Germany-Trade Philosophy and the Trade Balance Foreign Trade and Investment

West Germany has been one of the world's major trading nations, almost from the first days of the economic miracle that began in the early 1950s (see The Economic Miracle and Beyond, ch. 5). It also had high trade and current-account surpluses during most of these years, especially during the latter half of the 1980s (see table 20, Appendix). It was the world's largest exporter in 1988, second largest after the United States in 1989, and first again in 1990 if East German exports before monetary unification in mid-1990 are included. West Germany was also consistently one of the world's largest importers.

Ludwig Erhard set the tone for the future of German trade policy and practice when he was minister for economics in the early days of the Federal Republic. He made his own sentiments very clear, saying in 1953 that "foreign trade is not a specialized activity for a few who might engage in it, but it is the very core and even the precondition of our economic and social order." Commentators and authors on the German economy speak of a German "export mystique," of deliberate domestic underconsumption to facilitate exports and increase competitiveness, and of an "almost unconscious" German mercantilism. The export sector has a powerful voice in German economic and commercial policy making, including a special Foreign Trade Advisory Council located in the Ministry for Economics. Senior German political figures rarely make visits abroad without including select German businesspeople in their official delegations.

The German economy has failed to heed the export mystique only once, when the Hitler regime (1933-45) sought autarchy, or economic independence from the global economy. Between 1910 and 1913, exports accounted for 17.8 percent of Germany's GDP. Their share declined to 14.9 percent in the second half of the 1920s and fell to only 6 percent in the second half of the 1930s, but by 1950 accounted for 9.3 percent of West Germany's GDP. Once the postwar economic boom got under way, exports rose to 17.2 percent of GDP in 1960, to 23.8 percent in 1970, to 26.7 percent in 1980, and to approximately 33 percent in 1990.

Investment goods produced by West German industry were the most successful export items and contributed most heavily to the country's large trade surplus, although West Germany was competitive across a wide range of goods. The country imported more agricultural and processed food products than it exported (see table 21, Appendix).

A number of West German industries dedicated significant percentages of their production for export: shipbuilding, 62 percent; air and space, 59 percent; automotive products, 48 percent; machine tools, 45 percent; chemicals, 44 percent; iron and steel, 37 percent; and precision mechanics and optics, 31 percent.

Several of the industries with a high export share, such as shipbuilding and airframes, were heavily subsidized in West Germany and have continued to be subsidized in united Germany. They are competitive in world markets on the basis of those subsidies. The subsidies demonstrate the extent of the German export commitment. West Germany would have had a substantial trade surplus even without the subsidized products of those industries, but it did not wish to sacrifice their global market share.

After German unification, Germany's trade surplus shrank for several years. Whereas West Germany had shown a dramatically high trade surplus during the late 1980s until 1990, reaching almost US$80 billion in 1988, united Germany by 1991 was showing a much smaller surplus. Nonetheless, it was widely expected that large surpluses would return by the mid-1990s as the Länder of the former East Germany began to export more and required fewer imports.

Especially crucial to the future foreign trade position of united Germany will be the competitiveness of industry in the new Länder of the former East Germany, which could not be predicted with any reliability in the years immediately following unification. During 1993 only 2 percent of German exports came from the new Länder . It was unclear whether this area's competitiveness had been destroyed, or whether the West German producers that had bought East German firms had decided to continue to export from their western firms instead of from their newly acquired eastern firms. Whatever happened, it is worth remembering that the new Länder , like the western Länder , had generated a consistent trade surplus in capital and transport equipment, industrial consumer goods, and chemicals before unification. They could be expected to return to competitiveness in at least some of those areas. East Germany also suffered from several major shortages before unification, having trade deficits in fuels, raw materials, semimanufactures, agricultural products, and processed foods. Most of those deficits would persist even after unification.

With Germany united, the government expects trade with Eastern Europe to increase well over the levels West Germany had enjoyed and ultimately to exceed the level of separate East German and West German trade with Eastern Europe before unification. In fact, Germany's most important and most consistent policy since 1990 has been to improve its connections to Eastern Europe without loosening its links to the West and thus to bring Eastern Europe and Western Europe together. After the fall of communism, German business representatives began visiting Eastern Europe in large numbers to establish or reestablish trade connections and to inspect potential investment sites or joint ventures.

German economic links and outposts are being reestablished in Central Europe and Eastern Europe. The Czech Republic is again becoming an integral part of the industrial complex centered in Bavaria and Saxony, as Bohemia and Moravia were before World War I. The frontier region between Poland and Germany is already one of the most active border investment and trading centers in the world, beginning to emulate the Mexico-United States border and the Hong Kong hinterland as a place where Western capital meets non-Western labor and where goods are processed and exchanged freely. Cross-border traffic in goods and persons is burgeoning. German trade and investment being planned for the countries of the former Soviet Union and for Eastern Europe will make united Germany by far the largest single Western trading partner as well as the largest Western creditor of those states.

Germany has provided more aid and investment to the former Soviet republics than any other West European state, contributing US$52 billion in aid to Russia and other members of the former Soviet Union between 1989 and 1993 as well as US$25 billion to the states of Central and Eastern Europe. More than one-half of East European and Baltic trade with the EU is with Germany. Other types of economic activities are also becoming common. For example, by 1994 the Deutsche Bank had opened a branch office in Prague and planned to open others throughout Eastern Europe.

As part of that effort to speed the East's integration with Western Europe, Germany has not only endorsed but has often sponsored association agreements with the EU for the states of Eastern Europe and the former Soviet Union. It has also sponsored several East European applications for EU membership. Kohl himself told Hungarians and Czechs in April 1994 that the EU without their countries would be a "torso." A month earlier, he told the Baltic states that they belonged in the EU as much as the Mediterranean states. Kohl also strongly advocated Russian membership in the annual Group of Seven (G-7) meetings--at least for political discussions.

The credits that Germany has been giving to its Eastern trading partners are not without risk. Russian and East European debt has been accumulating for several decades. Virtually every East European state had trouble servicing its debts during the early 1990s, and special arrangements had to be made to reschedule Poland's debt. Nonetheless, the German government and German banks were prepared to extend further credits despite nagging doubts about when the credits would be repaid. German determination to increase trade with Eastern Europe and to invest more in that area reflects tradition as well as economic and political interest. Moreover, Germany is better located than any other West European state to trade with Eastern Europe, especially because Berlin remains one of the most attractive potential production, assembly, service, and transportation centers for East European trade.

Data as of August 1995

Trade Philosophy and the Trade Balance

West Germany has been one of the world's major trading nations, almost from the first days of the economic miracle that began in the early 1950s (see The Economic Miracle and Beyond, ch. 5). It also had high trade and current-account surpluses during most of these years, especially during the latter half of the 1980s (see table 20, Appendix). It was the world's largest exporter in 1988, second largest after the United States in 1989, and first again in 1990 if East German exports before monetary unification in mid-1990 are included. West Germany was also consistently one of the world's largest importers.

Ludwig Erhard set the tone for the future of German trade policy and practice when he was minister for economics in the early days of the Federal Republic. He made his own sentiments very clear, saying in 1953 that "foreign trade is not a specialized activity for a few who might engage in it, but it is the very core and even the precondition of our economic and social order." Commentators and authors on the German economy speak of a German "export mystique," of deliberate domestic underconsumption to facilitate exports and increase competitiveness, and of an "almost unconscious" German mercantilism. The export sector has a powerful voice in German economic and commercial policy making, including a special Foreign Trade Advisory Council located in the Ministry for Economics. Senior German political figures rarely make visits abroad without including select German businesspeople in their official delegations.

The German economy has failed to heed the export mystique only once, when the Hitler regime (1933-45) sought autarchy, or economic independence from the global economy. Between 1910 and 1913, exports accounted for 17.8 percent of Germany's GDP. Their share declined to 14.9 percent in the second half of the 1920s and fell to only 6 percent in the second half of the 1930s, but by 1950 accounted for 9.3 percent of West Germany's GDP. Once the postwar economic boom got under way, exports rose to 17.2 percent of GDP in 1960, to 23.8 percent in 1970, to 26.7 percent in 1980, and to approximately 33 percent in 1990.

Investment goods produced by West German industry were the most successful export items and contributed most heavily to the country's large trade surplus, although West Germany was competitive across a wide range of goods. The country imported more agricultural and processed food products than it exported (see table 21, Appendix).

A number of West German industries dedicated significant percentages of their production for export: shipbuilding, 62 percent; air and space, 59 percent; automotive products, 48 percent; machine tools, 45 percent; chemicals, 44 percent; iron and steel, 37 percent; and precision mechanics and optics, 31 percent.

Several of the industries with a high export share, such as shipbuilding and airframes, were heavily subsidized in West Germany and have continued to be subsidized in united Germany. They are competitive in world markets on the basis of those subsidies. The subsidies demonstrate the extent of the German export commitment. West Germany would have had a substantial trade surplus even without the subsidized products of those industries, but it did not wish to sacrifice their global market share.

After German unification, Germany's trade surplus shrank for several years. Whereas West Germany had shown a dramatically high trade surplus during the late 1980s until 1990, reaching almost US$80 billion in 1988, united Germany by 1991 was showing a much smaller surplus. Nonetheless, it was widely expected that large surpluses would return by the mid-1990s as the Länder of the former East Germany began to export more and required fewer imports.

Especially crucial to the future foreign trade position of united Germany will be the competitiveness of industry in the new Länder of the former East Germany, which could not be predicted with any reliability in the years immediately following unification. During 1993 only 2 percent of German exports came from the new Länder . It was unclear whether this area's competitiveness had been destroyed, or whether the West German producers that had bought East German firms had decided to continue to export from their western firms instead of from their newly acquired eastern firms. Whatever happened, it is worth remembering that the new Länder , like the western Länder , had generated a consistent trade surplus in capital and transport equipment, industrial consumer goods, and chemicals before unification. They could be expected to return to competitiveness in at least some of those areas. East Germany also suffered from several major shortages before unification, having trade deficits in fuels, raw materials, semimanufactures, agricultural products, and processed foods. Most of those deficits would persist even after unification.

With Germany united, the government expects trade with Eastern Europe to increase well over the levels West Germany had enjoyed and ultimately to exceed the level of separate East German and West German trade with Eastern Europe before unification. In fact, Germany's most important and most consistent policy since 1990 has been to improve its connections to Eastern Europe without loosening its links to the West and thus to bring Eastern Europe and Western Europe together. After the fall of communism, German business representatives began visiting Eastern Europe in large numbers to establish or reestablish trade connections and to inspect potential investment sites or joint ventures.

German economic links and outposts are being reestablished in Central Europe and Eastern Europe. The Czech Republic is again becoming an integral part of the industrial complex centered in Bavaria and Saxony, as Bohemia and Moravia were before World War I. The frontier region between Poland and Germany is already one of the most active border investment and trading centers in the world, beginning to emulate the Mexico-United States border and the Hong Kong hinterland as a place where Western capital meets non-Western labor and where goods are processed and exchanged freely. Cross-border traffic in goods and persons is burgeoning. German trade and investment being planned for the countries of the former Soviet Union and for Eastern Europe will make united Germany by far the largest single Western trading partner as well as the largest Western creditor of those states.

Germany has provided more aid and investment to the former Soviet republics than any other West European state, contributing US$52 billion in aid to Russia and other members of the former Soviet Union between 1989 and 1993 as well as US$25 billion to the states of Central and Eastern Europe. More than one-half of East European and Baltic trade with the EU is with Germany. Other types of economic activities are also becoming common. For example, by 1994 the Deutsche Bank had opened a branch office in Prague and planned to open others throughout Eastern Europe.

As part of that effort to speed the East's integration with Western Europe, Germany has not only endorsed but has often sponsored association agreements with the EU for the states of Eastern Europe and the former Soviet Union. It has also sponsored several East European applications for EU membership. Kohl himself told Hungarians and Czechs in April 1994 that the EU without their countries would be a "torso." A month earlier, he told the Baltic states that they belonged in the EU as much as the Mediterranean states. Kohl also strongly advocated Russian membership in the annual Group of Seven (G-7) meetings--at least for political discussions.

The credits that Germany has been giving to its Eastern trading partners are not without risk. Russian and East European debt has been accumulating for several decades. Virtually every East European state had trouble servicing its debts during the early 1990s, and special arrangements had to be made to reschedule Poland's debt. Nonetheless, the German government and German banks were prepared to extend further credits despite nagging doubts about when the credits would be repaid. German determination to increase trade with Eastern Europe and to invest more in that area reflects tradition as well as economic and political interest. Moreover, Germany is better located than any other West European state to trade with Eastern Europe, especially because Berlin remains one of the most attractive potential production, assembly, service, and transportation centers for East European trade.

Data as of August 1995