Who would have thought it? China long held up as the most prominent example of unfair trade practices by US firms and politicians – now used as an example of how others should behave?
What am I talking about? The US Treasury has issued a damning criticism of Germany’s chronic trade surplus in its annual report on worldwide exchange rate abuse. We should note, the US has not labeled the country a currency manipulator. The Treasury has told Congress that internal balances within the Euro-zone have disrupted the global trade structure, with almost nothing done by northern European states to curb their huge surpluses.
Not exactly anti dumping…
While imposing severe austerity on southern states in return for the promise of financial support, northern states have failed to stimulate any growth. Indeed they have perpetuated a situation in which Germany’s current account surplus runs at 6.3% of GDP. Holland’s runs even worse at 9.5%. In an article appearing in Business Matters magazine, the Treasury said despite repeated pledges by EU leaders that more must be done to foster growth, “They have not yet made any concrete proposals capable of yielding meaningful near-term results.”
Permanent trade surplus?
Apparently Germany’s permanent surplus stands in stark contrast to the shift under way in Asia. China, long the pariah, has made some progress according to the article, “partially succeeded in shifting away from a reliance on exports for growth”, and has slashed its surplus from 10.1% in 2007 to 2.6% today. Observing that while the yuan remains “significantly overvalued”, China has stopped building reserves to hold down it’s currency. It has seen a 40% appreciation against the dollar since 2005 in real terms. Double-digit wage growth has closed the currency gap by other means and has resulted in stimulating a considerable increase in domestic consumption. The report says that Germany has overtaken China to become the biggest single source of global trade imbalance, alone accounting for a large chunk of the US deficit.
Nor are Germany’s trade practices solely of concern in the US. George Soros has called for Germany to “lead or leave the euro”, identifying the country’s surpluses as part of the euro-zone crisis. Mr Soros argued that the euro-zone should target 5% economic growth. That would require the bloc to abandon German-backed austerity measures and accept higher inflation than the ECB’s 2% target. Germany’s central bank would certainly oppose Mr. Soros’ 5% economic growth target. For the region’s wealth to grow so strongly, prices and wages would also rise sharply leading to inflation above the ECB’s target. But Mr. Soros said the strong expansion in European wealth would allow the euro-zone “to grow its way out of its excessive debt burden.” The alternative would create a two tier Europe of creditor northern states and indebted southern states which would eventually tear the euro apart.
We doubt Germany will take any steps to curb its export surpluses. After all, falling manufacturing confidence and allowing GDP growth hardly form a recipe for politicians to take steps to curb export sales. On the contrary, expect more of the same from Germany and its northern neighbors.