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 #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 nearly 48% 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 France had Citroen, Peugeot, and Renault for all these years, and even BMW, Mercedes, Fiat, Lancia, 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 Free Trade Doesn't Work: What Should Replace It and Why (USBIC, $24.95) 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 ian.fletcher@usbic.net.
You did miss the role of strong unions and workers' councils in all major factories and corporations in Germany. This allows workers to offer input and exert influence on board business decisions - arguably one reason German products are so competitive in the global market place.
Where you lose me, however, is when you switch from writing an informed essay to "German-bashing", in a rather crude fashion at that. FYI, while gas-guzzling SUVs are not among them, some US products are doing quite well in Europe - the iPod and the iPhone, for example. Trouble with that is, although designed in Cupertino, they're all manufactured in China.
And please don't pretend that hormone-produced beef (with "downers" and BSE-meat in the mix) should be on the market anywhere. The problem here is regulatory capture (e.g., a cattlewoman functionary as head of George W. Bush's USDA).
In short, our financial industry is in permanent disrepute around the entire globe, and our current non-financial business model is broken. Don't we need to stop bashing successful models, and start learning from them?
The import tax is generally 0%. There is an EU wide exception with very few countries (currently mainly China) which demands an import tax for products manufactured with subsidies).
Import quotas and restrictions apply EU wide to agricultural products produced outside the EU. This is a limit to free trade. Unfortunately, this barrier exists in almost any country including the US.
The banks pressure companies to buy from local suppliers? That is against the facts. That Germany's exports and imports have increased dramatically in the last 3 decades is that more and more suppliers are located outside Germany. And if you buy a German car. There is a good chance that even the final assembly was done abroad.
Yes 48% of the GDP is created by the state. None of it in producing goods and services for exports. It includes education, health-care, welfare, etc. All major companies that dominate the export sector are privately owned. (American car makers are state-owned)
Fraport is an airport operator that is listed on the Frankfurt stock exchange. The majority is held by the public. As opposed to the US were almost all airport operators are 100% publicly owned.
VAT is just the European equivalent to the sales tax..
And by the way, every German knows about the GEZ and the state-owned television channels. It is a constant source of complaints and in the news almost every week. I don't know where you get this from.
The oligopolies and monopolies don't care about the U.S, all they care about is where they can make the most money by eliminating most of their competition (generally through mergers) and lowering wages in the race to the bottom of the wage scale.
The economic elite have already decided that they don't need the American worker or middle class in order to increase their wealth and power. This is what we get from our corporate owned government which was designed to serve the 18th century American financial elites and serves the interest of their successors today.
Parliamentary governments do a much better job of representing the views of the people then the American style of government. Parliamentary systems also allow for the influence of multiple political parties, unlike the U.S.
http://ampedstatus.com/full-report-the-economic-elite-vs-the-people-of-the-united-states-of-america
Therein lies much of the problem with the U.S. economy. The rest of the world makes high quality durable goods and pays their workers accordingly. The U.S. makes tasty lattes, serves giant burgers in franchise restaurants, hawks techno gadgets in mall kiosks, peddles funky clothes in crowded malls, and pays its workers accordingly. The really big money is made on trading floors shuffling paper covered in financial gibberish. The U.S. consumes much and produces little of significance.
Above all, if you ever read a comment proposing that a VAT is anything but trade neutral, you know you are listening to well rehearsed and completely unreformed suppy side voodoo economics, of they type that has brought the US economy to the brink.
The VAT is trade neutral because it is a sales tax on the German population. Whatever they buy, from Germany or the United States, is subject to the tax. Whatever Americans buy, whether from Germany or the United States, is not subject to the tax. Americans don't pay the German VAT on exports to Germany, Germans pay it.
Don't be so gullible that you believe that the US export industries are suffering because of various VAT regimes in the world, they are suffering from supply side economics, and the various VAT have nothing to do with it.
It's funny you mention the lower classes. You do realize that trade tariffs, especially those supported by this author on Chinese goods are regressive in nature? The poor have benefited the most from our trade with China and we will see prices for them substantially increase. It is those that argue for the poor to support them that don't care about the lower classes.
The article states half-truths, myths, unnamed sources, and just bogus 'facts'.
0% reasoning
0% sites
your comment is 100% empty rhetoric
- 5 points
[...]begin with careful control over Germany's currency[...] Half truth, The EZB has way more control over the Euro than the Bundesbank.
[...]So American goods entering Germany pay a border-adjustment tax,[...] Goods sold in Germany, by Companies located in Germany also have the 19%VAT, they also have to pay part of the workers' healthcare and retirement funds. So, foreign goods still have a fiscal advantage.
[...] ARD, ZDF, HR3, SWF, DW, BR3, NDR, WDR[...] This just shows the author did not too much of research. HR3, SWF, BR3, NDR, WDR are part of ARD. These are TV/radio station comparable to PBS, except they are funded by GEZ fees, and just about ALL Germans know that.
[...]Now they 'harmonized' ..., they still play them with the U.S[...] How does the author explain the success of Japanese cars? Maybe it has more to do with the product, sorry at gas prices of about $8 a gallon nobody wants a truck, big SUV, or V8.
[...] cars without Kat [catalytic converter] are so much cleaner and safer without airbags[...] There is NOT one new car sold without air bag or catalytic converter.
[..]bad tasting US wine to our country![..] Califoria wine is doing just fine in Germany, since they cleaned up their act an produce quality wine.
Don't think that you'll get European style benefits just because we are protecting domestic producers. Reducing our options as consumers is just one negative aspect. Protecting the politically connected producers at the expense of consumers and producers that work in conjunction with foreign entities will not make us any richer as a country. The factory walls have expanded across the globe and you aren't going to shrink them back down. Manufacturing continues to increase in this county despite the rhetoric of those such as this author. Those manufacturers that work in conjunction with foreign producers will be harmed to protect those manufactures that compete with foreign producers. Through increased prices, we pay to protect bad business models from competition out of the money that we could otherwise be saving for a vacation.
I don't think there is any new car for sale in the EU, that does not have at least 4 air-bags on board.
As I recall there have been more food recalls here in the US than in the EU.
But yes, this mixed economy that Germany has works well for them, and I believe that certain aspects of it would work well for the US as well.
Proponents of protectionist policies will point to the saved domestic jobs while ignoring those destroyed and the fact that prices on consumable goods goes up for everyone. In some cases, where the product is banned, the price may as well be infinity.
Now you are just being stupid. We have rules here in this country which define the parameters every company has to fulfill if they want to sell their products. If it be cars, produce or pharmaceuticals. Every, I repeat, EVERY company has to work with the same set of rules. If a German car manufacturer wants to sell cars in Germany, they have to abide to those same rules and if a U.S. American car manufacturer wants to sell cars here he has to do the same. And if a German company wants to sell their product in the U.S. they have to abide your rules, that is why Mercedes, BMW and VW built plants in your country btw..