporting industries but hits home with regard to some service sectors.

What would happen if Germany were to remove these obstacles in economic policy as well as to increase public investments and reduce bureaucracy? For one thing, companies would once again invest more of their earnings here in Germany rather than abroad. This would bolster innovation, productivity and demand, while a rise in wages and good jobs would boost demand further. This would raise potential growth and ultimately prosperity, and also reduce the current account surplus to around 2 to 3 percent, from current levels of 9 percent.

This would benefit Germany economically, and assuage other country’s irritation over the trade surplus. So Germany should not dismiss the international criticism of its trade imbalance. The country could do with some candid self-examination and should realize that, notwithstanding its economic strength, its economic policy is not infallible. A sensible look at its policies would prevent the new U.S. government from dividing Europe. Because this would be the worst of all possible results – for Germany and for Europe.



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