As America continues to contemplate its trade mess, the question naturally arises how other developed nations manage to trade with the world without deficits and without turning high-wage industries into low-wage industries to compete. Although some other developed nations, like Britain and Spain, have trade situations almost as bad as ours in recent years, some have been quite the opposite.
Germany is perhaps the best case in point, as this Montana-sized country of 82 million people was the world’s No. 1 exporter until 2008, surpassing the United States even today and only surpassed by China in 2009. Germany is more culturally familiar to Americans than Japan, another strong performer in the developed world, and thus its policies are easier to understand. (Both nations, by the way, now pay their workers industrial wages higher than the U.S.) This is all without significant natural resources to export (Canada doesn’t count) and while supporting a welfare state generous by American standards. And the rest of Germanic and Scandinavian Europe follows, broadly speaking, similar economic policies, so it is well-worth understanding how the Germans do it.
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. That these barriers exist is not especially controversial, even among those who espouse free trade and thus deny that they serve any useful purpose. For example, according to a report by the conservative Heritage Foundation:
Non-tariff barriers reflected in EU and German policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some goods 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. Restrictions in services markets and the burden of regulations and standards exceed EU policy.
Germany’s covert trade barriers—which should perhaps better be called “trade balancing measures,” as it would be a mistake to confuse them with crude protectionism—begin with careful control over Germany’s currency. As Americans presumably realize by now thanks to our problems with China, overt or covert currency manipulation can do a lot to improve a nation’s trade performance at the expense of its trading partners. When Germany was still on the Deutschmark, for example, it did not allow mass asset sales and foreign borrowing, preventing its currency from being manipulated, and thus it was protected against trade deficits. Germany’s adoption of the euro constituted a de facto downwards manipulation of its own currency, because the euro is essentially a one-size-fits-all “blend” currency, too strong for the weaker economies of Europe, but too weak for the stronger ones. The net effect is to encourage a trade surplus by the strong countries and the gradual selling-off and indebtedness of the weaker ones. Because two-thirds of Germany’s trade is with the rest of Europe, euro-related policies have a huge effect on German trade.
Another key policy: Germany does not use the credit system to subsidize short-term consumption as the U.S. does. For example, Germany has remarkably few credit cards per person. This tends to direct lendable money into investment, not consumption. This tends to favor balanced trade because investment strengthens industrial competitiveness, while consuming more than one produces necessarily means sourcing from abroad (as there’s nowhere else to get goods if you didn’t produce them yourself). Different tax policies also have a big effect. Above all, Germany has a 19 percent value-added tax (VAT) and the US doesn’t. So American goods entering Germany pay a border-adjustment tax, but German goods entering America don’t, a fact perfectly legal under WTO rules.
The corporate structure of Germany also fights trade deficits. Germany’s universal banks, for example, pressure the companies they own stakes in not to source components from abroad, which would weaken supplier companies they have big loans to. Similar pressures operate in retail and other parts of the supply chain. And the generally high level of German state involvement in industry, ranging from training schemes to state-owned banks, comes with similar strings attached. As one German puts it:
Germany as a whole has a near 48% share of its economy is some shape or fashion state controlled or run. The German is not even really fully aware of the true tax load he’s under nor the proportion of government that controls his life. Tell most Germans that the FRAPORT [airports] is a state entity and they are perplexed and confused. Explain to them about the GEZ, and how ARD, ZDF, HR3, SWF, DW, BR3, NDR, WDR etc. are more or less ‘state’ run entities and they are in disbelief. But the truth is, these agencies get their money through a tax that the state controls and their CEO is state-appointed by a committee. The Deutsche Bahn [national railway system] is another state entity, as is the Telecom.
The excruciatingly high technical and quality standards of many German (and now European) goods, ranging from the need for cars to do 150 MPH to survive the autobahn to the fact that American appliances (other than a few elite brands like the top Whirlpool, Jenn-Air, and Subzero models) are regarded as 1970s junk to European consumers, serve as barriers to penetration of European markets from the low end. This low end is, of course, the thin end of the wedge, as Americans learned from watching first Japanese and then Chinese imports to this country. Some of these standards are based on actual laws; others are deep set cultural preferences and thus consumer-driven.
It also doesn’t hurt that the German economy is, thanks to decades of policy, biased towards specializing in highly-exportable manufactured goods, while the U.S. excels in services—which may be nice to consume on a Sunday when the shops are closed in Berlin, but are hard to export and thus don’t help our trade balance.
Although Germany is nominally compliant with WTO rules, in reality, all manner of legal red tape is employed to discourage imports. As one web commentator puts it:
The reason why France had Citroen Peugeot and Renault for all these years and even BMW and Mercedes, Fiat, Lancia etc. or Audi and VW could not break into their market is because even Germany, Great Britain and Italy were being kept out of the French market with such games for years. Now they ‘harmonized’ a lot of hidden trade barriers and while they no longer play the games they once did with each other, they still play them with the U.S.
Import duty was (probably even more now from outside the EU) 10 % based on the purchase price + freight costs to the place of destination in Germany + freight insurance. Then comes the Mehrwertsteuer [value-added tax or VAT], and you have to get a German VIN [vehicle identification number] because of course the U.S. VIN in no good, and even if it’s a brand new car you have to take it to the TUV [German equivalent of Underwriters Laboratories] and the Kraftfahrtbundesamt [Federal Motor Transport Authority] has to first say that it’s even allowed to register the car in Germany.
German motor vehicle standards require many modifications to the US car despite the fact that German safety standards (No side impact struts in doors, safety glass that isn’t as good…..etc.) are lower. Example: On U.S. cars you had to disconnect the red brake light in the window of cars many years ago. Years ago (The U.S. used halogen lights first) you had to switch out headlights because the US used halogens on some cars and the Germans didn’t. Why? What safety aspect was impacted? None! It was pure games just to make it hard to import a car.
In sum, as another web commentator explains, “free trade” to a German means:
We should be able to sell all the cars in the US, but please don’t bring your Ami hormone beef Dreckschleuder [environmental hazard] car and silly Mickey Mouse phones to Germany! We have the Telecom and they build perfectly good phones that come in 4 colors (until the early 90s), and our cars without Kat [catalytic converter] are so much cleaner and safer without airbags, without side impact struts that are mandatory in the US and not in Germany (even today), without better safety glass…
In fact, we Germans, with our big foreheads, have determined that despite our BSE [mad cow disease], chicken flu, and the occasional farmer who feeds his cows illegal steroids and antibiotics anyway, these are much safer than U.S. beef that is hormone treated with (regulated) hormones and controlled by the USDA. Also don’t bring your bad tasting US wine to our country! Yes, you use (hybrid) plants and we don’t—and therefore your wine is much worse than our antifreeze wine from Italy and France and should be banned, after all—how dare you do something so uncultured as using hybrid vines?
Ian Fletcher is the author of the Free Trade Doesn’t Work: What Should Replace It and Why, an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933, he was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at email@example.com.