German and Chinese Exports

Readers Question: how can Germany show a surplus? I mean I can understand that German exports have always been their main source of income , but with all the world exports shifting to China and India wouldn’t we expect the German exports to decline? Thanks!

German Current Account Surplus

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Germany has a current account surplus. This means the value of exports (of goods and services) is greater than the value of their imports.

Firstly, it is a bit of a myth that all the world’s exports have shifted to China. It is true that China has a comparative advantage in the production of many manufactured goods, such as clothing, toys and electronic goods. But, that doesn’t mean they produce everything. For example, Germany still has a very strong comparative advantage in the production of higher tech goods, such as chemicals, electronics, cars and engineering. Although Germany has higher labour costs than China, they still retain a competitive advantage due to very good labour productivity and investment in new technology.

(It’s also a myth that the UK doesn’t produce anything. For example, in recent years the UK car industry has been successful, increasing the amount of cars exported – see what does the UK produce?)

Secondly, Germany has a high current account surplus because the economy is more geared towards exports and investment with a high savings rate, rather than domestic consumption. The German current account would decline, if they encouraged higher consumer spending.

Thirdly, the value of the exchange rate influences the current account. In recent years, we have seen an appreciation in the Chinese currency, which has led to Chinese exports becoming a little more expensive. The strong growth in China has also led to higher consumer spending and more imports. The Chinese middle class are increasingly spending more on imports from Europe and the US. In the Euro, the German currency has been weaker, than if it had its own independent currency. If Germany left the Euro, most analysts say the German D-Mark would appreciate. The relatively weaker Euro makes German exports more competitive contributing to the current account deficit.

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Graph showing how the huge Chinese current account surplus has fallen since 2007.

 

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