The reason behind Germany’s big trade surplus with the U.S.
Americans simply appreciate well-made German products
American car snobs love BMWs and Mercedes. U.S. hospitals love German-made medical instruments. U.S. manufacturers depend on German precision tools.
They’re all big contributors to the huge trade surplus Germany has run up with the United States in recent years, trailing only China and Japan.
President Trump has bemoaned the imbalance in recent tweets, saying Tuesday: “We have a MASSIVE trade deficit with Germany...Very bad for U.S. This will change.”
The surplus isn’t a byproduct of any particularly unfair trade policies in Germany, economists say, but a result of Germans’ reputation for quality and efficiency, plus one big advantage beyond its direct control: a weak euro vs. the dollar that makes German exports cheaper and U.S. goods in Germany more expensive.
In 2016, German companies sold $114 billion worth of goods in the U.S., much of it in cars, highend medical equipment and machinery. American companies sold $49 billion of goods in Germany, resulting in a $65 billion trade deficit, 35% wider than 10 years ago.
Finding evidence that Germany’s trade surplus causes lasting damage to the U.S. economy or results from unfair German trade policy is difficult, economists say. They note that BMWs and other German products are popular in the U.S. and considered good value. And the surplus can’t be blamed on cheap wages: Com- pensation is higher for German manufacturing workers than for their U.S. counterparts, according to a 2012 Labor Department survey.
“The U.S. trade deficit with Germany is largely a symbol of Germany’s competitiveness in specific categories of imports for which demand in the U.S. is very strong,” said Eswar Prasad, an economics professor at Cornell University. “It is not because of trade or other barriers in Germany that restrict U.S. imports.”
One hurdle for American companies is that exports they excel at — such as agricultural products, machinery and equipment, and financial services — compete in sectors in which German companies also thrive.
In addition, part of the German surplus comes from U.S. companies’ purchases of German parts used in U.S. manufacturing, said Dan Ikenson, director of the Center for Trade Policy Studies at the Cato Institute.
At the same time, Americans’ increased appetite for German products has an upside for the U.S. economy. Companies such as BMW, Daimler, Siemens and Volkswagen have expanded operations in the U.S., creating more jobs. Daimler, the maker of Mercedes-Benz cars and trucks, has nine factories in the U.S. with nearly 22,000 employees. It’s also in the midst of spending $1.3 billion to expand its factory in Tuscaloosa, Ala., to produce SUVs for American consumers. Volkswagen has 8,000 U.S. employees, including 3,200 in its Chattanooga, Tenn., factory that made nearly 94,000 Passats last year. Siemens, a German conglomerate, employs 50,000 in the U.S. with more than 60 factories.
The bigger problem for the global economy may be Germany’s worldwide current account surplus of about $300 billion.
While China has been reducing its surplus, Germany has enjoyed unique advantages of being the most competitive economy in Europe. The euro, the European Union’s currency, is relatively weak vs. the dollar, reflecting Europe’s slower recovery from the Great Recession that hit the U.S. in 2007-09. Since 2014, the euro has lost more than 20% of its value against the dollar.
Because Germany is part of the EU, it benefits from the weak euro even though it is the strongest economy in the EU by far.
“It’s not that (the U.S. doesn’t) produce good cars. It’s just that quality-per-dollar seems higher with German cars,” said Caroline Freund, senior fellow at the Peterson Institute for International Economics. Germany is “hypercompetitive because of the undervalued exchanged rate,” she added.
The currency advantage has worked to Germany’s advantage at the expense of the U.S. and other nations whose companies find global competition too tough and shutter their domestic factories, Scott said.
Like China, Germany has “effectively engaged in ‘beggar thy neighbor’ trade policies that exported unemployment to trade partners” while supporting employment in Germany, especially in manufacturing industries.
Despite stiff competition from China, Germany’s total share of world exports between 1997 and 2013 declined only slightly from 11% to 10.4%, Scott noted. The U.S. share fell by nearly one-third, from 13.7% to 9.5%, falling from second place to third place behind China and Germany.
Unlike U.S. exports, which represent a small slice of the American economy, German exports account for nearly half of Germany’s GDP.