Does trade policy affect trade balance

External influences on the German trade balance

Germany's persistent trade surplus has been an issue in international politics for some time. Since the new US administration took office, the tone of the debate has intensified significantly. President Trump accuses Germany of unilaterally strengthening its economic power through exports at the expense of other countries and thus endangering the stability of the world trading system. In other respects, too, the number of voices attesting German politics to macroeconomic failure on this point is increasing. Specifically, it is criticized that the federal government neglects the promotion of investment and domestic consumption. The impression is created that trade balances are essentially determined by national economic policy. In fact, however, trade flows are exposed to a large number of external factors.

A country's trade balance is generally in surplus when the value of the goods a country exports exceeds the value of the imported goods. First of all, this speaks fundamentally for the competitiveness of the respective country. Germany is then also in the top places globally in common competition indicators, such as 5th in the Global Competitiveness Index 2016/2017 of the World Economic Forum. Hard location factors such as the qualification of the workforce, the quality of the infrastructure and the innovative strength of the company play a decisive role in this context. In addition, Germany's trade balance is currently benefiting from a number of rather short-term external influences.

As an industrial nation with few raw materials, Germany is particularly dependent on the import of raw materials, especially energy resources such as gas and oil. The current price situation on the international raw material markets is therefore playing into the cards of the German economy. In order to illustrate the latest price development of energy raw materials here, we can use the energy raw material index, a component of the HWWI raw material price index. This index initially rose in 2011 (see Figure 1). The value of energy imports rose accordingly. The import growth in turn contributed to a (minor) decline in the German trade balance. In 2012 the phase of falling international energy prices began, primarily due to falling crude oil prices. This was reflected in lower energy imports in terms of value, which gave the German trade balance a boost. In addition, the German economy has also benefited from the price development on the export side: the relatively energy-intensive German exports thus gained in price competitiveness. In 2016, the prices of energy raw materials began to recover noticeably. Since the beginning of 2017, however, prices have flattened again, the increase was only 0.4% in January 2017 and decreased again in February 2017 by -0.1%. In this respect, energy prices should also have a supporting effect on the German trade balance in the future.

illustration 1
German trade balance

Note: The index shown here is the December values ​​for the respective year.

Source: Bundesbank (2017); HWWI.

International monetary policy inside and outside the euro area is also a major contributor to the current trade surplus. A low level of interest rates stimulates the investment climate in the euro area. The ECB has been sticking to its policy of ultra-low interest rates for some time, which manifests itself in a key interest rate of 0.00% and an even negative deposit rate for banks of -0.04%. The ECB is also continuing its bond purchase program in order to keep long-term interest rates on the capital markets low and to strengthen the economy in the euro area. There still seems to be hardly any conflict with the goal of price stability: Although the general inflation rate in the euro area has recently risen again to 2.0% (February 2017), this was largely due to the rise in the price of energy raw materials and food (cf. Figure 1), and thus to a large extent to import goods. The core inflation rate (excluding energy and food), which is more relevant as a political tax instrument, is only 0.9%. Since a medium-term weakening of the price increases in the raw material sector is not to be regarded as improbable, the general inflation rate could very well approach this low core inflation again soon. Another factor in favor of a continuation of the loose monetary policy in the euro area is the political level. This year there are still important elections in the euro zone, especially in France and Germany. In view of the tense political climate, sticking to the current course should be seen as an effective means of consciously demonstrating calm and reliability. Monetary policy thus helps to stabilize the economy and thus also the demand for imported goods in the surrounding countries that are so important for Germany as a sales market.

One factor that is closely related to monetary policy is the development of exchange rates. In relation to the strength of German exports, the euro appears to be valued too weakly against central currencies such as the US dollar. The German export sector benefits from this in its price competitiveness: German export goods are relatively cheap in foreign currency. In this respect, too, there is little to suggest a trend reversal anytime soon. This is mainly due to the current interest rate policy of the Federal Reserve. The US Federal Reserve increased interest rates by 0.25 basis points on March 15, 2017, against the backdrop of the ongoing good economic situation. This is the third rate hike after the increases in December 2015 and December 2016. The US key interest rate has thus risen to a range of 0.75% to 1.0%. The moderate increase in interest rates is intended to prevent the US economy from overheating. The interest rate hike not only has direct consequences for the real economy, but also for the international capital markets. Investments in US assets are generally becoming more attractive again. With an increased influx of capital into the USA, however, there is also a stronger demand for US dollars, which supports the US dollar against the euro.

For a long time, the rather weak global economy was a drag on German exports. Above all, the sluggish growth in important emerging countries such as China and Brazil has weakened the German export potential on the demand side. However, there is currently a noticeable recovery in demand for imported goods from these countries. The value of German exports to non-EU countries increased by 17.7% in January 2017 compared to January 2016. Added to this is the ongoing recovery in the euro zone, with exports to EU countries increasing by at least 8.0% over the same period.

However, the political development among important trading partners remains a major factor of uncertainty in this context. In connection with the planned constitutional amendment, Turkey is threatened with a prolonged phase of political instability, which threatens a sufficient inflow of foreign capital into Turkey and thus the country's medium-term growth potential. With regard to the USA, the plans announced by the Trump administration have potentially contrary impulses for the German trade balance. On the one hand, the planned economic stimulus program could stimulate German exports to the USA. Possible tax cuts will strengthen the purchasing power of US consumers and thus most likely also increase your demand for imported goods, especially high-quality consumer goods. The German construction and infrastructure industry with its specific know-how should also benefit from the announced investments in US infrastructure. On the other hand, there is the threat from the US government to raise the tariff barriers in sectors particularly threatened by foreign competition. Since this should primarily affect sectors such as automobile construction and steel production, and thus the cornerstones of Germany's export power, this would pose a significant potential risk to German trade. However, it remains to be seen whether and in what form the announcements will be translated into concrete policy.

Katrin Knauf, André Wolf
Hamburg Institute of International Economics
[email protected]