Germany And the Role of Exports In Modern Economies

Exports as a percentage of GDP

Country name 2014*
Hong Kong SAR, China 219.6
Luxembourg 203.3
Singapore 187.6
Ireland 105.3
Maldives 105.3
United Arab Emirates 99.5
Macao SAR, China 99.1
Malta 93.6
Slovak Republic 91.9
Hungary 88.8
Equatorial Guinea 88
Vietnam 86.4
Estonia 84.7
Seychelles 84.1
Belgium 83.6
Czech Republic 83.6
Netherlands 83.1
Lithuania 81.8
Congo, Rep. 80.1
Panama 79.8
Malaysia 79.6
Slovenia 76.8
Brunei Darussalam 76.2
Qatar 75.6
Puerto Rico 75.5
Thailand 75
Bahrain 74.3
Turkmenistan 73.3
Switzerland 72.1
Kuwait 71.6
Aruba 70.8
Cambodia 68.4
Bulgaria 67.9
Oman 63.6
Trinidad and Tobago 63.2
Palau 63.1
Fiji 61
Belize 60.9
Swaziland 60.3
Angola 58.5
Latvia 58
Lebanon 57.5
Belarus 57.2
Solomon Islands 56.4
Cyprus 55.4
Denmark 53.7
Mauritius 53.7
Austria 53.6
Iceland 53.5
Mongolia 53.5
Gabon 51
Faeroe Islands 50.6
Korea, Rep. 50.6
Togo 50.4
Botswana 49.8
Ukraine 49.2
Macedonia, FYR 47.9
Mauritania 47.8
Vanuatu 47.8
Bermuda 47.7
Saudi Arabia 47.5
Tunisia 47
Honduras 46.9
Poland 46.1
Malawi 45.8
Croatia 45.7
Germany 45.6
Paraguay 45.2
St. Lucia 45.1
Sweden 44.6
Serbia 44.3
Bolivia 44.2
Bahamas, The 43.9
Antigua and Barbuda 43.8
Cote d'Ivoire 43.4
Azerbaijan 43.3
Jordan 43.3
Georgia 42.9
Nicaragua 42.3
Moldova 42.1
South Sudan 42.1
Lesotho 41.7
Sierra Leone 41.3
Romania 41.1
Zambia 40.9
Iraq 40.8
Lao PDR 40.3
Portugal 39.9
Montenegro 39.6
Namibia 39.6
St. Kitts and Nevis 39.4
Bhutan 39
Ghana 38.9
Kazakhstan 38.2
Norway 38
Finland 37.3
Barbados 37.2
Gambia, The 37
Kyrgyz Republic 36.9
Albania 36.4
Costa Rica 35.1
Morocco 34.6
Dominica 34.3
Chad 34.2
Chile 33.8
Libya 33.5
Congo, Dem. Rep. 33.3
Greece 33
Mexico 32.7
Bosnia and Herzegovina 32
Spain 32
Israel 31.8
Canada 31.6
Cabo Verde 31.5
Armenia 31.3
Mali 31.3
South Africa 31.3
Samoa 30.5
Madagascar 30.1
Algeria 29.8
Jamaica 29.8
Italy 29.4
Uzbekistan 29.3
New Zealand 29.2
Philippines 29.1
France 28.7
Russian Federation 28.6
Ecuador 28.4
United Kingdom 28.4
Burkina Faso 28.3
Turkey 27.7
Guinea 27.6
Mozambique 27.2
Senegal 27.2
Grenada 26.5
Zimbabwe 26.5
El Salvador 26.4
St. Vincent and the Grenadines 25.9
Liberia 25.8
Dominican Republic 25.7
Venezuela, RB 24.8
Cuba 24.1
Indonesia 23.7
India 23.6
Uruguay 23.4
Guatemala 23.1
China 22.6
Peru 22.3
Sri Lanka 22.3
Cameroon 21.6
Australia 20.9
Bangladesh 19.8
Uganda 19.8
Tanzania 19.5
Tajikistan 19.2
Benin 18.9
West Bank and Gaza 18
Tonga 17.9
Niger 17.8
Comoros 17.5
Guinea-Bissau 16.4
Kenya 16.4
Japan 16.2
Nigeria 16.1
Colombia 16
Egypt, Arab Rep. 15.2
Haiti 15
Argentina 14.9
Rwanda 14.9
Eritrea 14.4
United States 13.5
Pakistan 12.3
Nepal 12.1
Timor-Leste 12.1
Sao Tome and Principe 11.9
Ethiopia 11.7
Brazil 11.5
Kiribati 10.8
Central African Republic 10.1
Sudan 9.1
Burundi 7.8
Afghanistan 6.5
Iran, Islamic Rep. na
Korea, Dem. Rep. na
Myanmar na
Somalia na
Syrian Arab Republic na
Taiwan, China na
Yemen, Rep. na
* or most recent available
The World Bank
(as of August 30, 2015)

The list on the right is mostly for fun. But consider the relative rankings of the big 5: US, China, Japan, Germany and UK. Let's pull out the relative rankings for exports to GDP:

Germany 45.6
United Kingdom 28.4
China 22.6
Japan 16.2
United States 13.5

Surprised? I'd wager very few could put these in their proper order. Most would list China first, with maybe Japan second. Very few would guess that Germany was number one, and even fewer would have had them there by such a convincing number -- nearly double the rest.

It isn't well understood that the EU is Germany's private export market. Because of economies of scale, no other member nation can compete with Germany on the number of automobiles, or nearly anything else, produced. Because of the role of technology, a lot of modern production has the tricky economic model of it costs you $1 billion to get the first item off the production line. The remainder of the production run costs $0.25 each. Your average cost per item is hugely tied to how many you can produce and sell. Germany simply produces more goods at a lower cost than the rest of the EU. The rest are limited to specialty markets or ones in which they have a large historical advantage.

There is a second advantage Germany possesses: When they swallowed East Germany from the Soviet Empire in 1991, they made a deal with the labor unions not to raise wages in the west for a while. Even now, wage growth in Germany is lower than the rest of the EU, leaving labor costs below their major competitors. Germany knew exactly what they were doing when the EU was created. The EU prohibits intra-EU tariffs, but allows the EU to erect external barriers to outsiders, like China, Japan and the US. So everyone who is a threat to Germany has artificial barriers to compete. The EU is Germany's private playground.

The problem Germany faces is their markets are tired. Northern Europe is doing OK, but southward there are massive problems. The Greek problems are well-known, but Greece accounts for only about 2% of the EU's GDP. Waiting in the wings to leave are the UK, Spain and Italy. That trifecta would have a massive effect on Germany. Check out my article on China Debt to understand what happens when an export-driven economy suddenly loses markets. It's not pretty.

This is why Germany reluctantly agreed to prop up the Greek economy. No one thinks the current round of support will be sufficient. Helping Greece is not popular with German voters. But Germany was terrified that a Grexit would lead to others following suit. The amount of money to keep the tiny Greek economy afloat while the other economies improve (hopefully) was a much smaller cost than letting other members of the EU see Greece leave the EU and possibly start to do better.

There is an even greater threat to Germany's economy than a shrinking EU. Inflation in the EU is horribly close to zero. Commodity prices across the world are in retreat. We know that crude oil is less than half of what it was a year ago. Copper is down about 25%, ditto for lead, zinc and tin, nickel is about half and aluminum down 20%. Virtually all the commodities needed to manufacture things are down sharply for the year as a result of falling demand around the world. Commodity producing countries like Brazil (-2.26%) are expecting negative growth this year and next.

The threat of falling commodity prices is two-fold: first, it is a sign of structural weakness in the world economy. Particularly for export-driven economies like Germany's, it is bad news. The second issue is one most people don't understand too well -- when consumers worry about deflation, they put off purchasing. If you expect inflation, it is better to buy now than wait when prices are higher. But expect deflation, and consumers put off purchasing, waiting for lower prices. This can be crushing for world economies. Fortunately, no one living today has lived through a long period of deflation. There are a few who suffered for about 5 years during the Great Depression, but there aren't even many who can remember that.

Over the past 800 years there have been four periods of inflation, followed (the first three times) by longer periods of deflation/stability. While prices have averaged about a 1% per year increase, it has been shorter periods of massive inflation followed by longer periods that start out with sharp deflation and flatten out into a period of stability. I am well aware of the "this time it is different" crowd. So are central bankers and they are still terrified. GDP growth in the central group of the EU remains stubbornly below 1%. France and Canada have slipped into recession. The Producer Price Index for the year ending July is negative .8%. China's stock market remains a horror show, threatening economies all across the globe. Unlike most of the last 65 years, not a single central banker is worried about inflation. The are praying for it.

If you think central bankers aren't worried about deflation, then why are world interest rates at virtually zero? When we had inflation in the 1970's we also had double-digit interest rates. Remember? We have zero percent interest rates today because central bankers expect inflation to be zero. Actually, they don't expect that. They *hope* for that and fear that any deviation will be negative (deflation). Over the past 5 years, almost every central bank forecast of inflation from every industrial nation on earth has been wrong -- in some cases massively wrong. And not a single one guessed too high.

To get an idea of how devastating deflation can be, consider the fate of Japan for the past 25 years. The recession of 1990, while hardly a blip on most world economies, tipped over Japan's economy. The minor recession caused lower than expected exports, which caused Japan's major corporations to slip into negative equity. Banks were forced to call in loans, which forced corporations to sell off most of their non-Japan holdings that had been acquired during the boom. Then they were forced to shutter factories and lay off workers. Real estate prices dropped in Japan and the NIKKEI 225 stock market index plunged from just under 40,000 to about 14,000 in 1995. Imagine if your retirement portfolio declined by 60%. Even now in 2015, the NIKKEI is still fluttering around 20,000, about half of its value 25 years ago. Put it into perspective, it took 26 years from the US peak of 1929 to be surpassed in 1955 -- and this was with World War II sandwiched in the middle. At about the same time, Japan is about half of the all-time high. Japan has been suffering deflation for 25 years as the economic bubble has been squeezed out of its economy.

If this is, indeed, the end of our 119 year inflationary session, the next few years promise to be a horror show. We hope the world economic stage can remain stable enough for us to get by this crisis. While a deflationary spiral will be exceedingly harmful for all the economies of the world, it will hit the large exporters the hardest, as it did th US in the 1930's. But wherever you live, it won't be pleasant.

September 13, 2015