German exports: China is the only real bright spot

NAfter a catastrophic year, Germany’s export industry will have to adjust to a persistently difficult global economic situation in 2021 as well. There is a huge amount at stake for this successful export nation. Because exports make up almost half of the gross domestic product (GDP). How the German economy comes out of the Corona crisis depends on foreign business.

According to calculations by the Federal Association of Wholesale and Foreign Trade (BGA), exports have shrunk by at least twelve percent this year. The US business even collapsed by 16 percent. Exports to Great Britain fell even more sharply, at 18.5 percent, because the companies “anticipated the consequences of Brexit,” as BGA President Anton Börner emphasized in his annual balance sheet. “The only bright spots are China and Asia, whose importance has increased during the corona pandemic.”

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Even if the vaccination, which is now starting, gives reason to hope for an economic recovery, the association expects that exports will not reach the pre-crisis level again until the first or second quarter of 2022. For the next few months, however, companies still expect that business – starting from a very low level – will run increasingly better, as the BGA sentiment barometer shows.

Source: WORLD infographic

In any case, profound changes are imminent in 2021, especially since one of the most important players leaves the stage in January with the outgoing US President Donald Trump. However, the President of the Institute for the World Economy (IfW), Gabriel Felbermayr, expects the United States to remain a difficult partner for the Europeans even with the new Prime Minister Joe Biden.

German exports to the USA could even run worse in the next four years than during the Trump era. “The atmosphere in transatlantic relations will be much better because you can talk to Biden,” says Felbermayr. But while Trump had boosted the economy with tax cuts at the beginning of his term of office, from which European and especially German exports had benefited, Biden wanted to raise taxes.

“Trump sounded belligerent, but his growth-friendly policy was very useful to the Germans. With his successor, things could go in the opposite direction, ”warns the economist. At least there will no longer be an explicit threat of tariffs on German cars.

Put pressure on China

Felbermayr is confident that the dispute over the aircraft manufacturers Airbus and Boeing will also be able to be repaired with Biden. Of course, the researcher does not expect a new attempt at a transatlantic free trade agreement (TTIP), as demanded by foreign trade chief Börner.

Controversial decisions are pending in relation to the People’s Republic of China. Because in future it will hardly be possible for Germany to continue to take a neutral position in the American-Chinese conflict – which will continue under the new President Biden.

“Europe, together with the USA and other western-oriented countries such as Japan and South Korea, must put pressure on China,” advises Felbermayr. With the new US administration, there is now an opportunity for such an alliance. New trade policy instruments are needed to deal with a state capitalist system.

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The legal system of the World Trade Organization (WTO) does not offer any suitable regulations for this. “Only with broad alliances and with massive pressure will you get concessions from China,” says the economist. If Beijing continues to restrict imports and investments at home, the EU should also threaten, and credibly, with market access restrictions.

Toughness is necessary to finally achieve fairer economic relations, according to Felbermayr: “It would be ideal to develop and show these instruments of torture, but never have to use them – like nuclear weapons in the Cold War.”

The reason for hope that China is moving is the investment protection agreement between the EU and the People’s Republic, which is apparently about to be concluded. “In view of the much better transatlantic cooperation in the next few years, China is now finally ready to make significant concessions to the EU in the long-term negotiations on the investment agreement,” says Felbermayr.

Source: WORLD infographic

Beijing is trying to drive a wedge between Brussels and Washington. Nevertheless, the EU should bring the negotiations to a conclusion now, advises the economist: “It would be risky to wait for the Biden administration.”

In addition, bilateral investment protection agreements also had a multilateral effect: the rules for state-owned companies and subsidies promised by Beijing improved the situation for companies in all countries that are in competition with China. Felbermayr criticized, however, that nothing was known about the concessions that the EU would have to make.

Dependent on open foreign markets

Another turning point is the British exit from the European single market, which will shrink by 16 percent as a result. The top economist emphasizes that Brexit is a disaster that will fundamentally weaken the EU. Europe is losing weight, and the balance is shifting in favor of members like Italy or France, who rely more than Germany on state intervention and protectionism.

Source: WORLD infographic

The German government should have paid much more attention to the exit negotiations instead of leaving everything to the chief negotiator Michel Barnier, the scientist criticizes. BGA President Börner warns that it will take years for German trade with Great Britain to recover. Because despite the last-minute agreement, bureaucratic obstacles loomed.

The global trend towards protectionism, which has received a powerful boost from the Corona crisis, is a growing danger for the German export business. This is shown by the current “Global Trade Alert Report 2020”, which this year is devoted to the collateral damage that the various rescue measures of the individual nation states have inflicted on international economic relations.

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According to a study by the Center for Economic Policy Research in London, British Prime Minister Boris Johnson and US President Trump in particular stood out as protectionists. But even in Germany, which with a total of 80 registered “harmful measures” ranks fourth just behind Canada in this ranking of the 20 largest economies, state interventions to protect the domestic economy from foreign competition are increasing sharply.

The export nation itself is dependent on open foreign markets and runs the risk that benefits granted by the state to local companies will provoke countermeasures abroad. An example of such an escalation spiral is the longstanding trade dispute between the USA and the EU over Boeing and Airbus, both of which receive state aid for research and development – with the result that the USA and the EU have imposed high punitive tariffs on each other.

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Worldwide, the report registered distorting interventions in the first ten months of this year in 2031 – an increase of 74 percent compared to the same period of the previous year. The area of ​​medical goods is an exception to the trend towards the establishment of trade barriers.

Although Germany and other countries temporarily issued export restrictions, there were far more frequent easements for the import of goods that are so important in times of pandemics. The bottom line, however, as the authors of the “Trade Report” criticize, was that a particularly large number of political measures were taken in this crisis year that were at the expense of other countries.

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