Germany surpassed the United States to become the world’s leading exporter in 1992, around the time that Germany joined the European Union as a founding member. The United States remained the second highest exporter until China surpassed it in 2008. Germany remained number one until 2009 when China surpassed it to become the world’s top exporter. Germany exported $1.17 trillion compared to the $1.057 trillion of the United States. However, China’s exports were $1.2 trillion for 2009. Germany’s exports fell by 18.4 % from 2008, the largest decline in 60 years, while China’s exports fell only 16 %.
“’This is just one more step by China in attaining economic size commensurate with its population,’ said Arthur Kroeber, managing director of Dragonomics, an economic research firm in Beijing. Germany has a population of about 80 million, while China’s population is about 1.3 billion.”
If population were a key factor, then at over 300 million in population, the United States would have maintained the number one status until being surpassed by China. The key question is how did Germany remain number one over the United States for so long and how did they lose this ranking to China?
Germany is the largest national economy in Europe, the fourth largest by nominal GDP in the world, and fifth by GDP in 2008. The service sector contributes around 70 % of the total GDP, industry 29.1 %, and agriculture 0.9 %. Germany is relatively poor in raw materials. Most of the country’s products are in engineering, especially in automobiles, machinery, metals, and chemical goods. Germany is the leading producer of wind turbines and solar power technology in the world. Exports account for more than one-third of national output. Germany is such an export-driven economy that German companies own 35% of the container ships in operation worldwide.
By the Fortune Global 500 ranking of the world’s 500 largest stock market listed companies, 37 are headquartered in Germany. Well-known global brands are: Mercedes Benz, BMW, Volkswagen, Audi, Porsche (automobile), Adidas and Puma (clothing and footwear), Bayer and Merck (pharmaceuticals), DHL (logistics), T-Mobile (telecom), Lufthansa (airline), SAP (computer software), Siemens (computer services), and Nivea (personal care). You may have been as surprised as I was to learn that DHL, T-Mobile, and Nivea are German companies.
With the manufacture of 5.2 million vehicles in 2009 (compared to the U. S. total of 7.9 million), Germany was the world’s fourth largest producer and largest exporter of automobiles. German automotive companies enjoy an extremely strong position in the so-called premium segment, with a combined world market share of about 90 %. Germany places five luxury automotive brands among the world’s top global brands for all sectors, more than any other country. Germany’s reputation for quality precision engineering gives them a competitive advantage in selling high dollar vehicles in foreign countries. Thus, German automotive products spearhead the high value and growth of Germany’s exports.
Germany is also the world’s leader in mechanical engineering systems analysis and design, holding about 20% of this global market. This precision engineering expertise gives Germany a competitive advantage in producing machine tools (the tools that make tools and equipment). For example, Germany has a 58 % market share for producing reciprocating pumps used for drilling and water purification and produces 34 % of packaging and bottling equipment used around the world.
It isn’t just large firms that are market leaders. Small-to-medium sized manufacturing firms that specialize in technologically advanced niche products are vitally important. It is estimated that about 1,500 German companies occupy a top three position in their respective market segment worldwide. In about two thirds of all industry sectors, German companies belong to the top three competitors.
Germany’s tax structure contributes to their success as an exporter and puts a barrier on imports. Germany’s corporate tax rate is 15 %, but they also have a solidarity surcharge (5.5 % of corporate tax) and a trade tax charged by local authorities. As of 2008, the rate averaged 14 % of profits subject to trade tax. In addition, all services and products generated in Germany by a business entity are subject to value-added tax (VAT) of 19%. Certain goods and services are exempted from value-added tax by law. Value-added taxes are added in paid for all along the supply chain, and then are rebated for exports. A VAT is added at the border to imports as a balancing trade strategy to discourage imports.
I had heard a rumor that one of the factors in Germany’s success is that they don’t tax revenue on exports, but was unable to confirm this by diligent research. I did learn that Germany practices a “national jurisdiction” on taxes wherein they tax national consumption in contrast to the “unitary jurisdiction” of the United States wherein companies are taxed on revenues from worldwide sales (with a deduction for taxes paid to foreign countries). This taxing practice may be the source of the rumor or the source may be confusing it with the value-added taxes that are rebated for exports.
In a June 28, 2010, economist Ian Fletcher, commented, “Germany, like the U. S., is nominally a free-trading country. The difference is that while the U. S. genuinely believes n free trade, Germany quietly follows a contrary tradition that goes back to the 19th-century Germany economist Friedrich List… 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.”
Fletcher, in turn quotes from a report by the Heritage Foundation: “Non-tariff barriers reflected in EU and German policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some good and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members.”
Another opinion of Germany’s export success as reported in The New York Times, is “the roots of Germany’s export-driven success reach back to the painful restructuring under the previous government of Chancellor Gerhard Schröder. By paring unemployment benefits, easing rules for hiring and firing, and management and labor’s working together to keep a lid on wages, ensured that it could again export its way to growth with competitive, nimble companies producing the cars and machine tools the world’s economies – emerging and developed alike – demanded.”
The same article reported that Germany’s Chancellor Angela Merkel resisted the use of government stimulus spending that the United States and some European partners used to handle the recession. Instead of extending unemployment benefits like the United States has done several times since the recession began, Germany “extended the “Kurzarbeit” or “short work” program to encourage companies to furlough workers or give them fewer hours instead of firing them, making up lost wages out of a fund filled in good times through payroll deductions and company contributions. At its peak in May 2009, roughly 1.5 million workers were enrolled in the program,” and the Organization for Economic Cooperation and Development estimated that “more than 200,000 jobs may have been saved as a result.”
As a result, Germany’s unemployment rate at the height of the global recession was 9.0% in contrast to the 10.2% of the United States. The German jobless rate in October 2010 was down to 7.0% in contrast to the 9.6% of the United States. Germany is one of the few economies experiencing a solid recovery and one of the even fewer economies without a substantial deficit crisis on its hands. Germany’s exports surged month by month in 2010, but year-end data hasn’t been released yet.
Numerous manufacturers in Germany see China as a key driver in their recovery from the global financial and economic crisis. In July 2010 , Chancellor Merkel took the heads of major German corporations with her on a four-day visit to China. As a result Siemens signed a contract worth $3.5 billion (2.7u billion euro) with Shanghai Electric Power General Equipment to develop steam and gas turbines. Daimler signed a contract worth 6.35 billion yuan (720 million euro) with Beiqi Foton Motor to build trucks.
Even small-to-medium manufacturers are benefiting from increased exports to China. Nobilia, a mid-size manufacturer of prefab kitchens “made in Germany,” is selling its kitchens to construction companies building huge housing projects in China. Company spokeswoman Sonja Diemann said, “These are big projects with 1,000-plus apartment units. There is a growing group of consumers who have money, seek quality products and know that Germany has a good reputation in manufacturing.”
German trade with China has grown from $41 billion in 2001 to $91 billion dollars in 2009, and now represents 5% of German trade. Germany’s exports to China in 2009 accounted for $36 billion, a 7% increase over 2008. However, Chinese exports to Germany accounted for $55 billion, and Germany has been running a trade deficit with China since 2005. It shows that even with the addition of a VAT on imports and other non-tariff trade barriers, Germans are increasingly buying the cheaper consumer goods that China is flooding onto the world market.
If even Germany has a trade deficit with China and can’t fend off the Chinese juggernaut on trade of consumer products, who can? This is a question that the economists of Germany and the United States must carefully consider. One answer is ending the so-called “free trade” coalition as advocated by Ian Fletcher in his book, Free Trade Doesn’t Work, What Should Replace it and Why. One thing I do know, the negotiation of more “free trade” agreements that provide an unfair playing field for developed countries is not the answer.