Opinion

Germany’s export-oriented economic model is caught in a US-Chinese squeeze

The new Merkel government has to reduce the dependencies on exports by stimulating domestic growth forces in Germany and Europe. At the same time, Berlin should push for a more ambitious national and European innovation policy as well as a robust European foreign trade policy.

By: and Date: April 30, 2018 Topic: Global Economics & Governance

This article has also been published by the Berlin Policy Journal;

 

The German export-oriented economic model is facing a massive attack this year. Germany is caught between tough American protectionism and aggressive Chinese industrial policy. The US government threatens to impose painful sanctions on key German export goods such as automobiles. China’s industrial policy is aimed at acquiring important industrial technologies and, in the medium term, at replacing existing foreign technology leaders in the automotive, engineering and chemical industries.

Because of the sizes of their markets, the United States and China undoubtedly have the tools to hurt Germany’s export-oriented economy. The new German government under Angela Merkel will have to buffer the effects of the US-Chinese squeeze. It should reduce the vulnerability of its export industry by promoting domestic growth and investment in Germany and in Europe. At the same time, Berlin should push for a more ambitious national and European innovation policy as well as a resilient European foreign trade policy.

First, the German dependency on exports to the United States and China must be reduced. The focus should be on strengthening not just German but European growth forces. All euro area countries except France, Finland, Cyprus and Belgium have a current account surplus. The euro area as a whole has a surplus of around 3% of GDP. Germany’s surplus amounts to almost 8% of GDP. These external surpluses are no longer sustainable in a world in which the US president is threatening to launch a trade war and the World Trade Organization can no longer enforce the rules for open markets in key economies.

Germany’s capital investment is lagging behind

Regardless of this acute pressure situation, it is also in Germany’s interest to liberate domestic growth forces. German business investment has been weakening for years. The level of German gross investment in the industrial sector has been below even that of France and Italy since the start of the millennium. A timely and feasible step would be to massively improve the rules for depreciating assets on capital, software, and research investments in the German tax code. This is all the more necessary as US corporate tax reform allows companies to immediately deduct 100% of their expense for equipment and building upgrades.

Beyond reforming the tax code and lowering other regulatory barriers, Germany will have to accelerate the development of public infrastructure. A strengthening of capital intensity will also help raise wage levels in Germany. This set of measures has the capacity to promote domestic growth and reduce dependence on exports. The resulting growth in Germany would also help EU partner countries such as Italy through increasing demand for their products.

Second, German innovation policy must make a real leap forward, especially in the field of the digital economy, so as not to leave the future of technological change entirely to others. American and Chinese IT corporations are in the process of dividing up world markets, setting the technological standards that will be associated with huge licensing revenues in the future. They are also rushing into the meta-technology of the near future: artificial intelligence.

Europe has left 5G technology to China

At present, Germans and Europeans do not have a lot to offer to the digital economy. The Digital Single Market in the EU is not progressing. As early as 2019, Europeans will become painfully aware of the shortcomings in innovation policy in their telecommunications networks when, for example, the Chinese company Huawei begins to install 5G mobile technologies in Europe, the prerequisite for networked industrial production and autonomous driving.

Europe needs a much more ambitious and active digital innovation policy that must include the targeted promotion of European “infant industries,” for example through the development of larger venture capital markets. With regard to critical infrastructures, there should be no taboo on the targeted support of currently weakened European 5G developers such as Nokia or Ericsson. If European companies for semiconductors and mobile networks disappear from the markets, dependencies on US and Chinese technology providers will not only create security risks, but will permanently minimise European innovation capacities.

European governments will therefore need to fundamentally rethink their innovation policies, and in particular their digital policies, in order to counter the rush of American and Chinese companies and innovations. Trusting in the power of company- and market-driven “innovation from below” will not be enough. This is because digital transformation requires new, state-financed infrastructures, targeted support measures and educational offers, as well as continuously adapted market rules that are not provided by companies, but by governments and parliaments. Public innovation policy must simply become more ambitious and think in terms of bigger goals and dimensions. Substantially strengthening research and development spending in the European and German budgets is only a first necessary step in this direction.

Foreign investment should be screened for market distortion

Third, Germany should campaign for a robust foreign trade policy in Europe. On the one hand, this is about adequately examining security interests in foreign investments and acquisitions, and flanking them with a pan-European coordination office. On the other hand, it is about protecting strategic technologies from takeovers through market manipulation practices. For this task, the competencies of the EU Directorate-General for Competition should be strengthened. It is completely unacceptable that foreign top dogs operating with special state funding from closed domestic markets, based on practices that massively distort competition, should be able to drive European companies out of the European market.

Germany must stand up for open markets and fair trade practices more decisively than before through the EU’s Directorate-General for Trade, without weakening the European institutions through national unilateral action. European Trade Commissioner Malmström is doing a very good job not only in her negotiations with the United States and China, but also in establishing new strategic trade relations with, for example, the Latin American Mercosur or the free trade agreement with Japan. Europe should build further partnerships and, at the same time, sharpen its trade policy instruments in order to defend itself in case of conflict and to represent European interests more effectively than before.

Germany can no longer avoid an economic policy correction in face of the dual pressure from the United States and China. The new German government has to act now if it wants to defend domestic industries from unfair competition while releasing Europe’s own growth forces.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read article More on this topic More by this author

Opinion

Ubu ou Machiavel?

L'administration Trump veut imposer une approche transactionnelle des relations économiques gouvernée par le rapport de force bilatéral en lieu et place du contrat multilatéral. Un défi d'une ampleur inédite pour l'Europe.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 6, 2018
Read article More on this topic More by this author

Opinion

Die Unternehmensteuer muss reformiert werden

Der deutsche Kapitalstock schrumpft. Das liegt zum einen an sinkenden Investitionen von Unternehmen. Eine Reform der Unternehmensteuer könnte helfen.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 3, 2018
Read article More on this topic More by this author

Opinion

Can Multilateralism Adapt?

Global governance requires rules, because flexibility and goodwill alone cannot tackle the hardest shared problems. With multilateralism under attack, the narrow path ahead is to determine, on a case-by-case basis, the minimum requirements of effective collective action, and to forge agreement on reforms that fulfill these conditions.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 3, 2018
Read article More on this topic More by this author

Blog Post

US tariffs and China's holding of Treasuries

China has the biggest bilateral trade surplus vis-à-vis the US but is also a top holder of US government bonds. While China has started to counteract US trade tariffs, economists have been discussing the case of China acting on its holdings of US Treasuries. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: July 2, 2018
Read about event

Upcoming Event

Sep
3-4
08:30

Bruegel Annual Meetings 2018

The 2018 Annual Meetings will be held on 3-4 September and will feature sessions on European and global economic governance, as well as finance, energy and innovation.

Speakers: Maria Åsenius, Richard E. Baldwin, Carl Bildt, Nadia Calviño, Maria Demertzis, Mariya Gabriel, Péter Kaderják, Joanne Kellermann, Jörg Kukies, Emmanuel Lagarrigue, Philippe Lespinard, Montserrat Mir Roca, Dominique Moïsi, Jean Pierre Mustier, Ana Palacio, Jean Pisani-Ferry, Lucrezia Reichlin, Norbert Röttgen, André Sapir, Jean-Claude Trichet, Johan Van Overtveldt, Margrethe Vestager, Reinhilde Veugelers, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Brussels Comic Strip Museum, Rue des Sables 20, 1000 Brussels
Read article

Blog Post

Trading invisibles: Exposure of countries to GDPR

This blog post identifies provisions of the EU’s General Data Protection Regulation (GDPR) that affect foreign companies, and discusses implications for trade in services with the EU. The authors provide a novel mapping of countries’ relative exposure to these regulations by a) measuring the digital maturity of their service exports to the EU; and b) the share of these exports in national GDP.

By: Sonali Chowdhry and Nicolas Moës Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 28, 2018
Read about event More on this topic

Past Event

Past Event

Trade war trinity: analysis of global consequences

Analysis of the long-term impact of the trade war and its three key players: EU, US, and China.

Speakers: Alicia García-Herrero, Ignasi Guardans and Carl B Hamilton Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 28, 2018
Read article More on this topic

Blog Post

China’s strategic investments in Europe: The case of maritime ports

The EU is currently working on a new framework for screening foreign direct investments (FDI). Maritime ports represent the cornerstone of the EU trade infrastructure, as 70% of goods crossing European borders travel by sea. This blog post seeks to inform this debate by looking at recent Chinese involvement in EU ports.

By: Shivali Pandya and Simone Tagliapietra Topic: Global Economics & Governance Date: June 27, 2018
Read about event More on this topic

Past Event

Past Event

EU-LAC Economic Forum 2018

The second edition of the EU-LAC Economic Forum, a high level gathering for in-depth research-based exchanges on economic issues between European, Latin American and Caribbean (LAC) policy makers and experts.

Speakers: Angel Badillo, Federico Bonaglia, Maria Demertzis, Sylvie Durán, Guillermo Fernández de Soto, Alicia García-Herrero, Elisa Grafulla, Gonzalo Gutiérrez, Bert Hoffmann, Juan Jung, Emilio Lamo de Espinosa, Carlos Malamud, J. Scott Marcus, Neven Mimica, Fabio Nasarre de Letosa, Detlef Nolte, Anne Sperschneider and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 26, 2018
Read about event More on this topic

Past Event

Past Event

State of transatlantic trade relations

A conversation on transatlantic relations with Michael Froman.

Speakers: Michael Froman, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 21, 2018
Read article More on this topic

Blog Post

Understanding (the lack of) German public investment

An array of data suggests that there is a general lack of investment by all branches of the German government, despite running budget surpluses for several years. This blog post plots the progression of the public investment problem, and explores which regions, which sectors, and which levels of government have been most affected.

By: Alexander Roth and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 19, 2018
Read article More on this topic

Blog Post

The G7 is dead, long live the G7

The summit in Charlevoix left behind a Group of Seven in complete disarray. The authors think that the G-group, in its current formulation, no longer has a reason to exist, and it should be replaced with a more representative group of countries. In this fast-changing world, is the G7 only a relic of the past?

By: Jim O‘Neill and Alessio Terzi Topic: Global Economics & Governance Date: June 13, 2018
Load more posts