Capitol in autumn ©

Capitol in autumn ©

The German Current Account Surplus: No Indicator of Unfair Trade!

U.S. President Donald Trump accuses Germany of trading unfairly, pointing at the country’s trade surplus. However, a look at the bilateral trade balance alone is misleading. Germany's high surplus reflects different business models of German and U.S. companies. For the whole picture, it is important to have a look at all trade and investment relations between the European Union (EU) and the United States.

Germany has regularly had a surplus of goods exports over imports since at least 1991. This surplus has grown over the years and peaked at 249 billion euros in 2016. Since then it has declined somewhat to 228 billion euros in 2018. Particularly in trade with the United States, the surplus in trade of goods of 49 billion euros (2018) is significant.

Allegations by the United States Unfounded

U.S. President Trump describes Germany’s surplus in trade with the United States as unfair and detrimental to his country. He refers, in particular, to the high level of car imports from Germany and the lower tariffs levied in the United States compared with the EU in this area. However, Germany’s trade surplus is no compelling evidence of injustice in economic relations. According to data by the World Trade Organisation (WTO), the average applied tariff rate on overall imports is only slightly lower in the United States (2.4% in 2016) than in the EU (3,0% in 2015). Thus, tariffs are low on both sides and not substantially ‘unfairly’ unsymmetrical. Still, an agreement to abolish all industrial tariffs would be mutually beneficial as both sides benefit from trade with each other.

It furthermore does not make sense to isolate the United States’ economic relations with Germany, as Germany is as integrated into the European market just as California is integrated into the U.S. market. It thus makes sense to look at the U.S.-EU economic relationship at the macro level. In doing so, not only the balance in trade in goods matters but the current account as a whole, i.e. trade in services, primary income (which is income from foreign investment and salaries), and secondary income (which includes residual and mostly negligible monetary transfers). A look at the overall current account shows that economic relations of the United States and the EU are almost in equilibrium, despite the U.S. deficit with Germany.

What are the facts? It is true that the United States buys more goods from Germany than vice versa. According to official U.S. data (Bureau of Economic Analysis; BEA), the U.S. deficit in trade in goods with Germany was 69 billion U.S. dollars in 2018. The picture is quite balanced for trade in services, where the Unites States has a small surplus of 1 billion U.S. dollars. On primary and secondary incomes, the data shows a U.S. deficit of 12 billion U.S. dollars with Germany, the bulk of which consists of German investment income from the United States. Thus, overall the U.S. current account deficit with Germany was 80 billion U.S. dollars in 2018.

However, this limited view on the U.S.-German statistics is misleading. For a realistic picture, it is necessary to also consider the expenses for services provided by U.S. companies, which German companies do not purchase directly from the United States, but rather from U.S. companies in other European countries. This is because many U.S. companies conduct their business in Germany from tax-favourable countries such as Ireland and the Netherlands. The profits of these U.S. subsidiaries therefore do not appear at all in Germany’s direct current account with the United States. They do, however, appear in the EU’s current account with the United States.

The United States has generated a substantial surplus of 55 billion U.S. dollars in trade in services with the EU and a whopping 119 billion U.S. dollars in 2018 in primary and secondary incomes. The U.S. deficit in trade in goods with the EU was 170 billion U.S. dollars (2018).  Putting these numbers together, the United States has therefore achieved an overall current account surplus (!) with the EU (trade, services and primary income). This surplus has existed since 2009 and most recently amounted to 4 billion U.S. dollars (2018, data from BEA). 

Differences in Business Models

Germany’s surplus in its current account balance is not a sign of unfair trade but reflects different business models of German and U.S. companies. German companies export many goods directly from Germany to the United States. On the other side, many U.S. companies market services in the EU through their EU-subsidiaries and then transfer profits to the United States. The EU trade surplus with the United States is offset by a deficit in primary income, i.e. investment income. In this way, the U.S. economy benefits considerably from business with the EU – even if this is not evident through the one-sided view of binational trade balances. The almost balanced current account balance between the United States and the EU is evidence of good economic relations in which each partner can benefit from its different strengths and business models. At any rate, the trade balance does not provide a reasonable reason for protectionist measures against Germany and the EU.