Germany Profits from International Division of Labor

Germany is suffering from globalization. Competitive pressure from low-wage countries is keeping the economy in the doldrums. This widely held impression runs counter to actual developments. All the available data indicate that Germany is profiting from its integration into the international division of labor - and is holding its own on world markets despite competitive pressure from eastern Europe and China.

Despite the appreciation of the euro in the past years, German merchandise exports - which do not factor in the value of German services sold abroad - increased by 22 percent in 2004, the World Trade Organization (WTO) announced recently. It confirmed Germany's position of world champion in the export of goods, ahead of the United States and China - even though the figures cited by the WTO exaggerate German exports from a domestic perspective.

Because the WTO measures exports in dollar, the nearly 10 percent appreciation of the euro vis-à-vis the greenback is calculated into Germany's export growth rate. In euro terms, German exports rose by 10.4 percent last year - roughly the same as US and Japanese exports, but markedly less than China, which sold 35 percent more goods abroad last year.

This comparison shows that the listed countries, in particular China, profit from international trade. For the first time, China replaced Japan at No. 3 among the world's biggest exporters in dollar terms last year. But at $593 billion, China's goods exports still fall far short of those of the United States, at $819 billion, and Germany, with $915 billion. Incidentally, neither the United States nor China or Japan could rival the European Union if it appeared as a single economic area. According to the WTO, the EU exported goods worth €1,203 billion ($1.573 billion) last year.

Whether foreign trade bolsters a national economy is shown by the difference between exports and imports. This balance indicates the net stimulus of trade for the domestic economy.

The trade balance, which comprises trading of goods and services, offers a more comprehensive picture here. According to the Federal Statistics Office, the difference between exports and imports last year amounted to a price-adjusted €114 billion - about 5.7 percent of German gross domestic product and more than at any other time since unification.

Apparently, the German economy profits from foreign trade, despite competition from China and eastern Europe. And the positive trade balance, which has also increased over the past few years, rebuts the thesis that Germany is only exporting pre-products imported from eastern Europe these days, and that its ex-port successes are therefore fake successes.

However, an export surplus is generally accompanied by net capital exports. While Germans are rejoicing over their booming export business, they must ask themselves why investors are making a detour around their country. But this does not cast any doubt on the benefits of the international exchange of goods and services.

Germany has also fared well compared to other export nations over the past few years. According to OECD and WTO, its world market share of goods and services exports remained stable at about 9.4 percent in 2004 - over one percentage point higher than in boom year 2000. The United States lost market share during this period, but still commands about 10 percent.

A more precise picture of relative export performance is offered by the OECD's export performance indicator. The indicator states the share of domestic export volume in import demand of key export nations. It thus shows whether a country's exports have developed better or worse than demand in its key markets. According to this indicator, China and South Korea made the biggest leaps forward in 2004. Their export performance rose by 8.6 percent. That was, however, a downturn for China whose indicator had increased by more than 20 percent in the previous years. The Asian stars are followed by eastern European countries: the Czech Republic, Hungary, Poland and Slovakia. This mirrors the competitive pressure which they exert on their trade partners, above all in Europe. Japan is the only of the G7 industrial nations to have boosted its export performance.

This indicator listed Germany as one of the relative losers in 2004, but its 0.5 percent decline was much smaller last year than in 2003, when Germany's export performance had deteriorated by 2.4 percent. Companies have improved their competitive position in foreign trade thanks to rationalization measures and wage restraint.

This is also highlighted by the fact that other major euro-zone countries like France, Italy and Spain have been hit much harder by appreciation of the euro during the past years. An analysis of investment bank Lehman Brothers shows that the United States and the European Union have fared similarly well on their markets. This seems to indicate that competitive pressure from the United States remains limited despite the falling dollar.