Der Spiegel U.S. to Bully Germany at G20

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11/09/2010 12:40 PM

A Distorted Global Economy

US to Bully Germany on Trade Surplus at the G-20

By Christian Reiermann

The US thinks it know s w ho is to blame for its struggling economy: Germany and other countries

w ith a trade surplus. W ashington w ants to see new rules that would punish such imbalances, but

Germany says it shouldn't be blamed for having more competitive companies than the US.

There is an ironclad rule in Berlin politics: The greater the concern the more nervous the rhetoric.

Given such a yardstick, members of the German government must be suffering from anxiety attacks

whenever the talk turns to global free trade these days. A case in point is Finance Minister Wolfgang

Schuble, a member of the center-right Christian Democrats (CDU), who refers to the reports on

currency and trade wars, foreign exchange battles and devaluation contests as "sheet lightning."

Economics Minister Rainer Brderle, of the pro-business Free Democrats (FDP), believes he has

spotted the "specter of protectionism" dressed in an insidious disguise. "There are many ways todress up protectionism," the politician warns. Brderle recently admitted that, in light of the imminent

risk, he feels like a "missionary" for free trade and globalization.

Berlin's political community is not distressed without reason. When the financial crisis erupted three

years ago, the international community initially managed to prevent an imminent global economic

crash by taking joint action to rescue banks and stimulate the economy. These measures were

particularly beneficial for the German economy, which will experience the strongest growth this year

since 1991.

Dramatic Distortions

But new, dramatic distortions are now looming in the post-crisis globa l economy. The current global

economic order threatens to fall into disarray in several different areas:

In the wake of the economic and financial crisis, many countries have begun to seal off their

markets against foreign products in order to protect domestic producers.

Two of the world's largest economic powers, China and the United States, seem to be

initiating a race to devalue their respective currencies.

Key emerging economies, most notably Brazil and Indonesia, are imposing restrictions on the

movement of capital, which could disrupt the global money cycle.

In desperation over the grim economic situation, the administration of US President Barack

Obama is embarking on a diplomatic offensive intended to pillory countries w ith chronic trade

surpluses. This puts China, Japan and Germany in the line of fire.

Each individual development is cause for concern on its own. But together, they constitute a seriousthreat to the world economy. The German bus iness model, which builds on the success of the

country's export economy, is particularly at risk.

The movement toward liberalization shaped world trade for decades. Tariffs were reduced or

abolished and trade barriers were eliminated. This released energy to stimulate growth and

increased prosperity worldwide. For years, global trade grew at a faster pace than economic output.

It was a clear indicator of the productive effects of the division of labor and the freedom of trade. As

Scottish economist Adam Smith pointed out, everyone benefits when each player in the economic

system produces what they are best at producing.

Much at Stake for Germany

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But now, for the first time since the end o f World War II, free trade could face setbacks on a broad

front, unless the leaders of the major industrialized and emerging economies can agree on joint

solutions to the current problems. The G-20 will meet this week in the South Korean capital Seoul to

discuss the condition of the global economy once again. Currency wars and trade imbalances are at

the top of the agenda.

Much is at stake for Germany, which is currently experiencing an unexpected employment and

growth spurt, due in large part to the substantial competitiveness of its companies in global

markets. The German economy is expected to grow by about 3.5 percent this year, perhaps even

more.

This success has sparked resentment, particularly among countries that are having a hard time

pulling themselves out of the crisis, most of all the United States. The government in Washington

sees the success of others as the source of its own troubles. Treasury Secretary Timothy Geithner

has long complained that China's and Germany's trade surpluses indicate that these countries

haven't developed enough domestic demand to help weaker countries.

A few months ago, French Finance Minister Christine Lagarde used s imilar arguments to target

Germany. Two weeks ago, Geithner followed up on his complaints with action when he proposed a

mechanism that would require countries w ith trade surpluses to modify their fiscal and economic

policies in ways that would stimulate domestic demand. This would enable these countries to import

more, said Geithner. In other words, countries with a trade surplus should voluntarily give up their

competitive advantages for the benefit of the United States.

A Bombardment of Communiqus

Geithner failed to get his way at a meeting of G-20 finance ministers two weeks ago. Now, President

Obama has decided to take matters into his own hands, and he is hell-bent on advancing the issue

at this week's summit.

The White House and the US Treasury Department have bombarded their partner countries with

memos and draft communiqus explaining their ideas. Washington wants to see countries w ith a

trade surplus or deficit exceeding 4 percent of GDP subjected to heightened observation or required

to change their policies. The Americans are doggedly sticking to this quantitative benchmark.

The German government is not prepared to bow to the will of the battered hegemon. "The proposalis not acceptable for Germany under any circumstances," German Finance Minister Schuble said in a

SPIEGEL interview. His ministry's policy is clear: "We reject non-cooperative solutions."

The German government's negotiators, Jens Weidmann, the chancellor's economic advisor, and Jrg

Asmussen, a state secretary in the Finance Ministry, are feverishly trying to organize a concerted

defense aga inst the American proposal. In the dozens of position papers and memos that have

been traveling back and forth among the capitals of the participating countries, Weidmann and

Asmussen make no secret of their rejection of and disagreement w ith the Geithner proposal.

Germany Seeks to Undermine the US

They point out that there are various reasons why countries produce surpluses. A country like Saudi

Arabia w ill generate a surplus for a long time, because it exports oil. China manipulates its currency

to create an advantage for its products.

But Germany's export surplus, Weidmann and Asmussen argue, is not the result of the country

having ample natural resources or a deliberate devaluation of its currency. Instead, it is based on

the diligence and ingenuity of its companies and workers. For this reason, they say, Germany should

not be pilloried.

In any case, Germany regards the target range of between plus four and minus four percent of GDP

to be completely arbitrary. There is, they say, absolutely no research that would support setting the

threshold at these specific levels.


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There is, however, a clear political reason: The United States does not run the risk of falling afoul of

the limits Geithner proposes. Its trade deficit of 3.2 percent is w ithin the permissible framework, as is

that of Great Britain (2.2 percent), which supports the US proposa l. The French are supporting

neither the US-British offensive nor the German defensive position.

The German government plans to constructively undermine the American proposal. Under Berlin's

concept, the new monitoring regime would not only consider trade imbalances, but would also look

at a country's natural resources, international competitiveness and demographic developments.

Under no circumstances does Germany want to allow a target corridor w ith specific threshold

numbers.

Raw Tone

It remains to be seen whether Germany will prevail or whether the US will ultimately get its way.

In any case, the tone of the debate among governments is becoming increasingly raw. German

government experts fear that the Americans are interested in more than just forcing other countries

to make adjustments. If a country like China is constantly under suspicion, it becomes much easier to

justify retaliatory measures against its flow of goods. Instead of eliminating global imbalances, the

new mechanism could even accelerate the tendency toward new trade barriers.

The flood of protectionist measures since the height of the financial crisis two years ago has already

become surprisingly large. Particularly given the fact that, during their first conference -- inWashington in the autumn of 2008 -- G-20 members pledged to dispense with self-serving,

protectionist policies.

But in a recent report, the European Commission enumerated 332 individual protectionist measures .

In one case, the United States raised import barriers on steel and certain types of sleeping bags. In

another, Canada granted discounts on domestic milk for the production of ice cream.

Almost 2 percent of EU trade was affected by protectionist policies between October 2008 and

October 2009 (more recent data doesn't exist). "These are the wrong signals altogether," says

senior Economics Ministry official Bernd Pfaffenbach, who heads the ministry's division of foreign

economic policy. He notes with concern that many protectionist measures remain in force, even

though the acute crisis is over. "This will be a burden on world trade," Pfaffenbach fears.

The Weapons of War

Economists have long agreed that protectionist measures reduce prosperity -- for all parties

involved. Production declines in countries whose goods are locked out. This means that they can

import less, which in turn affects the protectionist country. Its economy and consumers are also

forced to pay inflated prices for domestically produced goods, which leads to a loss of affluence.

For Thomas Straubhaar, director of the Hamburg Institute of International Economics (HWWI),

protective tariffs and other trade barriers are the handguns in the global fight for market share.

Their effects are selective, but they can also be deadly when they hit their target.

Countries also wage economic war with weapons of a bigger caliber. "Those are exchange rate

manipulations and the expansion of the money supply," says Straubhaar.

The Americans' determined approach was in full evidence last Wednesday, when Federal Reserve

Chairman Ben Bernanke announced that the Fed would purchase an additional $600 billion (432

billion) in US Treasury bonds.

The unrestrained firing up of the money printing machines w ill inevitably weaken the external value

of the dollar and, in turn, force the Chinese to defend their currency. Bernanke's announcement was

met w ith harsh reactions in Beijing, where an advisor to the Chinese central bank rebuked the

United States for what he called the "unbridled printing of dollars" and said that China must set up a

"fiscal firewall."

'Resemblance to the 1930s'


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The poss ibility of an economic arms race looms. "The bad thing about it is that everyone can offer

good reasons to defend his actions," says Dennis Snower, president of the Kiel Institute for the

World Economy in northern Germany. According to Snower, the Chinese are manipulating their

currency, the yuan, downward to prevent their export sector from collapsing. Meanwhile, the

Americans are tapping the Fed for hundreds of billions in the hope that their economy will pick up

momentum. Both approaches accelerate the decline in the value of both currencies.

The clash of the titans will provoke substantial distortions in the world economy. If the European

Central Bank, in keeping with its mandate to limit inflation in the common currency zone, does not

relax its monetary policy any further, the value of the euro w ill likely rise considerably against the

dollar. The consequences are foreseeable: Goods from the euro zone will become more expensive.

This doesn't bode we ll for Germany. "As the world's second-largest exporter, Germany would be

particularly affected by such turbulence," says Snower.

Economics Ministry official Pfaffenbach looks to the future w ith a touch of gloom. He sees parallels to

the Great Depress ion. Protectionism and a scramble to devalue currency are the last things the

world needs at the moment, he says. "It bears a fatal resemblance to the 1930s."

Translated from the German by Christopher Sultan

URL:

http://www.spiegel.de/international/world/0,1518,727970,00.html

RELATED SPIEGEL ONL INE LINKS:

Interview With German Finance Minister Schuble: 'The US Has Lived on Borrowed

Money for Too Long' (11/08/2010)

http://www.spiegel.de/international/world/0,1518,727801,00.html

Germany Blasts Bernanke: Results of Fed Stimulus Could Be 'Horrendous'

(11/05/2010)

http://www.spiegel.de/international/business/0,1518,727457,00.html


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Der Spiegel U.S. to Bully Germany at G20