Download China and Germany: How Two Super

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
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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
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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.
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