A Distorted Global Economy US to Bully Germany on Trade Surplus at the G-20
The US thinks it knows who is to blame for its struggling economy: Germany and other countries with a trade surplus. Washington wants to see new rules that would punish such imbalances, but Germany says it shouldn't be blamed for having more competitive companies than the US.
There is an ironclad rule in Berlin politics: The greater the concern the more nervous the rhetoric.
Given such a yardstick, members of the German government must be suffering from anxiety attacks whenever the talk turns to global free trade these days. A case in point is Finance Minister Wolfgang Schäuble, a member of the center-right Christian Democrats (CDU), who refers to the reports on currency and trade wars, foreign exchange battles and devaluation contests as "sheet lightning."
Economics Minister Rainer Brüderle, of the pro-business Free Democrats (FDP), believes he has spotted the "specter of protectionism" dressed in an insidious disguise. "There are many ways to dress up protectionism," the politician warns. Brüderle recently admitted that, in light of the imminent risk, he feels like a "missionary" for free trade and globalization.
Berlin's political community is not distressed without reason. When the financial crisis erupted three years ago, the international community initially managed to prevent an imminent global economic crash by taking joint action to rescue banks and stimulate the economy. These measures were particularly beneficial for the German economy, which will experience the strongest growth this year since 1991.
But new, dramatic distortions are now looming in the post-crisis global economy. The current global economic order threatens to fall into disarray in several different areas:
- In the wake of the economic and financial crisis, many countries have begun to seal off their markets against foreign products in order to protect domestic producers.
- Two of the world's largest economic powers, China and the United States, seem to be initiating a race to devalue their respective currencies.
- Key emerging economies, most notably Brazil and Indonesia, are imposing restrictions on the movement of capital, which could disrupt the global money cycle.
- In desperation over the grim economic situation, the administration of US President Barack Obama is embarking on a diplomatic offensive intended to pillory countries with chronic trade surpluses. This puts China, Japan and Germany in the line of fire.
Each individual development is cause for concern on its own. But together, they constitute a serious threat to the world economy. The German business model, which builds on the success of the country's export economy, is particularly at risk.
The movement toward liberalization shaped world trade for decades. Tariffs were reduced or abolished and trade barriers were eliminated. This released energy to stimulate growth and increased prosperity worldwide. For years, global trade grew at a faster pace than economic output. It was a clear indicator of the productive effects of the division of labor and the freedom of trade. As Scottish economist Adam Smith pointed out, everyone benefits when each player in the economic system produces what they are best at producing.
Much at Stake for Germany
But now, for the first time since the end of World War II, free trade could face setbacks on a broad front, unless the leaders of the major industrialized and emerging economies can agree on joint solutions to the current problems. The G-20 will meet this week in the South Korean capital Seoul to discuss the condition of the global economy once again. Currency wars and trade imbalances are at the top of the agenda.
Much is at stake for Germany, which is currently experiencing an unexpected employment and growth spurt, due in large part to the substantial competitiveness of its companies in global markets. The German economy is expected to grow by about 3.5 percent this year, perhaps even more.
This success has sparked resentment, particularly among countries that are having a hard time pulling themselves out of the crisis, most of all the United States. The government in Washington sees the success of others as the source of its own troubles. Treasury Secretary Timothy Geithner has long complained that China's and Germany's trade surpluses indicate that these countries haven't developed enough domestic demand to help weaker countries.
A few months ago, French Finance Minister Christine Lagarde used similar arguments to target Germany. Two weeks ago, Geithner followed up on his complaints with action when he proposed a mechanism that would require countries with trade surpluses to modify their fiscal and economic policies in ways that would stimulate domestic demand. This would enable these countries to import more, said Geithner. In other words, countries with a trade surplus should voluntarily give up their competitive advantages for the benefit of the United States.
A Bombardment of Communiqués
Geithner failed to get his way at a meeting of G-20 finance ministers two weeks ago. Now, President Obama has decided to take matters into his own hands, and he is hell-bent on advancing the issue at this week's summit.
The White House and the US Treasury Department have bombarded their partner countries with memos and draft communiqués explaining their ideas. Washington wants to see countries with a trade surplus or deficit exceeding 4 percent of GDP subjected to heightened observation or required to change their policies. The Americans are doggedly sticking to this quantitative benchmark.
The German government is not prepared to bow to the will of the battered hegemon. "The proposal is not acceptable for Germany under any circumstances," German Finance Minister Schäuble said in a SPIEGEL interview. His ministry's policy is clear: "We reject non-cooperative solutions."
The German government's negotiators, Jens Weidmann, the chancellor's economic advisor, and Jörg Asmussen, a state secretary in the Finance Ministry, are feverishly trying to organize a concerted defense against the American proposal. In the dozens of position papers and memos that have been traveling back and forth among the capitals of the participating countries, Weidmann and Asmussen make no secret of their rejection of and disagreement with the Geithner proposal.
- Part 1: US to Bully Germany on Trade Surplus at the G-20
- Part 2: Germany Seeks to Undermine the US