Germany in World Trade: A Clear Winner of Globalisation

© bernswaelz/Pixabay

If you ask what German industry is world-famous for, many people will say: for mechanical engineering and its cars. And of course, that’s right. But they are just two of many areas in which German industry is strong and competitive on global markets. How exactly does Germany benefit from trade?

Whenever a country is particularly good in one area, its products and services tend to seek (and find) their way to customers beyond national borders. It is the birth of a new export hit. The Swiss export their watches all over the world; China excels in trade in electronics; and the United States is particularly good in trade in services. Everyone does what they do best. That’s how world trade works; that’s how everyone benefits.

Today, value chains are strongly internationalised. Intermediate products, components, and industry-related services are traded across national borders in order to be further processed or finished by subsidiaries or industrial customers. In 2017, 46.5 percent of German merchandise exports and 51.6 percent of imported goods were intermediate products according to the World Trade Organisation (WTO).

In addition, so-called intra-industry trade – trade in the same products – plays an important role in world trade, in particular in trade among industrialised countries. Germany, for example, produces cars and exports them to Sweden. Cars are also produced in Sweden and find their customers in Germany. The reasons for this include product differentiation and varying consumer preferences.

Cross-border trade makes it possible to utilise technological leadership. This benefits exporters as well as customers because they can choose the right products for them from a greater variety.

Furthermore, more trade makes production more cost-effective via specialisation and economies of scale: Producing not only a few products of a certain type but larger quantities for a worldwide clientele reduces the share of fixed costs in overall costs. Because the manufacturer can standardise and prefabricate parts and automate work processes, costs decrease while the quality stays high.

Nevertheless, governments sometimes find it difficult to dismantle trade barriers due to the competition brought to their own markets by opening boarders. All in all, the aggregate welfare effects of trade are generally positive. Many academic studies show that trade liberalisation and economic growth correlate positively. More competition essentially means more supply, pressure to innovate, and falling prices. However, trade can also have redistributional effects. Not all companies will be able to strive in the new environment. This makes it all the more important that states invest in training and education as well as research and development and that social systems are well-equipped to mitigate the adaptation costs.

Germany as Trading Power

Germany has long known how to take advantage of the benefits of globalisation. Today, exports of goods and services account for around half of the country’s value added. One in four jobs depends on exports; in industry, this is true for even more than every other job. Exports are not the only decisive factor here. As a manufacturing nation, Germany also heavily depends on inexpensive, high-quality imports. According to WTO data, around 25 percent of the value added in German exports in goods was directly attributable to foreign suppliers in 2015.

For years, Germany has ranked high on the list of top trading nations, placing third in 2018 (exports of goods and services taken together); only China and the United States sold more globally. The nation is also one of the top three importing countries after the United States and China. Germany could not maintain its position as a competitive exporter without German industry being deeply integrated in reliable, international value chains.

Trade Agreements: Free Trade, Strong Rules

Due to worldwide technological progress, transport costs are falling continuously. At the same time, however, customs duties and a large number of so-called non-tariff trade barriers continue to place a severe burden on global trade. Consumers pay the price in the form of higher prices and the unavailability of better products and services.

This certainly does not have to be the case. Countries have opened their markets under the General Agreement on Tariffs and Trade (GATT, 1947) and later under the WTO (founded in 1995). In addition, states have committed to liberalising trade in more than 300 trade agreements (trade agreements notified to the WTO that are still in force today). In addition, there are numerous unilateral trade agreements in which industrialised and emerging countries grant developing countries preferential access.

However, free trade does not mean that trade takes place without rules. Quite the opposite, it means that countries commit to certain rules in trade agreements such as the non-discrimination principle. They also often sign up to rules on government procurement, competition, trade-related investment matters, and trade facilitation. Modern trade agreements also feature strong sustainability chapters on labour and environmental standards. Most trade agreements also feature dispute settlement procedures. Last but not least, countries can also re-implement trade barriers – for example, if a product or service poses a risk to the health of humans, animals or plants or are a threat to national security.

The content of trade agreements has changed over time: for example, the European Union (EU)’s free trade agreements with Mexico and Chile, negotiated in the late 1990s, focused mainly on dismantling tariffs. Newer trade agreements, such as those between the EU and South Korea, Vietnam, Singapore, Canada, and Japan, also cover the so-called WTO+ areas. These are issues that have not yet been discussed at the multilateral level, or only to a limited extent, including competition rules, the protection of intellectual property, government procurement, and investments.

In addition, EU members states have signed a multitude of investment treaties. They grant protection to foreign investors against political risks such as discrimination and expropriation. In the past, such agreements were usually signed by two states (some of them are also plurilateral) and negotiated separately from trade agreements. With the Lisbon Treaty in 2009, the EU gained competence to negotiate such treaties for the EU as a whole and made them part of free trade agreements (e.g. with Canada). Subsequently, the European Court of Justice clarified that investor-state arbitration proceedings do not fall within the exclusive competence of the EU and that corresponding agreements must therefore be ratified by all member states before they come into force. In order not to overburden free trade agreements with lengthy ratification processes of the chapters on investment protection, the EU has started to separate investment protection from free trade agreements wherever possible.

The dismantling of regulatory barriers to trade is another aim of free trade agreements. Of course, regulatory cooperation between states should neither lead to lower standards, for example in consumer protection, nor should it restrict the scope for political action of the EU and its member states.