Opinion Europe
Who's Afraid of Germany's Trade Surplus?
The flip side of Germany's current-account surpluses is billions in German investment in Eastern Europe, China and the U.S.
By Heribert Dieter
Nov. 28, 2013 2:30 p.m. ET
A number of prominent critics in Europe and the U.S. have complained about the supposedly selfish and mercantilist nature of the German business model. But critics of Germany's trade surpluses are ignoring a key fact: A current-account surplus implies a net export of capital of the same magnitude.
Between 2005-12, annual German foreign direct investment abroad was as high as €557 billion, while FDI entering Germany was just €233.6 billion. That difference of more than €320 billion explains a significant part of Germany's trade surpluses during that period.
The car industry illustrates the point. The last new car factory in Germany was opened more than two decades ago. In 2010, German manufacturers for the first time produced more vehicles abroad than in Germany; last year, 8.2 million vehicles were produced abroad, compared to 5.4 million in Germany. German auto makers have invested in Eastern Europe and in American states like Alabama, South Carolina and Tennessee.
These recipients of German direct investment tend to have a much more positive perception of Germany's trade surpluses. A Hungarian newspaper recently suggested that "German car manufacturers are pulling the Hungarian economy like a team of oxen."
Hence, a reduction of German trade surpluses would mean a reduction of German investment in Eastern Europe, China and the U.S. This would result in lower growth and employment in those economies.
A Mercedes Benz plant in Kecskemet, Hungary. Sandor Ujvari/Associated Press
The U.S. is an exception: From 2000-08 alone, the U.S. imported $5.3 trillion of capital, including $1.6 trillion of foreign direct investment. Without investment from abroad, the development of the American economy would have been much more sluggish over this period. It is somewhat ironic that the world's largest importer of capital is complaining about other countries' exports of capital.
But both the foreign critics and many German commentators have missed an important dimension of the problem. Germany's capital exports have been resulting in massive losses. German portfolio investment abroad has been much less successful than FDI. If capital had been invested wisely, German claims on the rest of the world would have been at least as high as the cumulative current-account surplus of €1.275 trillion generated between 2000-12. The actual figure is €1.013 trillion because a whopping €269 billion had to be written off. In effect, a substantial chunk of German exports were given away.
The European Commission, subtracting the current valuation of German investment abroad from its peak value, suggests an even more depressing depreciation of €650 billion, equivalent to two years' spending by the German federal government. Germans, in essence, are competitive producers of goods but foolish exporters of capital. The real way for Germany to improve its business model would be to end its amateurish approach to portfolio investment abroad.
Mr. Dieter is a senior fellow at the German Institute for International and Security Affairs and a visiting professor for international political economy at Zeppelin University in Friedrichshafen, Germany.
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