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MERICS China Comment by Rolf J. Langhammer, Senior Policy Fellow for China in the Global Economy, MERICS (03.04.2014) China and Germany: How Two Super-Traders Can Shoulder Responsibilities for the World Economy China and Germany are two of the four basic country pillars on which world trade rests, the other two being the US and Japan. Compared to the latter pair of countries, for the time being, the former is the more dynamic one. This holds for merchandise trade and for service trade as well as for exports and imports. This is important given the allegations frequently raised against China and Germany about suppression of domestic demand, currency undervaluation and excessive current account surpluses. In dollar terms, China ranked second next to the US in 2012 world merchandise imports followed by Germany and third in 2012 world commercial services imports next to the US and Germany. China’s huge absorptive capacity and its openness as an export market for many countries in the world is often underrated relative to its leading position in world merchandise exports. In 2012, China ranked only fifth in German exports but second in German imports. Between 1995 and 2012, the rate of growth of German imports from China was more than twice as high as the rate of growth of total German imports. This is a clear indicator for the importance of China as a source market. Yet, the fact that the competitiveness of both countries strongly contributes to raise real income of consumers in the trading partners often receives much less attention than the fear that China’s export strength costs jobs in the partner countries. Such fear can only be overcome by pointing to the importance of cross-border value-added chains in which the two countries are integrated together with suppliers of intermediate goods and downstream processors from other countries. If trade would be measured at value-added terms rather than on gross output terms by deducting foreign imports of upstream products from final goods exports, then Germany and China have good arguments to counter allegations. At value-added terms, the surplus of China in trade with the US would shrink by one third, and similar declines could be observed for the deficit of France in trade with Germany. This is because the two countries import much 1 more intermediates from their two major trading partners than the US and France import from China and Germany. Both China and Germany are finished goods producers which enable competitive suppliers from other countries to participate in global supply chains and to benefit from the reputation of German and, increasingly, Chinese companies. This is a valuable help for structural change and productivity increase in partner countries and thus should be seen positively and not negatively in policy circles. Both countries would certainly receive more credibility in supporting the decline of global imbalances if they would further open domestic service sectors to international competition. Given these similarities and the anchor role of China and Germany in their respective regions, the two countries would be well-advised to shoulder more responsibilities in regional and global governance in their own self-interest. There are a number of opportunities for joint actions. Due to similarities in trade orientation as shown above, a natural field of common actions would be trade policies. However, while China is the master of its trade policy, Germany is not in this position. It can only try to influence EU common trade policies as the EU Commission is the responsible negotiation partner in external trade. How limited this influence can be and how strong positions of the Commission and of members states can differ, especially vis-á-vis China, became visible in the anti-dumping actions of the EU against solar panel imports from China. While Germany and some other member states urged for moderation, the EU Commission defended stronger actions against China by pointing to the outcome of anti-dumping (AD) investigations in favor of imposing AD tariffs. With these qualifications in mind, three initiatives in trade policy are promising. Germany should first try to accelerate negotiations within the EU on granting China the status of a “market economy”, and China should support such initiative by positively responding to the prerequisites for that status demanded by the EU. Second, in the negotiations of the EU with the US on the TTIP, Germany should urge on a non-discrimination clause in order to protect the interests of non-member countries. This would be consistent with the requirements in Art. 24 GATT that bilateral free trade agreements (FTAs) must meet a number of conditions to comply with the non-discrimination principle in the WTO. For the world’s largest bilateral FTA to be concluded so far, strict compliance with non-discrimination is a must. A third initiative of China and Germany in trade policies could be to support the WTO management in building upon the results of the Bali Conference results for more global agreements and possibly revitalize the Doha Round process and the WTO as the only relevant institution for global governance in economic affairs so far. A second field for joint economic initiatives of China and Germany comprises the process of the internationalization of the CNY. From its own economic history, Germany can offer valuable advice on the timing and sequencing of this process from 2 the easier stages in using the CNY in current account transactions to the much more difficult stages in opening capital account transactions. Germany should politically welcome and support this process while China should endeavor to fulfill the preconditions for becoming eligible as a part of Special Drawing Rights. A third field could be to revitalize the moribund state of reducing CO2 emissions on a contractual basis. Admittedly, this is a difficult process first because of the disincentives which shale gas fracking has given to a successor treaty of the Kyoto Protocol and second because the two countries pursue different reduction targets (China reducing CO2 per unit of GDP and Germany reducing CO2 in absolute terms). Yet, two countries like China and Germany which perceive environmental bottlenecks to the well-being of their people as serious and have the technological and financial means to stem the pollution tide should strengthen their cooperation. To sum up, being super-traders and anchor countries in their region poses obligations to China and Germany to take the effects of their policies for the rest of the world into account. A common view on these effects would be a first step on the long march toward global governance. 3