Wednesday, December 4, 2013

What can we learn about trade from Germany???

The Germans are taking a lot of heat lately for their large trade surplus of nearly $250B this year.  This kind of criticism is par for the course from the talking heads, but what really stunned me is that nobody asked "how did Germany manage to have such a large trade surplus when they have such high labor and structural costs?"  This to me is the key issue here, so I did a little searching around and found this great article from 2010 about just this issue.  Ian Fletcher has written an interesting piece about what the Germans are doing right and how they do it.  You can find it here:

The principle reason for the German trade surplus is the underlying philosophy of the Germans which Ian describes as: "Germany, like the U.S., is nominally a free-trading country. The difference is that while the U.S. genuinely believes in free trade, Germany quietly follows a contrary tradition that goes back to the 19th-century German economist Friedrich List (who was, ironically, a student of our own Alexander Hamilton, the man on the $10 bill). So despite Germany's nominal policy of free trade, in reality, a huge key to its trading success is a vast and half-hidden thicket of de facto non-tariff trade barriers."  They, being disciples of List, understand the importance of protecting their high value added, high wage, high tech industries and never running trade deficits as the path to prosperity.  List wrote the brilliant critique of Adam Smith in "The National System of Political Economy", which I highly recommend to all.

What is unfortunate about the German trade policy is that they must maintain the pretense of "free trade" while they nonetheless go about instituting obscure policies which provide protections.  Wouldn't it be easier, clearer, fairer, and more straightforward to simply replace many of these rules and regulations with tariffs?  Let's just state again that all nations have the right to balanced trade, and that tariffs are a legitimate mechanism for achieving this balanced condition.  Indeed tariffs should be the preferred mechanism due to the reasons above.  Certainly, the need for balanced trade is self evident as in the long run trade deficits are unsustainable and trade will come back into balance as the "free trade" crowd insists, but this will likely be accomplished through a variety of shocks that will inflict more suffering on the public.

Now List goes beyond balanced trade to requiring protection of key industries that provide for high value, high wage jobs be protected and promoted above  that necessary for domestic consumption, with the surplus being exported in exchange for low value commodities produced at low wages.  This policy, will as List adequately shows, create prosperity at home, but at the cost of prosperity for other nations.  A balance of trade with all providing roughly for their own needs, or trading for similarly value added goods will likely be more palatable to all.

As to the current criticism that the Germans are suffering?  Well, there is some merit in that, as we'll say again, all nations have the right to balanced trade, including the Germans.  They will eventually have to spend what they are saving from running a trade surplus so they might as well do it now and give a demand boost to production in other EU countries, such as Spain and Greece, which are running far below their production potential.  This may induce some inflation in the Eurozone, but maybe that will provide the impetus that the Germans need to exit the EU.


  1. Germany’s Bundesbank, Europe’s largest central bank, has sensationally changed tact and backed the push for higher wages to boost the flat-lining Eurozone economy.

    Jens Ulbrich, the bank’s Chief Economist, joins an ever-growing list of global leaders calling for widespread pay rises to fend off the crippling effects of failed austerity and low inflation and to crawl back the falling wage share in national wealth.

    Ulbrich told Der Speigel that recently agreed pay rises of more than 3 percent were “welcome” and that recent wage trends were “moderate” given Germany’s relative economic strength and low unemployment. Germany’s average worker’s wage has hardly risen over the last decade. It’s a similar story in other major economies such as the United States and United Kingdom.

    UNI General Secretary Philip Jennings first issued his call for worldwide higher wages at the World Economic Forum in Davos in 2013 with his phrase “The world needs a pay rise.” The call has since been repeated by the likes of the Pope, President Obama, and CBI UK.

    Jennings said, “The Bundesbank has joined a growing list of the great and the good calling for a pay rise for workers. All of these institutions, from the Pope to the U.S. President, recognise that if employees’ pockets are empty they are not in a position to spend to pick up the economy.

    “It’s time for the Federal Reserve, the Bank of England and the European Central Bank to heed this message. The world needs a pay rise if we want to see our way out of the shadow of the crisis and into the light of sustainable growth. After all,

  2. This is great news, but it doesn't suggest a reason for the current relatively low wages, nor a mechanism for increasing wages. The implication is that companies should simply agree to pay more by policy rather than traditional negotiation techniques.

    What the analysis of Freidrich List and the current German trade policies suggest is that the lack of balanced trade, and the existence of "free trade" is the cause of high unemployment and low wages. That the cure is balanced trade and protection of high-wage, high value added industries. In other words, this is a national trade policy issue, and that efforts over the last few decades to liberalize trade are part of the cause of our current income disparity.