Trump and US need to learn right lessons from Germany's success
The Financial Times on Monday published an interview with Trump's trade council chief who criticised Germany for using a “grossly undervalued” euro to “exploit” the US and its EU partners — while this echoes the US president's knee-jerk protectionist position, the US policy makers are likely to ignore the right lessons from Germany's manufacturing success.
Also on Monday the German Ifo economics institute reported that Germany once again emerged as capital export world champion in 2016, according to preliminary calculations. Germany’s current account surplus is expected to have totalled US$297bn (€268bn) in 2016. China ranks second with an anticipated current account surplus of $245bn. The US in contrast, is expected to show the biggest capital imports in the world, with a deficit of $478bn in 2016. Current account surpluses (goods, services, interest rates, wages and transfer payments) mean capital exports, while deficits represent capital imports.
The comments by Peter Navarro, head of Trump’s National Trade Council and until recently a professor of economics at University of California Irvine, on German exploitation of the US prompted a sharp response from Jeroen Dijsselbloem. The Dutch president of the Eurogroup of finance ministers told the FT that “clearly Navarro has no clue about the Eurozone.”
His criticisms make “no sense when you are aware of Germany’s critical position on ECB’s current monetary policy. Therefore his analysis has no merit,” Dijsselbloem said. He also pointed out that large-scale central bank asset purchases “first occurred in the United States, pushing down the dollar, and only at a later stage in Europe.”
Speaking in Stockholm, Angela Merkel, the German chancellor, said: “Germany is a country that has always called for the European Central Bank to pursue an independent policy, just as the Bundesbank did that before the euro existed.
“Because of that we will not influence the behaviour of the ECB. And as a result, I cannot and do not want to change the situation as it is.”
The ECB's policies of ultra low interest rates and buying government bonds are unpopular in Germany because of the low bank saving rates.
George Magnus, an economic adviser to UBS bank, said in a tweet that the comments from Navarro about the euro were “hogwash” because it was not “Germany’s currency to influence or manage.”
A German goods trade surplus every year in the period 1952-2016 and a combined goods + services deficit every year since 1993 is not thanks to currency manipulation! The US has had a combined trade deficit every year in the period 1976-2016.
Using US Bureau of Labor Statistics data for the period 1997-2012, America’s decline in manufacturing jobs as a percentage of working-age population was 38%, while Germany’s was just 10%.
The Conference Board, a private New York-based research organisation, published data in 2016 which show that in dollar terms, direct hourly pay in manufacturing in 2015 was $33.24 in Germany, $28.77 in the US, $4.14 in Mexico and $26.17 in the France.
The change in total compensation costs relative to the United States in 2000-2015 was +12% in Germany; +17% in France and -17% in Mexico (includes currency movements).
Last month we reported that Germany has a relatively low stock market capitalisation to GDP ratio of only around 50%, barely half the equivalent figure for the US, UK and Japan — German firms can invest for the long-term rather than try to satisfy shareholders in the short-term.
In terms of numbers alone, Germany only has around 800 publicly traded companies in addition to the 30 listed on the DAX. Clearly many German companies remain independent from the capital markets when it comes to their financing structure...a high proportion of the value in manufacturing is still created domestically. This can be attributed to a strong culture of innovation among German firms. The importance of industry has also remained stable over the past 20 years which is in stark contrast to most other developed economies.
The enduring apprenticeship system provides firms with a high-skilled workforce.
In contrast, a 2013 report, 'Competitiveness at the Crossroads,' written by three leading professors at Harvard Business School — Michael Porter, Jan Rivkin and Rosabeth Moss Kanter — concluded that America had been losing the ability to compete in the international marketplace.
The basic narrative begins in the late 1970s and the 1980s, when changes in geopolitics and technology dramatically broadened the geographic scope of competition. It became possible and attractive to do business in, to, and from far more countries. At the same time, changes in corporate governance and compensation caused US managers to focus more attention on stock price and short-term performance.
The ensuing wave of globalization by US firms brought great benefits to American consumers, managers, and shareholders. Costs fell, and firms achieved faster growth in newly opening emerging markets. But globalization also weakened the historically strong connections between companies and their U.S. communities. Increasingly, international firms became less invested in what our colleagues Gary Pisano and Willy Shih term “the commons”— shared resources such as pools of skilled labor, supplier networks, an educated populace, and the physical and technical infrastructure on which US productivity and competitiveness depend. Corporate mobility made possible an outcome that would have been hard to imagine a generation earlier: US-based companies could thrive in global competition even as the United States as a location became less competitive.
Globalization also put intense pressure on America’s middle class, which suddenly found itself in fierce competition with hundreds of millions of skilled, ambitious workers in other countries with lower wages. Job growth largely ceased in sectors exposed to international competition. Household incomes stagnated in the lower and middle echelons, and US wage growth stopped tracking domestic productivity growth. Meanwhile, individuals with unique skills that could be marketed globally experienced growing opportunities and income. Inequality in America soared, with the divergence in income especially high at the very top. The share of income accruing to the top half of 1% of the population rose from around 7% in 1980 to about 16% in 2010. Gains were so concentrated at the very top that even people widely considered wealthy saw only modest gains: the incomes of the rest of the top 5% improved, but far more slowly. Their share increased from 16% to 20%.
How did America respond to pressure on its middle class? Unfortunately, our society did not mobilize to invest so that the middle class could compete in the global marketplace. Instead, America and Americans maintained an illusion of growing prosperity. Abetted by lenders and government institutions, consumers with stagnant incomes borrowed more to buy houses and fund consumption. Government itself made unsustainable promises to the middle class, pledging to cover more healthcare expenses of future retirees, to employ more individuals in government jobs, and to pay generous pensions to many in the public sector, while reducing effective tax rates across the board between 1980 and 2010.
These promises, coupled with a deep recession and two wars, have left government finances in a fragile state. As debts and unfunded liabilities have risen, federal, state, and local government expenditures that support long-run growth in productivity and competitiveness — on items such as infrastructure, training, education, and basic research — have stagnated or fallen as a portion of GDP. Moreover, a resulting need to make tough, unpalatable choices has contributed to paralysis in our political process. In sum, firms are globally mobile and government is hobbled, with neither making the long-term investments required to secure US competitiveness. Mistrust has emerged in business-government relations: government often sees business as abandoning America, pursuing special interests, and avoiding taxes, while business often views government as layering on unnecessary regulatory, tax, and legal burdens while other countries are aggressively reducing their costs of doing business.
Research and development (R&D) intensity in US manufacturing remains high but it's concentrated in a small number of sectors — defence, aircraft, drugs and electronics — while it is much more diffuse in Germany.
In addition the US no longer makes a lot of merchandise, while companies like Apple, Intel and the big drugs companies have most of their manufacturing located overseas.
Starting trade wars with Germany and China while failing to address the homegrown failings of the US manufacturing sector, would be extremely foolish.
Look to Germany for the lessons that can put manufacturing in the United States back in the game.