How did Germany get so lucky?
Source: Global Sourcing Blog
China entered the World Trade Organization in 2001. This has an immense, positive impact on their exports. With trade came growth, and China’s growth meant low-skilled jobs were at risk. In the US, workers who lost their jobs had a hard time finding new employment, and often dropped out of the workforce. Our labor participation rate peaked in the year 2000, and has fallen steadily since, despite our growing economy.
But this didn’t happen in Germany. Since 2004, Germany’s labor force participation rate has been increasing, not decreasing – the exact opposite of what has been happening in the US. Imports from China grew in Germany during this time – by 14 percent – a little less than they did in the US, where they grew by 25 percent. But that doesn’t explain why our economic trends are going in the opposite direction. Are Germans just better deal-makers?
Source: Trading Economics, Eurostat
Part of the reason has to do with the nature of our two economies. Germany is heavily dependent on trade. Indeed, as a mostly land-locked country, they’ve always had to trade with their neighbors like Holland and France in order to get access to good ports. So Germany was already importing a lot of the items China was making. Chinese exports of textiles replaced low-cost fabric Germany was already importing from Greece and Italy. Chinese exports have had a greater impact on those countries.
Second, Chinese trade expanded just as Eastern Europe was being integrated into European trade. These two adjustments were quite distinct: Eastern Europe was skills-rich but capital poor. They needed a lot of new capital equipment. China, on the other hand, was labor-rich. They exported textiles, toys, and computers, while Germany exported cars, medicines, and precision machinery. Eastern Europe offered new market opportunities as well as a pool of skilled labor.
Finally, German firms have introduced an agile, decentralized management style in their global manufacturing that provides incentives to improve product quality, just when China’s middle class has been craving high-quality items. German exports to China have been booming. In 2015 Germany exported $1.2 trillion to the rest of the world, almost as much as the US at $1.4 trillion. They’re the third largest exporter in the world, just behind us and China. They’ve complemented China’s export machine, rather than competed with it.
Annual German Export Growth Composition, 2010-2015. Source: Atlas Media
Germany has been in the right place at the right time. When Germany reunited and accepted East German Ostmarks at parity, they went through a decade of hard economic adjustments. But now they’re thriving in an integrated global economy. Improving long-term, sustainable economic growth isn’t about being lucky. It’s about being ready.
Douglas R. Tengdin, CFA