A reduction of Germany’s trade surplus is in the long-term self-interest of the country itself, writes Thieß Petersen.
Dr. Thieß Petersen is a senior advisor at Bertelsmann Stiftung, Gütersloh, with the project Global Economic Dynamics (GED)
For years, Germany has been producing high export surpluses – a welcome development for the German economy which is increasingly criticised by the rest of the world. Actually, I believe that Germany must contribute to the reduction of these surpluses. However, rather than actively decreasing its exports, the German economy should increase its imports.
From the German point of view, the annual export surpluses of currently almost 250 billion euro have two main positive consequences.
First, the export surplus is beneficial for the German labour market. If the economy was only to produce the goods and services required by domestic consumers and investors, this would imply a smaller demand for labour. Hence, German level of employment would be lower. In addition, public finances benefit from an export surplus. A higher level of production goes hand in hand with larger public revenues from taxes and lower expenditures
Second, the German economy accumulates assets vis-à-vis the rest of the world. Once a country earns more money in foreign trade than it spends, surplus revenues can be used in order to buy foreign assets such as shares, bonds and direct investments in foreign countries. Thereby Germany can make provision for the ageing of the population.
The reverse is true for countries in which imports are higher than exports. These countries have a lower level of employment and they must borrow money from abroad. Hence the economy as a whole is indebted. And each year with an import surplus, the debts of the economy are growing.
It is due to these negative economic effects for countries with a trade deficit that the European Commission criticised the German export surpluses back in March 2014 and called on the federal government to counteract this development. The reason for this intervention is the fact that the central mechanism responsible for eliminating an export surplus – the appreciation of the domestic currency – has been disused since Germany became a member of the euro area.
According to our economic textbooks, trade imbalances are only a temporary phenomenon. In case of an export surplus, the demand for the currency of the country with the trade surplus increases. Hence the price for the currency rises. This appreciation makes the goods and products in the rest of the world more expensive. Consequently, exports go down. In theory, the appreciation of the currency continues until exports equal imports.
Germany’s membership of the currency union prevents an appreciation of the German currency. Consequently, German export surpluses have become a lasting phenomenon – just like the labour market problems and debts of trade deficit countries.
The second main mechanism which could remove an export surplus – an increase in prices for domestic goods and services – does not work either. In principle, higher exports than imports imply an excess demand for German goods and services. Such an excessive demand results in an increase in prices. And due to rising prices, demand for German products in the rest of the world declines. In fact, Germany’s overall economic situation is characterised by a weak consumer demand and a low volume of investment. Hence there is no increase in prices even though foreign demand is high. Wage restraints over the last two decades have supported price stability.
When both exchange rate changes and price increases are not able to reduce the export surplus, Germany has to take measures to reduce these surpluses – as required by the European Commission. Of course countries with a trade deficit are obligated to react, too. They must do everything in their power to increase their international competitiveness.
In my view, the reduction of Germany’s trade surplus does not request lowering German exports. This would lower production and employment not only in Germany, but also in those countries from which German export companies obtain their intermediate goods.
Instead it is necessary to increase domestic demand and thereby imports. The usual way to increase domestic demand is an increase in wages. In Germany, wage negotiations are in the responsibility of the social partners. Hence government influence is limited. Nevertheless, many professional activities are under public responsibility such as large parts of the education system and of the healthcare sector, public security as well as tax authorities and the entire public administration. In these sectors, government can advocate for higher wages.
Another possible instrument for the government is a reduction of the rate of value added tax in order to increase purchasing power of private households and hence private consumption. The same effect could be achieved by lowering the tax burden and social security contributions of low income groups. Necessary tax increases should be borne by high income groups which have a higher propensity to save. On balance, these changes in the tax system are supposed to increase domestic consumption.
Finally, an increase in public investment could boost domestic demand in Germany. As a matter of fact, there are many areas where an increase in public expenditures is useful: transport infrastructure; network infrastructure in the fields of energy and broadband expansion; transformation of the energy supply into renewable energies; expansion of the education sector and more.
All in all, a reduction of the own trade surplus is in the long-term self-interest of Germany. Otherwise the countries with a trade deficit might increase their protectionist measures. These measures could result in a global trade war. All economies would suffer from the associated decline in foreign trade – especially highly export-oriented economies such as Germany.