Trade in Germany

Germany

Beautiful Germany

Formal Name: Federal Republic of Germany.
Short Form: Germany or Federal Republic.
Term for Citizen(s): German(s).
Capital: Berlin.

Geography

Germany in Map

 

Size: 356,959 square kilometers.
Topography: Terrain rises from northern coastal lowlands to belt of central uplands, complex and varied in form. To south of uplands, a high plain suddenly rises to Alps in country's extreme south. Most important rivers: Rhine, flowing to north; Elbe, flowing to northwest; and Danube, flowing to southeast.
Climate: Cool, continental climate with abundant rainfall and long overcast season. Lower temperatures with considerable snowfall in east and south. Prone to rapid weather variations from merging of Gulf Stream and extreme northeastern climate conditions.

Society

Population: 81,338,000 (July 1995 estimate) with growth rate of 0.26 percent (July 1995 estimate).
Ethnic Groups: 95.1 percent German, 2.3 percent Turkish, 1.7 percent Italian, 0.4 percent Greek, and 0.4 percent Polish; remainder mainly refugees from former Yugoslavia.
Languages: Standard German, with substantial differences in regional dialects. Three very small linguistic minorities, which speak Sorbian, Danish, or Frisian.
Religion: Protestants, mostly in Evangelical Church in Germany, 30 million; Roman Catholics, 28.2 million; Muslims, 2.5 million; free churches, 195,000; and Jews, 34,000.
Education and Literacy: 99 percent literacy rate in population over age fifteen (1991 estimate). Education compulsory until age eighteen. At age ten, after primary school (Grundschule), students attend one of five schools: short-course secondary school (Hauptschule); intermediate school (Realschule); high school (Gymnasium); comprehensive school (Gesamtschule); or a school for children with special educational needs (Sonder-schule). At about age fifteen, students choose among a variety of vocational, technical, and academic schools. Higher education consists of many kinds of technical colleges, advanced voca-tional schools, and universities.
Health and Welfare: About 90 percent of population covered by comprehensive compulsory insurance for sickness, accidents, disability, long-term care, and retirement. Most of remainder enrolled in voluntary insurance programs; the very poor are covered by state-financed welfare programs. Quality of medical care generally excellent. Comfortable pensions paid according to life-time earnings and indexed to meet cost-of-living increases. Wide variety of other social welfare benefits managed by both government and private agencies available to those in need. Life expectancy 76.6 years for total population (73.5 years for males and 79.9 years for females) (1995 estimates). Infant mortality rate 6.3 deaths per 1,000 live births (1995 estimate). Total fertility rate 1.5 children born per woman (1995 estimate).

Economy

Gross Domestic Product (GDP): In 1994 US$1,840 billion, or about US$27,800 per capita. Real growth rate 2.4 percent, inflation rate 3.0 percent, and unemployment rate 8.2 percent.
Agriculture: 3 percent of labor force and 1 percent of GDP in 1992. Main crops wheat, potatoes, sugar beets, and barley.

Industry of Germany

Industry: 38 percent of labor force and 38 percent of GDP in 1992. Products highly specialized goods, including machine products of all varieties, chemicals, electrical products, construction, food and beverages, lignite, textiles, and petroleum and gas refining.
Services: 59 percent of labor force and 61 percent of GDP in 1992.
Exports: US$428 billion in 1994, mainly highly specialized industrial products, including motor vehicles, machines, electronic goods, and chemicals.
Imports: US$376 billion in 1994, including food, petroleum products, manufactured goods, electrical products, automobiles, and apparel.
Foreign Trade by Region: Imports in 1994: European Union (EU) 47.6 percent, European Free Trade Association (EFTA) 14.0 percent, developing countries 11.5 percent, former European communist bloc countries 8.1 percent, United States and Canada 7.7 percent, Japan 5.6 percent, other dynamic Asian economies 3.7 percent, and Organization of the Petroleum Exporting Countries (OPEC) 2.0 percent. Exports in 1994: EU 48.9 percent, EFTA 15.1 percent, developing countries 11.5 percent, United States and Canada 8.5 percent, former European communist bloc countries 7.1, Japan 2.6 percent, other dynamic Asian economies 3.5 percent, and OPEC 2.6 percent.
Balance of Payments: In 1994 trade balance US$52 billion; current account showed deficit of US$20 billion; capital account balance US$24 billion.
Fiscal Year: Calendar year.
Currency and Exchange Rate: Deutsche mark (DM). In April 1996, exchange rate US$1 = DM1.51.

Germany in the World Economy

Germany in World Finance and in the Group of Seven

Along with the United States and Japan, Germany has one of the world's biggest economies and most dominant central banks. Of the three, Germany has the smallest and most vulnerable economy. Germany's GDP of DM3 trillion (for value of the deutsche mark--see Glossary) is less than one-third of United States GDP and less than one-half of Japan's.
Despite Germany's relatively small size, it has consistently exerted a powerful influence on the world economy. Since the end of World War II, the Federal Republic has played a key role in beginning, managing, or ending each crisis and each phase experienced by the global monetary system.
The first phase was the Bretton Woods era, named after the New Hampshire resort where the Allied monetary conference of July 1944 created the IMF and shaped the global postwar order. The dollar was pegged to gold at a fixed rate of US$35 per troy ounce, constituting the official backing of the global monetary system; other currencies were linked to the system through their own fixed, dollar-pegged exchange rates. Countries could devalue or revalue with respect to the dollar, and the dollar price of gold could at least theoretically remain constant even as rates of exchange between separate currencies fluctuated.
By the late 1960s, there was a surplus of dollars in the international financial system. Largely for domestic reasons, the United States had put far more emphasis on expanding dollar liquidity than on maintaining dollar value. Growing fear of United States inflation had made those dollars less desirable, and many central banks held more dollars than they wanted. The United States proposed that other countries revalue their currencies as provided under the Bretton Woods Agreement. But those other countries, and West Germany in particular, were not prepared to revalue. Money poured into purchases of the deutsche mark, sometimes for the purchase of German goods, but more often to hedge against the dollar or to make a profit when--as was widely expected--the deutsche mark would have to be revalued. West German foreign-exchange reserves rose from US$2.7 billion in December 1969 to US$12.6 billion by December 1971, and to US$28.1 billion by September 1973. The steady flow of foreign money into deutsche marks not only undercut the Bretton Woods system (see Glossary) but also threatened to import inflation into Germany by expanding the German money supply.

Car garage

West Germany tried to help support the dollar during the late 1960s and early 1970s. Bundesbank president Karl Blessing sent a letter to the chairman of the United States Federal Reserve Board pledging not to purchase United States gold but to maintain West German reserves in dollars. West German chancellor Ludwig Erhard (1963-66) agreed to make large purchases of United States dollar instruments and to make "offset" payments to lessen demands in the United States Congress for a reduction in United States forces stationed in West Germany. The United States and several other nations pressed West Germany to revalue in order to compensate for the dollar glut. Although the Bundesbank would have favored revaluation to reduce the risk of inflation, the West German government was afraid that a revaluation would cut into West Germany's global competitiveness and curtail exports.
Finally, after intensifying waves of speculation, the Bretton Woods system collapsed in August 1971. The United States stopped the sale of gold at US$35 per troy ounce and thus removed the fixed link between the dollar and gold. With that step, the system lost its anchor.
The deutsche mark remained under strain throughout the post-Bretton Woods period. It was alternately used in interventions to support the dollar or as a hedge against it. Other currencies again flooded into purchases of deutsche marks. To ease pressure within Europe, West Germany and other European states agreed to peg their currencies to a special system of relatively narrow exchange-rate bands formally entitled the "European narrow-margins agreement" but informally known as the "snake." But the snake also failed to hold. The domestic policies and even the economic philosophies of its leading member states--West Germany, France, Britain, and Italy--diverged too widely. The deutsche mark was the strongest currency, and others could not hold their value against it.
The United States and West Germany played key roles in trying to arrange a new global monetary system. But they had opposite objectives: the United States was determined not to have the dollar reassume responsibility for maintaining an international arrangement, fearing the great cost to its exports and economic stability. The United States government believed that countries with a trade surplus, such as West Germany, should accept part of the responsibility for solving exchange-rate crises and should be prepared to revalue, and it insisted on advance agreement for sanctions against any country that refused to do so. Despite its readiness to make minor exchange-rate adjustments for the sake of new currency alignments, West Germany refused to commit itself to any arrangement that would oblige it to revalue in the future.
In March 1973, the United States and other governments and central banks gave up trying to preserve the Bretton Woods system by setting new fixed exchange rates. With that decision, the next phase of the postwar international system, "floating," began. With floating, the relationship between the United States dollar and the deutsche mark became subject to market forces rather than official negotiations. West Germany was not certain whether floating would serve its needs but was not prepared to pursue any alternative.
The economic consequences of floating for Germany were not uniformly beneficial. The Bundesbank welcomed floating because it gave the bank more flexibility. The bank, in fact, could virtually control the deutsche mark's exchange rate if it was prepared to manipulate interest rates to that end. But West German industry, and especially West German exporters, did not welcome the unpredictability that flexible exchange rates introduced into commercial arrangements and production plans.
West German exporters also faced a particular problem that persisted in the 1990s. The Bundesbank's favorite instrument for fighting inflation, a high real domestic interest rate, is also the instrument that attracts capital to the deutsche mark and keeps the currency valuable. Many businesspeople feared then, as they have since, that the Bundesbank's anti-inflationary policy would always keep the deutsche mark stronger than most other currencies and would thus jeopardize exports.
German exchange-rate policy has been constantly caught on the horns of that dilemma. When a decision absolutely needed to be made during the floating era, however, German governments and the Bundesbank have almost always chosen an anti-inflationary course of action. They have preferred a strong currency, which might adversely affect trade, to a weak one, which would jeopardize the stability of the German monetary system. With that choice, they set policy for others as well as for themselves. As long as the deutsche mark is strong and German interest rates remain high, even the United States can diverge from German policy only at the risk of seeing its own currency fall in value. Because of Germany's monetary dilemma, and because the German government as well as the nation's bankers and industrialists have recognized German limitations and vulnerabilities, all have been anxious to establish the highest possible level of international predictability. The Germans have become regular participants in international economic consultations, and they have emphasized the value of such consultations at every opportunity.

Exports by province

Global economic coordination after the end of the Bretton Woods system has resulted in the development of a number of coordinating institutions. One, first known informally as the Group of Five (G-5), consisted of the United States, West Germany, Japan, Britain, and France. After Canada and Italy joined, the association became known as the Group of Seven (G-7). The G-7 includes the finance ministers and central bankers of the principal economic powers, who meet periodically and consult regularly between meetings.
In addition to the meeting of G-7 finance ministers, there is an annual G-7 economic summit at which the heads of state or government of the same seven countries meet to coordinate economic and political policies or at least to attempt to understand each other better. The summits have been held annually since 1975 on a rotating basis among the summit states, usually in the capital. At the Naples summit of the G-7 in 1994, Russia joined the political discussions, essentially turning the gathering into the Group of Eight (G-8).

The Deutsche Mark as an International Currency

At the core of Germany's success and influence lies its currency. The deutsche mark gave concrete expression to West Germany's international financial and economic success and also contributed to it. Since unification, it has become even more important as a symbol as well as an instrument of Germany's new central role in Europe. The success of the deutsche mark has been anchored in the success of West German exports, in the Bundesbank's solicitous management of the currency's value, and in the confidence generated by the country's prosperity.
The deutsche mark has been a model of stability since it became fully convertible in 1958. No other major currency, including the Japanese yen or the Swiss franc, has been stronger. The United States dollar, the cornerstone of the global system, has lost about two-thirds of its value against the deutsche mark since 1958.
The deutsche mark is not used as widely for transactions as it is to supply central-bank reserves. Global commodity prices are still largely denominated in United States dollars. Whatever the deutsche mark's strengths may be, it does not offer the kind of liquidity that the dollar does. Invoicing in deutsche marks is concentrated on Germany's own commerce, but almost 15 percent of world trade is conducted on a deutsche mark basis. The deutsche mark figures much less significantly than the dollar in the creation of international credits or in debt servicing. But a growing quantity of international bond issues--including some being floated in the United States--are denominated in deutsche marks. Major United States banks offer deutsche mark accounts for Americans who want to hedge some of their assets against a fall in the dollar. The World Bank has floated Eurodeutsche mark bonds, as have various United States corporations. In Europe the deutsche mark has virtually become a parallel currency, with prices in Western Europe and Eastern Europe increasingly quoted in deutsche marks as well as in local currencies.
Bundesbank officials worry constantly that the growing circulation of the deutsche mark makes it difficult to control the supply of the central bank's own currency. Deutsche marks held abroad, circulating abroad, and perhaps even used for currency intervention abroad are still part of the total German money supply. Sudden, large flows could have undesirable impacts on German interest rates or German prices, materially complicating the execution of German monetary policy. The bank fears that any decline in the deutsche mark's value or in the German current-account surplus could set off a selling wave that would force it to intervene massively and perhaps unsuccessfully. Bundesbank president Tietmeyer has warned that the high deutsche mark holdings abroad place a particular burden on the Bundesbank because any loss of faith in the German currency could provoke large-scale selling. The deutsche mark has thus become a burden for Germany as well as a blessing. The Bundesbank stated in May 1991 that one reason it had to maintain high interest rates was to avoid the kind of decline and subsequent market effects that Tietmeyer had cited. The German currency risks finding itself on a treadmill where the stronger it gets, the stronger it must remain until the German monetary authorities no longer dare to reduce interest rates significantly for fear that they might spark a deutsche mark sell-off.

The IMF recognized the reality of German monetary power in 1990, when it promoted Germany and Japan to share the second rank just below the United States and ahead of Britain and France. German government and banking officials were not certain that they welcomed such prominence, but they were prepared to accept it as a reflection of international appreciation of German monetary policies.
The West German role in the development of the global financial and monetary system has been replete with ironies. No state consistently had a greater interest in developing a stable system and in cooperating in such a system. Nonetheless, West German policy helped undermine and even destroy some of the arrangements that West Germany wanted to maintain. During the Bretton Woods era, pressures on the dollar almost always expressed themselves in massive purchases of deutsche marks. The strength of the deutsche mark weakened the system because any currency--including the United States dollar--could come under attack if it were not defended and preserved as solicitously as the deutsche mark was by Germany. The only currencies and systems that survived this pressure were those whose governments determined from the beginning that they would follow a strict monetary discipline similar to that applied by the Bundesbank to the deutsche mark.

Germany in the European Community

If Germany's global role is beset with complications, its European role seems relatively clear. Germany has always concentrated its economic interests and activities, whether in trade, investment, or finance, within whatever form was being taken by West European integration.
Although German economic and political interests cover all of Europe, they have been most immediately reflected in the EU and the European Monetary System (EMS). The Germans have found that these two systems complement each other. But the German government and German business and banking establishments have long had separate attitudes toward the two institutions, and they play a different role in each.
The EC was West Germany's economic home, and the country remains one of the organization's strongest supporters. Chancellor Kohl on several occasions made special efforts to promote European cooperation, especially concentrating on the drive to create a European Single Market and on the negotiation and ratification of the Treaty on European Union (commonly known as the Maastricht Treaty--see Glossary) (see The European Single Market, this ch.). Kohl also intervened on occasion to avert potential conflicts between Germany's European interests and its ties with the United States, although he had great difficulty resolving the dispute over agricultural trade that broke out between the United States and France during negotiation of the Uruguay Round of the GATT talks. He also followed up German unification with efforts to draw the EU further toward Eastern Europe.

Global economic perspective

Germans have consistently pressed for closer integration of the states of Western Europe, officially and in public opinion. They have also been among the staunchest European advocates of open trade between Europe and the outside world. German officials and political leaders have strongly and consistently asserted that United States fears about a "Fortress Europe" are misplaced. Whereas several other European states--especially France and Italy--have tried to limit imports of various foreign products to the EU, the German government has argued for open markets, imposing fewer controls or restrictions on trade than most European states.
West Germany, and especially West German industry, carved out an important export niche within the EC. In the process, it made the EC an essential market for German goods and an important factor in German prosperity. Because one-third of West German GDP was exported and because one-half of all exports went to countries of the EC, at least one of every six West German jobs depended directly on the EC market. Many other jobs depended on imports from EC states or on the general prosperity the EC had brought to all its members.
The intimate connection with the EC was reflected in West German trade statistics (see table 19, Appendix). Not only did more than half of West German exports go to other EC countries, but many West German industries relied on the EC for a major share of their total market--whether domestic or international. Before unification in 1990, 48 percent of West Germany's production of office machinery was exported to other EC countries, as was 24 percent of its chemical goods and machinery, 23 percent of its motor vehicles, 17 percent of its electronic goods, 16 percent of its textiles, and 14 percent of its iron and steel.
But if West European trade was vital to West Germany and remains so for united Germany, West Germany was vital to the success of the EC. Even before German unification, there were more Germans--more than 60 million--than any other nationality in the EC. With unification the figure came to about 80 million. West Germany alone already had the largest share of the EC's GDP, over 25 percent; the largest amount of private consumption, more than DM1.2 trillion in 1988; and the largest investment in other EC countries, DM56.7 billion. Because the German share of EC production and consumption was expected to grow in the aftermath of unification, the EC recognized the impact of this process by allotting united Germany a larger number of seats--ninety-nine--in the European Parliament than any other state.
The Federal Republic was often termed the EC's "paymaster." Its net contribution to the EC budget was often four times as large as the next-largest contribution because West Germany never drew as heavily as such states as France or the poorer Mediterranean countries on either the agricultural or the developmental support programs. West Germany regularly provided over 25 percent of the EC budget, with no other state contributing more than 20 percent; and united Germany's projected share of the 1994 EU budget was 30 percent, or DM44.1 billion. Although Germany was receiving some EU aid in 1994 to develop the economy of the former East Germany, united Germany will in the future be expected to contribute an even larger share to the EU than West Germany did--in part because Germany itself is larger and in part because many prospective East European members will need support. This was one reason Germany strongly supported the EU membership applications of such relatively well-to-do states as Norway, Sweden, Finland, and Austria. Germany's contribution to the EU is becoming increasingly controversial, however, as more and more Germans complain about the growth of the EU budget. Several German political figures, including Bavaria's political leader, Minister President Edmund Stoiber, have said that Germany must reduce its contribution.
Management of the EU's Common Agricultural Policy (CAP--see Glossary) illustrates some of the conflicts in intra-German interests. That system, by its commitment to subsidize both production and exports, has become increasingly expensive. It consumes more than half of the EU budget, or more than US$35 billion a year. Germany's Ministry of Agriculture has often tried to use the EU to drive support prices higher and to prevent or restrict foreign imports. The Ministry of Finance, by constrast, has sought to reduce the CAP in order to cut the German contribution to the EU.

The European Single Market

To advance the EC toward a truly integrated and borderless internal market--the European Single Market--the EC's European Commission (see Glossary) in 1985 submitted a white paper to the European Council (see Glossary) in which it listed a series of 225 steps needed to create such a market. It also proposed a schedule for completing these steps in time for the internal market to begin functioning by the end of 1992. The council accepted the commission's proposals, with West Germany strongly supporting the concept. West Germany later advanced the process significantly during its presidency of the council in the second half of 1988.
Once Germany was united, it remained among the European states the most determined to implement the conditions of the European Single Market. Even before the formal implementation of the single market on January 1, 1993, Germany had already incorporated 80 percent of the single-market regulations into its own legislation, a higher percentage than any European state except Denmark or France. Notably, the German government also applied those new regulations in the five new states (Länder ; sing., Land ) of the former East Germany, as well as in the old Länder of western Germany.

Not all Germans welcomed the coming of an open internal market. Many worried that the guidelines for such a market would give so much power to the bureaucrats within the European Commission that economic initiative within the member states might be stifled. Many German businesspeople dreaded the prospect of more EU offices in Brussels enforcing more regulations. Some Länder , especially Bavaria, as well as a number of German communities, became disturbed by prospects that the EU would in the future have such immense powers over economic life that the German federal system itself could be placed in jeopardy. As a result, Germans have become strong advocates of the principle of Subsidarität (subsidiarity), under which matters not specifically covered by EU laws are left to the practices and the laws of the individual national states.
Despite steady German government support for the internal market, attitudes in German business and economic circles also have remained mixed, depending on the size and interests of the affected firms. The largest German firms with strong export positions strongly favor the internal market. The midsized firms, which are unable to relocate their main production sites or develop subsidiary sites abroad, have a more cautious reaction. Smaller firms, especially those involved in handicrafts or services, are fearful of the competition that might come from other European countries with lower production costs.
Just as firms of different sizes have reacted differently to the internal market, so have firms in different industries. The producers of Germany's most competitive products--whether automotive manufacturers, toolmakers, chemical firms, or electronics firms--regard the single market as an opportunity. By constrast, Germany's relatively inefficient service firms, whether in telecommunications, banking, or insurance, see the market as a threat because it would eliminate national regulations that had given them privileged positions.
German trade unions particularly fear the internal market. They have warned that it will cause production to move to countries and regions where wages are lowest and social benefits most limited. Despite the existence of strict EU standards governing the rights and privileges of workers, the trade unions have consistently warned of "social dumping," the temptation for manufacturers to look for those sites where regulations are less stringent or are less vigorously enforced than in Germany.
German environmentalists, for their part, fear that German manufacturers might shade their environmental commitments in order to keep their costs as low as possible against competitors who face fewer environmental problems in less densely settled countries (see The Environment, ch. 3). Environmentalists have also expressed concern that manufacturers will be tempted to locate production facilities abroad, where environmental standards might be less rigorously enforced or where less severe population and land-use pressures might make pollution seem less onerous. As German trade unions fear social dumping, the environmental groups fear "environmental dumping."
With the continued development of the internal European market, many Germans began to perceive another danger--that the EU might become so internally focused that it could become too protectionist. The Board of Advisers to the German Ministry for Economics warned in 1990 that such protectionist thinking, if not promptly countered, could jeopardize European prosperity. German industry and trade associations have expressed similar concerns, warning that the protectionist risk of the internal market must be fought at every level to avoid driving Germany ever more into a limited European mold. German industry has consistently pointed out that Germany stands to lose far more than any other European state if the global trading system collapses because of the protectionist proclivities of the EU.
The increasing power of protectionist forces in the EU has raised concerns in Germany about the potential for the emergence of three separate and competitive regional trading areas, the EU, the Americas, and Asia, with some form of negotiated--or managed--trade among them. Any such arrangement negotiated by the EU would establish quotas for each side, and Germany almost certainly would not obtain as large a share of any European quota as that which German exporters could obtain on their own.
Kohl, in fact, has sought to use EU cooperation to help cement a close German relationship with France. He and French president François Mitterrand promised in early 1994 that they would use the successive German and French presidencies of the European Council during the last half of 1994 and the first half of 1995 to plan and execute a joint program for the further development of the EU.

Trade Philosophy and the Trade Balance

West Germany has been one of the world's major trading nations, almost from the first days of the economic miracle that began in the early 1950s (see The Economic Miracle and Beyond, ch. 5). It also had high trade and current-account surpluses during most of these years, especially during the latter half of the 1980s (see table 20, Appendix). It was the world's largest exporter in 1988, second largest after the United States in 1989, and first again in 1990 if East German exports before monetary unification in mid-1990 are included. West Germany was also consistently one of the world's largest importers.
Ludwig Erhard set the tone for the future of German trade policy and practice when he was minister for economics in the early days of the Federal Republic. He made his own sentiments very clear, saying in 1953 that "foreign trade is not a specialized activity for a few who might engage in it, but it is the very core and even the precondition of our economic and social order." Commentators and authors on the German economy speak of a German "export mystique," of deliberate domestic underconsumption to facilitate exports and increase competitiveness, and of an "almost unconscious" German mercantilism. The export sector has a powerful voice in German economic and commercial policy making, including a special Foreign Trade Advisory Council located in the Ministry for Economics. Senior German political figures rarely make visits abroad without including select German businesspeople in their official delegations.