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The controversy of Germany's trade surplus

Nils Zimmermann
April 7, 2015

Last year, Germany again had a huge surplus of exports over imports. Strong exports are good, but they can also cause imbalances. We take a closer look at the pros and cons of Germany's controversial trade surplus.

Container port
Image: picture-alliance/dpa/K. Nietfeld

Germany's trade surplus - the excess in the value of its exports over its imports - hit another record in 2014. At 217 billion euros ($236 billion), it was Germany's biggest ever.

There's a long-standing debate amongst economists and politicians about whether Germany's huge perennial trade surplus is a good or a bad thing. The debate is unlikely to be resolved, because in reality, the trade surplus has both good and bad aspects. Let's look at the numbers, and then the debate.

The numbers

According to a March 23 report by Destatis, Germany's national statistics agency, Germany exported 39 percent of all the goods and services it produced in 2014. Total export sales came to 1,133 billion euros ($1,229 billion); gross domestic product (GDP) was 2,903 billion euros.

Passenger cars in Bremerhaven port
The German car industry is leading the country's exports, ahead of deliveries of machinery and industrial equipmentImage: Getty Images

Total imports, however, were only 916.6 billion euros. At 216.9 billion euros, Germany's trade surplus beat the previous record of 195.3 billion euros from 2007. Expressed as a percentage of GDP, Germany's 2014 trade surplus was 7.5 percent.

For comparison, China's trade surplus in 2014 amounted to 2,349 billion yuan (about 347 billion euros at current exchange rates), or 3.7 percent of China's GDP. As a proportion of GDP, then, Germany's trade surplus is twice the size of China's.

The controversy

If Joan gives Susan a ten-dollar haircut, and Susan gives Joan a seven-dollar meal in return, then at the end of the day, Susan owes Joan three dollars.

It works the same way with international trade balances. Germany has bilateral trade surpluses with most - though not all of its trading partners - and it has a substantial global trade surplus if the rest of the world is considered as a unit. This means that every year, Germany is increasing its net financial claims on the rest of the world.

The balance of trade between any two countries isn't directly determined by government policy. It's determined by the purchasing decisions of millions of businesses and households. In general, a bilateral trade imbalance favoring Germany doesn't take the form of government-to-government debt; it takes the form of private debt.

Problems can arise when one country consistently runs a trade deficit vis-a-vis another country - as many countries do with Germany. Too much private debt can build up, eventually leading to difficulties in repaying it.

For sale sign in front of a Spanish estate
When the Spanish real estate market bubble burst in 2010, many Germans also saw the value of their property tumbleImage: picture-alliance/Patrick Seeger

An example: Spain and Germany

In 2014, German companies sold 34.9 billion euros worth of goods and services to customers in Spain, but Spanish companies sold only 25.0 billion euros worth of goods and services to Germany. That left Spaniards owing a total of 9.9 billion euros more to Germans at the end of 2014 than they did the year before. Spain has been running trade deficits with Germany for many years, so Germans have accumulated a large net financial position vis-a-vis Spain.

From the point of view of private German businesses and households involved in trade with Spain, the trade surplus with Spain takes the form, initially, of an increase in financial savings. There are three things that the Germans holding those savings can do with them: Spend on consumption, spend on domestic business investment, or spend on foreign investments - for example, by buying shares of corporations in France or buying land in Spain.

Germany is a nation of savers in which many people set aside some money every month. Some of those savings are invested domestically, and some in foreign assets. To the extent that Germans channel their excess savings into investments in foreign countries with which Germany has a trade surplus, this provides those countries with the financial means to offset their net debt to Germany.

In this way, for example, the net debt Spain runs up with Germany through the Spanish trade deficit is partly compensated by Germans buying houses and land in Spain - as many prosperous Germans have done. But in financial terms, foreign investments haven't worked out particularly well for German investors.

"Germans have invested a lot of their surplus earnings over the years in buying foreign assets," according to Heike Jöbges, an economist at the Berlin School of Economics and Law, who has studied the country's trade imbalances and investment flows. "On the whole, those investments have lost money."

Because of exchange rate depreciations as well as losses on paper assets like US sub-prime mortgage bundles in the wake of the 2008 financial crisis, the portfolio value of Germans' assets is only two-thirds what the buyers originally paid for it.

What if Germany invested more domestically?

According to Jöbges, German investors may well have done better had they invested their savings domestically. That would have tended to increase employment, incomes, and aggregate demand within Germany, including demand for supplies from its European trading partners.

But increasing the level of domestic investment would also tend to further increase Germany's ability to efficiently produce vast amounts of goods and services. It's far from clear that increased domestic investment would end Germany's trade surplus with the rest of the world - or even with other European countries.

One euro coin next to one deutschmark coin
Forcing Germany out of the euro currency area and a return to the good old deutschmark would only partially hurt Germany's export strengthImage: dapd

The currency advantage

Some economists point to the euro currency as a key reason for Germany's perennial export surpluses. By sharing the euro with a larger population of mostly less competitive economies, German exporters have a built-in benefit: a currency that's permanently weaker than it should be. That provides an artificial advantage to German exporters.

That's true as far as it goes, but it ignores the fact that if Germany still had its own currency and its own central bank, that central bank would always have the option of using its balance sheet to buy massive quantities of foreign currency, flooding the market with deutschmarks until the exchange rate once again dropped far enough to present no barrier to German exporters.

Insofar as Germany's perennial trade surplus is a 'problem', it's not clear whether or how a 'solution' might be found. At the end of the day, Germany's trade surpluses are likely to continue, at least until competitors in other countries figure out how to beat German companies at producing premium quality cars, machinery and industrial goods.