Prelude to a Trade War: Deutschland Edition

Unsplash Germany
Photo by Roman Kraft on Unsplash

You just finished that delightful Korean BBQ dinner with your best buds as you see the check approaching.  Instinctively you grab it and do some quick consulting math to determine everyone owes about $50.  You tell everyone to Venmo you, when that one friend asks to look at the check.   “The amount owed is $49.77.”   Your blood boils.  You remember covering drinks for this friend just last week, and the Lyft ride, and not to mention that beemer* you bought from them a year ago.

You can’t hold it in any longer.  “What gives Germany?!   We all know you are running a trade surplus of about 8% of GDP, why are you being so cheap?!  Just spend some money!”  An audible gasp is heard, and the rest of the world begins staring at their shoes.  Germany calmly pauses, takes a sip of soju, and replies, “America – you don’t understand.  Our workers and businesses value security.  You don’t know what it was like for us in the 90s when the shock of reunification plunged our unemployment to a tenth of the workforce.  Labor and business now work with each other to ensure stability!”

If you are still following along with this metaphor (or allegory?…this wasn’t on the GMAT), then you are primed for one of the main sources of tension between the U.S. and Germany that sets the stage for our Chazen trip Innovation Aus Deutschland.  This post hopes to sum up the issues and provide some insight into opportunities.

*A beemer is a car or motorcycle manufactured by the company BMW

1. What’s a trade surplus?

Unsplash Piggybank
Photo by Fabian Blank on Unsplash

For those of you who were asleep or recruiting during Global Econ, I am going to briefly and inadequately (so review your core notes, you bum) explain trade surpluses/deficits.  A trade surplus is an excess of national saving over domestic investment also known as when the value of a countries’ exports exceeds that of its imports.  In other words, a surplus occurs when the value of what a country sells to the world is more than what that country consumes from the world.  A trade deficit is the opposite when a country spends more than it saves thus the value of imports exceeds the value of exports.

2. Why can trade surpluses be bad?

Unsplash Map
Photo by Christine Roy on Unsplash

There are a lot of shifting graphs that I don’t care to get into (for real though, go to Professor Moser’s office hours, super helpful!), but one interesting thing is it seems counter intuitive on an individual level that being “fiscally responsible” is a bad thing.  In fact, for an individual country, a trade surplus helps to be more resilient to economic shocks.  For example, Germany’s unemployment rate was minimally affected during the 2008-2009 Great Recession when compared to other countries.  The problem occurs in a global economy, where to offset Germany’s savings glut, the rest of the world must borrow and spend enough to sustain aggregate demand to keep people working.  This can lead other countries to run trade deficits which in turn can lead to economic crises.  Germany’s trade surplus has been as high as 8.3% of its GDP (in 2016), which is substantial considering it far exceeds China’s current account balance (another country highly criticized for saving too much) of 1.8% of GDP in the same year.  The European Commission recommends that Germany reduces its surplus to 6% of GDP.

3. Who is to blame?

Unsplash Trump
Photo by Secretary of Defense Wikimedia Commons

Depends on who you ask!  President Trump has been a harsh critic of German trade surpluses stating Germany was, “Very bad on trade.”  This implies that there is an intentional German mercantilist policy that is causing the surplus.  He has proposed protectionist tactics, such as telling Americans to not buy German vehicles and proposing tariffs on steel and aluminum imports to punish Germany and other countries running surpluses.  These proposals have been met with harsh criticism, sparking threats of retaliation from the European Union.

4. What is the German side of the story?

Angela Merkel
Photographer: Armin Kübelbeck, CC-BY-SAWikimedia Commons

From the German perspective, the concept that its current accounts surplus is an intentional policy is preposterous.  The argument is that a surplus has naturally arisen from deeply cultural and nuanced relationships between labor and business.  The challenges of reunification in the 1990s, which raised unemployment to a tenth of the workforce, are burned in the psyche of the modern German.  A tacit agreement exists in which unions practice wage restraint to keep exports competitive and in return, businesses maintain the workforce even in economic downturns.  Pressure from low-cost emerging markets has reinforced this relationship, making workers averse to asking for wage increases.  The result is a culture of thrift among German citizens, who must save to compensate for low wage growth and thus spend less on imports.

5. What’s the solution?

Unsplash daycare
Photo by Phan Xiaozhen on Unsplash

It’s complicated, but one solution that may address Germany’s saving problem is…wait for it…wait for it…SPEND SOME MONEY!  Government spending can be helpful in updating infrastructure to increase productivity, creating programs to help let mothers work full time to increase disposable income, and investing in technology to fuel future German growth.  The bottom line, however, is German people need to spend more, and to do so, a substantial wage increase is long overdue.  Finding the political and sociological will for such actions, however, is difficult in a country where both businesses and workers are fighting for wage restraint.

As always, please feel free leave comments with any fact checking, insights, and/or happy thoughts!

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