A Distorted Global Economy US to Bully Germany on Trade Surplus at the G-20
Part 2: Germany Seeks to Undermine the US
They point out that there are various reasons why countries produce surpluses. A country like Saudi Arabia will generate a surplus for a long time, because it exports oil. China manipulates its currency to create an advantage for its products.
But Germany's export surplus, Weidmann and Asmussen argue, is not the result of the country having ample natural resources or a deliberate devaluation of its currency. Instead, it is based on the diligence and ingenuity of its companies and workers. For this reason, they say, Germany should not be pilloried.
In any case, Germany regards the target range of between plus four and minus four percent of GDP to be completely arbitrary. There is, they say, absolutely no research that would support setting the threshold at these specific levels.
There is, however, a clear political reason: The United States does not run the risk of falling afoul of the limits Geithner proposes. Its trade deficit of 3.2 percent is within the permissible framework, as is that of Great Britain (2.2 percent), which supports the US proposal. The French are supporting neither the US-British offensive nor the German defensive position.
The German government plans to constructively undermine the American proposal. Under Berlin's concept, the new monitoring regime would not only consider trade imbalances, but would also look at a country's natural resources, international competitiveness and demographic developments. Under no circumstances does Germany want to allow a target corridor with specific threshold numbers.
It remains to be seen whether Germany will prevail or whether the US will ultimately get its way.
In any case, the tone of the debate among governments is becoming increasingly raw. German government experts fear that the Americans are interested in more than just forcing other countries to make adjustments. If a country like China is constantly under suspicion, it becomes much easier to justify retaliatory measures against its flow of goods. Instead of eliminating global imbalances, the new mechanism could even accelerate the tendency toward new trade barriers.
The flood of protectionist measures since the height of the financial crisis two years ago has already become surprisingly large. Particularly given the fact that, during their first conference -- in Washington in the autumn of 2008 -- G-20 members pledged to dispense with self-serving, protectionist policies.
But in a recent report, the European Commission enumerated 332 individual protectionist measures. In one case, the United States raised import barriers on steel and certain types of sleeping bags. In another, Canada granted discounts on domestic milk for the production of ice cream.
Almost 2 percent of EU trade was affected by protectionist policies between October 2008 and October 2009 (more recent data doesn't exist). "These are the wrong signals altogether," says senior Economics Ministry official Bernd Pfaffenbach, who heads the ministry's division of foreign economic policy. He notes with concern that many protectionist measures remain in force, even though the acute crisis is over. "This will be a burden on world trade," Pfaffenbach fears.
The Weapons of War
Economists have long agreed that protectionist measures reduce prosperity -- for all parties involved. Production declines in countries whose goods are locked out. This means that they can import less, which in turn affects the protectionist country. Its economy and consumers are also forced to pay inflated prices for domestically produced goods, which leads to a loss of affluence.
For Thomas Straubhaar, director of the Hamburg Institute of International Economics (HWWI), protective tariffs and other trade barriers are the handguns in the global fight for market share. Their effects are selective, but they can also be deadly when they hit their target.
Countries also wage economic war with weapons of a bigger caliber. "Those are exchange rate manipulations and the expansion of the money supply," says Straubhaar.
The Americans' determined approach was in full evidence last Wednesday, when Federal Reserve Chairman Ben Bernanke announced that the Fed would purchase an additional $600 billion (432 billion) in US Treasury bonds.
The unrestrained firing up of the money printing machines will inevitably weaken the external value of the dollar and, in turn, force the Chinese to defend their currency. Bernanke's announcement was met with harsh reactions in Beijing, where an advisor to the Chinese central bank rebuked the United States for what he called the "unbridled printing of dollars" and said that China must set up a "fiscal firewall."
'Resemblance to the 1930s'
The possibility of an economic arms race looms. "The bad thing about it is that everyone can offer good reasons to defend his actions," says Dennis Snower, president of the Kiel Institute for the World Economy in northern Germany. According to Snower, the Chinese are manipulating their currency, the yuan, downward to prevent their export sector from collapsing. Meanwhile, the Americans are tapping the Fed for hundreds of billions in the hope that their economy will pick up momentum. Both approaches accelerate the decline in the value of both currencies.
The clash of the titans will provoke substantial distortions in the world economy. If the European Central Bank, in keeping with its mandate to limit inflation in the common currency zone, does not relax its monetary policy any further, the value of the euro will likely rise considerably against the dollar. The consequences are foreseeable: Goods from the euro zone will become more expensive. This doesn't bode well for Germany. "As the world's second-largest exporter, Germany would be particularly affected by such turbulence," says Snower.
Economics Ministry official Pfaffenbach looks to the future with a touch of gloom. He sees parallels to the Great Depression. Protectionism and a scramble to devalue currency are the last things the world needs at the moment, he says. "It bears a fatal resemblance to the 1930s."
Translated from the German by Christopher Sultan
- Part 1: US to Bully Germany on Trade Surplus at the G-20
- Part 2: Germany Seeks to Undermine the US