The International Spectator
German Foreign Economic Policy in the Age of Globalisation
By Georg Koopmann
Enhancing the competitiveness of German firms on foreign markets and preserving the attractiveness of Germany as a business location to foreign investors are the twin objectives of foreign economic policy (FEP) in Germany. Its scope extends far beyond conventional border measures to encompass a broad range of domestic policies, such as competition policy, technology policy, and the policies of regulation and subsidisation, as these policies are increasingly relevant in terms of international competition. German FEP is implemented at the national, supranational (that is, European) and international (that is, World Trade Organisation, Organisation for Economic Cooperation and Development, G-7, etc.) levels under a number of constraints. 1 Internationalisation of domestic economic policies also calls for FEP to be analysed in terms of international systems or institutional competition. The rivalry that occurs is between the immobile factors of production in different countries (including the legal, economic, social and political systems), which vie for the only really mobile factor of production, namely capital (including technical knowledge). In theory, FEP in Germany is the external complement of market-oriented structural policy in the internal economy. The latter consists of:
policy on the underlying order (Ordnungspolitik), setting out the legal framework and supporting economic institutions;
competition policy, safeguarding individual economic freedom;
market policy, ensuring that markets function properly.
Structural policy concurs with growth and stabilisation policies that must not interfere with private decisions on what to produce and how to produce it. The basic tenet of German FEP accordingly is non-discrimination between foreign and domestic market participants. In practice, however, deviations from this baselineand from the model of market-oriented structural policy in generalhave been frequent in Germany.
The national level
At the national level, an important part in German policy is played by the average voter, upon whose vote any party wishing to form the next government depends, and who is generally regarded as oriented towards stability and security, but with a dislike for structural adjustment and mobility. 2 The federal structure of Germany also entails a prominent role for the individual states (Länder) in foreign economic policy which often leads to measures that are inconsistent with the framework outlined above. Finally, and most important, pressure is exerted by industry associations and a wide variety of lobbyists. Granting specific concessions to percent-2 such groups is rational for political decision makers if the costs of the measures taken can be shared among larger groups which are less well informed and less well organised. However, institutional structures may limit the impact of special interests. A useful analytical tool in this context is the notion of encompass percentingness as proposed by Olson. 3 In the field of trade policy, political-economic analysis of FEP in Germany has indeed shown a high degree of encompassingness of the organisations acting on the demand and supply side of protection. From this, one would expect a rather liberal policy stance to prevail.
Industrial business in Germany is organised in the Federation of German Industry (Bundesverband der Deutschen IndustrieBDI) which comprises branches as diverse as precision engineering, chemicals and clothing. It represents industry as a whole vis-à-vis the government on all issues of interest to it, including foreign economic policy. Even though each individual industry promotes the policy it favours in this area, there is a fairly large degree of coordination at the top of the BDI through its Foreign Trade Committee (Außenwirtschaftsausschuß). The BDI position on trade policy is thus as one might presume: Free trade is a good thing. 4 German labour unions by and large share this broad view of trade policy which is based on the recognition that industrial jobs in Germany depend to a large extent on exports. This attitude characterises powerful individual unions like the metal workers union (IG Metall) as well as the (less powerful) umbrella organisation (Deutscher GewerkschaftsbundDGB).
Viewsand underlying structureson the demand side of protection largely match with features on the supply side where the Ministry of Economics takes the lead. Its industry department, with individual industry desks that are often sympathetic to specific protectionist demands, faces other departments, in particular the departments on Foreign Economic Policy (Außenwirtschaftspolitik) and on Economic Policy (Wirtschaftspolitik), and with the top of the Ministry, which are committed to liberal trade.
The European level
The European factor in German FEP varies with the policy area at hand. The leeway available to Germany in pursuing its own research and technology policy has not yet been substantially restricted by the increasing significance of Community programmes in this field, as these are still relatively minor in quantitative terms. With regard to subsidies, over and above R&D support, Germany has traditionally been a strong advocate of strict control at the Community level. This policy stance, and Germanys modest subsidisation of manufacturing industries, no longer holds though, as re-building industry in eastern Germany still involves public financial assistance on a large scale. 5 In trade policy, as far as trade in goods is concerned, more powers have been ceded to Community bodies by member states than in any other area of foreign economic policy. Germany can now also wield less influence on anti-dumping (and anti-subsidy) measures in the Council of Ministers, which are the instruments of first choice in European trade protection, after the voting rule in this area of trade policy was changed from a qualified to a simple majority in 1994. The substantial transfer of powers from national authorities to the European Commission in competition policy, which took place at the insistence of France against German opposition, has led to the increased importance of industrial policy considerations in this field. Franco-German antagonism is also evident in industrial policy in general, witness the debate on Title XIII (Industry) of the EC Treaty which was to introduce specific Community powers in this area, reaching beyond the field of research and technology. 6 On the whole, Germany advocates foreign economic policies in the European Union that limit state interference with market forces. Together with the United Kingdom, the Netherlands and Denmark, and recently Finland and Sweden, Germany is frequently depicted as a standing member of the liberal camp within the EU which is set against a dirigiste group of countries led by France, with Italy and Greece as regular allies. To what extent the German government actually asserts its ideas on FEP in the EU bodies is difficult to tell, however, as in many cases package deals are reached which tend to undermine the practical value of the right of veto where it applies in principle. EU membership may also be used as an excuse to defend protectionist policies at home.
The international level
At the international level, Germany acts both autonomously and as a member of the European Union. The Communitys exclusive competence in trade policy is confined to trade in goods where decisions are taken by qualified majority (Article 113 of the EC Treaty). In other areas of trade policy, such as trade in services or in the field of trade-related intellectual property, joint international action by the Community requires unanimity in the Council of Ministers, and the agreements concluded need ratification by the individual member states. This is seen by the European Commission as a serious disadvantage in international negotiations because of the delays involved and the need to adopt a bargaining position corresponding to the lowest common denominator. The Commission therefore pressed for amendment of Article 113 to extend it beyond trade policy in goods. However, this met with the resistance of Germany, as well as of Britain and France, which are sceptical about handing more power in this area over to Brussels. 7
Germanys Position in International Trade and Investment
Since the end of the (short-lived) post-unification boom in 1992, there have been more frequent and vocal complaints in Germany about a lack of international competitiveness on the part of German industry and a declining ability of the country to attract internationally mobile factors of production such as capital, technical knowledge and entrepreneurial commitment. More specifically, it is held that German industry is losing ground in industries of the future or key sectors. Foreign trade and direct investment figures are the most common indicators used.
Germanys export profile
Before unification, (West) Germany and the United States were the two leading exporters of goods in the world. The two countries accounted for respectively 11.0 percent and 11.1 percent of total merchandise exports during the second half of the 1980s, followed at a distance by Japan with 9.2 percent. 8 After unification, Germanys share of world exports in goods sharply declined, from 12.2 percent in 1990 to 10.2 percent in 1993, which mostly reflects the diversion of western German exports from foreign countries to eastern Germany while eastern German exports to the former Soviet Union collapsed. In the following years, Germanys position in exports of goods deteriorated further, albeit less dramatically. In 1996, with 9.9 percent, it fell below the 10 percent level for the first time since the mid-1980s. Consequently, Germany now trails behind the United States (11.9 percent in 1996) whereas its lead over Japan (7.9 percent) has been maintained (Figure 1). Even in 1997, when exports were the engine of overall economic growth in Germany, the German world market share declined, which is however largely a technical valuationeffect owing to the devaluation of the Deutschmark up to mid-1997. 9
German exports also show a number of structural weaknesses, among which under-representation in the field of high-technology goods and on regional growthmarkets stand out. The position of Germany as a leading industrialised country, with a high level of human capital and a sophisticated research infra-structure, would suggest a powerful presence of its exporters in high-technology trade. Yet Germanys share of OECD exports in this most expansive field of international business is relatively small (13.3 percent in 1995) if compared to its share in OECD exports of manufactured products as a whole (15.8 percent), and it is significantly lower than the respective (absolute and relative) shares of the United States (25.2/15.6 percent) and of Japan (19.8/14.0 percent). 10 Germany is comparatively strong in exports of medium-technology products where it was the world market leader in 1995 (19.5 percent), together with Japan (19.3 percent) and far ahead of the United States (13.1 percent). 11 The share of these products in total OECD exports of manufactures has been stagnant in recent years. German exporters in this field rely to a considerable degree on high-technology imports from other countries. Germanys stake in medium-technology trade is also increasingly challenged by newly industrialising countries. Dynamic Asian economies, in particular, of the first and second generation are intensifying the production and export of these goods. Similar trends can be observed in Latin American countries, and the transition economies of central and eastern Europe are expected to join these country groups soon. 12 The geographic proliferation of the innovative potential thus threatens established German market positions in product areas where comparative advantages have hitherto been enjoyed as a matter of course.
The regional structure of German exports still is closely geared towards relatively slow-growing markets in industrialised countries, and particularly those in western Europe, even though the EU share in German trade has fallen from about 60 to 55 percent during the 1990s. This corresponds with increasing shares of dynamic growth regions in other parts of the world, in particular Pacific Asia and Latin America, and of eastern European countries. Germanys exports to the Asian tiger economies rose from 3.3 percent to 5.5 percent of total German merchandise exports and those to central and southern American countries from 1.9 to 2.7 percent while shipments to Germanys major trading partners in eastern Europe even doubled (from 3 to 6 percent) in relative terms between 1990 and 1997. 13
Nevertheless, the German export profile in Pacific Asia and Latin America remains low. In 1996, German exporters captured only 4.3 percent of Asian import markets (down from 4.5 percent in 1990), against 19.5 percent (20.9 percent) for Japanese companies and 13.9 percent (15.1 percent) for US firms. The German part of Latin American imports shrank from 6.6 percent in 1990 to 4.6 percent in 1996, whereas the respective American and Japanese shares grew from 38.5 to 40.5 percent and 5.9 to 6.3 percent during the same period. 14 In eastern Europe, by contrast, Germany is the dominant supplier. Its import share in the area has increased further in recent years (from 23.6 percent in 1993 to 24.8 percent in 1996) compared to the low and (slightly) declining percentages for the United States (3.9/3.7 percent) and Japan (1.9/1.8 percent) in the same period. 15
Direct investment and research and development
The second indicator commonly used to characterise Germanys foreign economic positiondirect investment (DI)shows that a big gap has developed since the early 1980s between outward and inward capital flows (Figure 2). In 1996, investments by foreign companies in Germany almost came to a halt, amounting to little more than DM 1bn, whereas German firms in this year nearly invested DM 39bn abroad, thus leaving a record deficit of about DM 38bn.
Similar trends occur in the field of investment in knowledge capital which is a special element of the general direct investment process. It has been the focus of much of the locational debate in Germany as intensified innovative activity, that is, the accelerated development of new products and production processes is the conditio sine qua non for achieving higher levels of real income and gainful employment. The share of gross domestic product (GDP) spent on research and development (R&D), which is the mainspring of innovation, has in fact declined steadily in Germany, from 2.9 percent in 1987-89 (the historical peak) to 2.3 percent in 1996, owing mostly to a real reduction of R&D expenditures in the company sector. In international comparison, Germany has clearly lost ground against trading partners in this area. 16 Declining R&D intensities in Germany concur with stagnant R&D activities of foreign companies in this country. German-based firms, on the other hand, in particular big companies, have quickly expanded their R&D engagement in foreign countries in recent time. In 1995, R&D expenditures by German companies abroad (amounting to about DM 10bn, that is, 17 percent of total R&D expenditure by enterprises in Germany) for the first time exceeded that of foreign firms in Germany (DM 9.5bn/15 percent). 17 If current tendencies continue, a wide gap between outwardand inwardinvestment in knowledge capital could even evolve, similar to the general direct investment gap noted above.
In the R&D area, as well as in the field of direct investment in general, the problem is not the growing internationalisation of German firms, including global technology sourcing. Outward investments by German companies often create the very conditions which are required to maintain existing levels of value added and jobs in Germany and to provide additional production and employment via successful export trade. 18 By the same token, conducting R&D in foreign countries in many cases also improves access to foreign know-how, thus enhancing the competitive strength of the respective company proper as well as the technological performance of its home economy. 19 The problem rather is that Germany itself has apparently fallen behind other countries as both a production place and a research and innovation location for increasingly globally-oriented corporations. This sheds an unfavourable light on the qualityand costof immobile locational factors in Germany, including the economic policy framework. Deregulation in the field of high technology, increased flexibility of the labour market, removal of bureaucratic investment obstacles, promoting the acceptance and application of new technologies, and a better match between science and industry are therefore also central issues of foreign economic policy in Germany.
International Competitiveness and Domestic Competition: the Role of Competition Policy
Competition policy is a cornerstone of market-oriented structural policy in Germany while the Law Against Restraints of Competition (Gesetz gegen WettbewerbsbeschränkungenGWB) of 1957 is often referred to as the constitution or basic law of the social market economy. In its original version, the GWB was strongly influenced by the Freiburg School of ordo-liberalismaccording to which no individual market participant should dispose of any control over the formation of prices, that is, perfect competition was to be the rule. Later on, the static model of perfect competition gave way to the more dynamic concept of workable competition, borrowed from the Harvard School of competition theory, which comes closer to the reality of oligopolistic competition on most markets. This change of paradigm in German competition policy manifested itself particularly in the merger control procedures introduced into the GWB in 1973, together with a number of provisions that immunise cooperation among firms against antitrust prosecution. In evaluating a proposed merger, both static and dynamic efficiency aspects are now considered and weighed up against each other, if necessary. German companies nonetheless often complain about too restrictive controls on mergers and acquisitions by the Federal Cartel Office (Bundeskartellamt). Stiff antitrust regulations are regarded as a locational disadvantage if a merger is prohibited at home while allowed abroad. The business community accordingly calls for an industrial policy which, in the higher interest of overall industrial competitiveness, would deliberately suppress the prohibition of certain mergers, even though they might in themselves not be consistent with competitive market structures. 20 Empirical evidence, though, points to a positive connection between competition and international competitiveness. It is also shown that this is particularly the case when strict competition policy goes hand in hand with liberal trade and investment policies. 21
Competition policy in Germany appears to be broadly in line with these findings and thus little receptive to the demands cited above. It is, however, oriented towards preserving competition on the domestic market only. This implies, on the one hand, a disregard of anti-competitive conduct originating in Germany but mainly effective in foreign countries while, on the other hand, competitive restraints on the German market which have their origin abroad would be subject to German law. Typical cases are German export cartels (or international cartels with German participation) and foreign cartels affecting competition in Germany. A secondand more importantroute through which considerations of international competitiveness, and thus industrial and foreign economic policy, may enter competition policy in Germany is ex post authorisation by the Minister of Economics of mergers prohibited by the Federal Cartel Office.
Export cartels are exempt from the general ban on cartels in Germany or may be authorised by the Federal Cartel Office upon application (Section 6 of the GWB). The former applies to pure export cartels, which are limited to the regulation of competition in foreign countries, whereas the latter holds for mixed export cartels, which also entail competitive restraints on the domestic market. Mixed export cartels must be approved if it is demonstrated that the domestic restraints of competition are necessary for the desired regulation of competition outside the German territory to be effective. The rationale behind this policy has apparently been to ensure that antitrust provisions do not hamper the ability of German firms to compete successfully against foreign firms which are not subject to equally restrictive rules.
Since 1957, 127 pure export cartels have been notified to the Federal Cartel Office of which 40 were still in force at the end of 1994. During the same period, 24 mixed export cartels were registered, of which only 2 are still active. 22 All existing export cartels with German participation refer to markets outside the European Union.
The declining significance of notified and authorised export cartels in Germany also indicates a more restrictive policy stance adopted since the fourth amendment of the GWB in 1980, when the government acknowledged that export cartels limit and distort the free international exchange of goods and may impair efforts toward achieving price stability. It is a logical consequence of this view that the privileged treatment of export cartels in Germany is to expire as part of the sixth amendment of the GWB which is presently under preparation. 23 Doing away with the export cartel privilege would also be a welcome extension of German competition policy to protect competition beyond the limits of the national market.
Mergers and acquisitions
The other industrial political element in German competition policy noted aboveministerial authorisation of mergers and acquisitionsis of greater practical significance than the permission of export cartels. The Federal Minister of Economics may approve a merger project previously rejected by the Federal Cartel Office, for instance, if the international competitiveness of the companies concerned is at stake. The project may accordingly go ahead, in spite of its presumed negative impact on competition, if it is recognised to produce considerable economies of scale for the national economy and/or ease access to financial resources, foreign procurement and sales markets, and technological know-how. Since the adoption of preventive merger control in 1973, more than 100 mergers have been prohibited by the Federal Cartel Office in formal proceedings. In 16 of those cases, applications for authorisation were filed with the Federal Minister of Economics. Approval was granted six times, four of which were subject to conditions and restrictions. In another four cases approval was denied. In five cases the application was withdrawn. One case is still pending. 24 Strengthening international competitiveness was the second most frequently named reason for justifying a merger or acquisition after the argument that the merger could save jobs. Altogether, the instrument of ministerial authorisation, as the second (industrial policy) step of the German merger control procedure has nevertheless been applied rather sparingly to date and in a restrictive manner.
In the late 1980s, the planned merger between Daimler-Benz and MBB attracted particular attention regarding the process of obtaining ministerial approval. At the time, Daimler-Benz justified its merger with MBB, inter alia with spillover effects which would result from activities in aerospace construction. However, considerable doubts were raised regarding this hypothesis. Nonetheless, ministerial approval was granted by the Minister of Economics at the time because it was hoped that the takeover of the aircraft construction company MBB by Daimler-Benz would encourage more entrepreneurial commitment to aerospace construction on the part of the private sector, strengthen the competence for systems leadership in projects of international cooperation, facilitate economies of scope (synergies) and lead, in the longer term, to a marked reduction in state subsidies to this industry. On the other hand, there is no way of proving that the takeover was a successful strategy for the company which carried it out.
This merger and the intervention by ministerial approval which made it possible were the subject of heated controversy in Germany. The very fact that there was such an intense debate surrounding this merger and that this was the first case of its kind can be seen as indicators of the federal governments fundamentally competition-oriented policy stance which does not place industrial political aims on the same level as the competition principle of safeguarding competitive market structures.
Foreign Economic Policy Implications of Subsidisation, Technology Promotion and Regulation
The two-edged strategy, as laid down in the Principles of Sectoral Structural Policy of 1968, 25 of assisting shrinking industries based on past technologies and simultaneously promoting industries and technologies of the future, has clear implications for foreign economic policy in Germany as it affects the position of these industries in international competition.
The strategy is biased in favour of the former group of industries, though, and the measures directed at this lower end of the industry range have increasingly turned into structural conservation rather than adjustment policies. Government support to high-technology industries, by contrast, still is only a rather small fraction of the total amount of subsidies paid. 26 On the whole, subsidisation in Germany is heavily, and even to an increasing degree, skewed to the advantage of just a few sectors: the lions share falls to agriculture, coal-mining, shipbuilding and the railways. 27 This entails disadvantages to other industries in the German economy which have to provide part of the money (via increased taxes) while competing with the favoured industries for scarce resources.
From a theoretical viewpoint, subsidies may be justified by market failure due to externalities, entry barriers or asymmetrical information. Even then, the theory only allows subsidies to be used if (a) there is no other, more efficient instrument available and (b) the costs of intervention do not exceed the welfare losses incurred due to market failure. Subsidisation policy in Germany hardly meets these criteria. This is not only true for the assistance granted in support of production, employment or investment but also for the subsidies in favour of R&D activities. It has been shown, for instance, that the sectoral structure of R&D subsidies in Germany stands in marked contrast to the pattern of R&D externalities, or spillovers, as an overwhelming share of the aid payments goes to the aerospace industry which for its part is only an insignificant source of technological spillovers to other businesses. 28 Outside aerospace, however, Germany appears to have largely abstained from policies directly targeting strategic high-technology industries. Semiconductors are frequently named as a case in point. It is held that semiconductor policies in Germany are different from those applied in other countries in that most of the support measures for this industry are of a horizontal nature rather than industry-specific as in countries like Japan, South Korea and Taiwan or, within Europe, France. 29
Promotion of technology
On the whole, technology policy in Germany is directed at specific projects or technologies rather than industries. It is presently guided by the concept of promoting (cross-sectoral) lead projects (Leitprojekte) which is seen as a complement to the principle of providing the right framework of conditions for the build-up of sufficiently attractive centers of industrial competence also in the future. The policy of project-related research funding has been called into question, though, as it frequently distorts competition and places smaller firms at a disadvantage with respect to larger ones. 30 A related point of criticism refers to possible adverse effects on competition caused by cooperation among companies in the field of R&D. These are allegedly disregarded by competition authorities in Germany. 31 R&D consortia are indeed the preferred recipients of project-related public R&D funds in Germany, 32 and in the merger case of Daimler-Benz/MBB in 1989, for instance, avoidance of parallel research was one of the reasons for greenlightingthe merger in spite of the increased market power involved. 33
A closely linked issue, which is of particular relevance to foreign economic policy, refers to the freedom of foreign access to government-sponsored technology programmes in Germany. Subsidiaries of foreign-based firms are allowed to participate in Germanys R&D programmes provided that this is in the German interest. This policy is in line with the general tendency among OECD countries to make government R&D support dependent on performing the R&D in the financing country and exploiting the results of the R&D to a maximum extent in that country in order to ensure domestic spillovers from supported R&D and to contain free-rider behaviour. 34
A more controversial area is the policy of regulation in Germany. Germany is frequently depicted as an over-regulated economy where legal provisions, administrative orders and lengthy procedures (including court procedures) suppress the initiative of private enterprise, curb investment activities and increase the prices of key inputs. The bureaucratic burden on business has been estimated at about DM 60 bn per year which is DM 3640 per job in the business sector; for small and medium-sized enterprises, the estimated per-capita burden is even DM 6840. 35 Regulation, often motivated by the desire to satisfy special interests or protect them against unwelcome competition, has apparently exceeded its original objective which is to correct for market failure and provide public goods. This has far-reaching implications for foreign economic policy.
Regulation may well strengthen the competitive position of domestic producers and consequently also attract international investors. This will be the case, for instance, if standardisation requirements serve to reduce transaction costs and improve quality. On the other hand, regulation may act as a deterrent to internationally mobile capital if its effect is to raise production costs or put up barriers to the entry of new producers into the market (or to the exit of established suppliers), including those from abroad. On balance, regulation in Germany seems to impair rather than enhance commercial opportunities and thus diminish the attractiveness of Germany as a business location.
Export Promotion and Import Policy
In the classic areas of trade policy, which concern direct intervention on the export or import side of trade with goods, the German government has traditionally been committed to an open international trading environment and non-discrimination among trading partners.
Within the European Community, the government has used its influence in favour of a liberal common external trade policy and against the emergence of a Fortress Europe. Domestically, non-tariff barriers to imports were removed for a wide range of manufactures or simply not enforced. 36 Export policy has concentrated on improving foreign market access for domestic firms rather than discriminating against foreign competitors. In the case of trade with services, on the other hand, Germany takes a more restrictive stance. This is particularly so when liberalisation involves large-scale labour migration, as in construction and some consumer services.
Export promotion can basically take one of two distinct forms:
Dismantling of trade barriers which bar access to export markets. In analogy to the term negativeintegration or liberalisation, this form can be called negativeexport promotion.
In contrast, positiveexport promotion entails direct state support for export activities in the home country, that is, by providing information, covering risks or providing grants for interest payments.
Positive and negative export promotion
Negative export promotion has been the most important instrument of foreign trade promotion in Germany. It is embedded in trade policy by the European Union aimed at opening third-country markets for European companies in bilateral and multilateral negotiations on a reciprocal basis, that is, as a quid pro quo for opening the European market to foreign enterprises. Germany also endorses the new market access strategy launched by the European Commission in February 1996.
Positive export promotion, on the other hand, has remained a largely national matter, a number of constraints on Germanys freedom of action in this area notwithstanding. These include Article 92 of the EC Treaty prohibiting export promotion measures by member states that directly or indirectly distort competition and impair trade within the Community; WTO subsidy rules which prohibit export subsidies on industrial products (Art. 3 of the Agreement on Subsidies and Countervailing Measures) and allow for retaliatory measures to be taken by the countries affected if these rules are violated (Art. 4); and the OECD consensus on export credits stipulating minimum interest rates for long-term official loans granted to finance export transactions.
The federal and provincial (Länder) governments in Germany have numerous instruments of export promotion at their disposal. According to their primary intention, the instruments may be grouped into (1) export subsidies which artificially improve the competitiveness of export products; (2) measures aimed at reducing export risks such as state securities and guarantees; and (3) measures aimed at improving export marketing, for example, by means of supporting collective self-help measures on the industrial association level. 37 Actual export promotion measures do, however, not always easily fit into this scheme. A striking example is the exchange rate guarantee for the Deutsche Airbus GmbH of 1989 which went far beyond a mere insurance measure to an outright subsidy. 38 It was the subject of sharp international controversy. In January 1992, a GATT panel set up on request of the United States declared the German exchange rate guarantee to be inconsistent with GATT as it constituted an export subsidy as prohibited in the GATT subsidy code. The federal government thereupon suspended the measure, which was intended to last until 1998 from 15 January 1992.
Relief for financing exports is provided in the form of low-interest loans with interest rates which remain below market interest rates. Medium-term loans for up to four years, for example, are available from the Export Credit Agency (Ausfuhrkredit-Anstalt). The Credit Agency for Reconstruction (Kreditanstalt für Wiederaufbau) offers long-term loans on preferential conditions for financing exports of industrial goods to developing countries, but the interest rate advantages are relatively modest. 39
In the case of export insurance, which is dealt with by Hermes and Treuarbeit, elements of market economics carry considerable weight since the political and economic export risks are covered for a fee, and an own share has to be borne by the exporter in the case of loss or damage. Slightly contentious is also the support granted at the federal and Länder level for the participation of companies (typically small and medium-sized firms) in international trade fairs and exhibitions. Finally, a key instrument of market-oriented export policy in Germany is the provision of export-related information by the Federal Office for Foreign Trade Information (Bundesstelle für Außenhandelsinformation), the Chambers of Foreign Trade (Außenhandelskammern) and the official German representations abroad which together form the three-pillar system of trade promotion in Germany.
On the whole, the economic effect of positive export promotion in Germany appears to be rather small. There is little proof of any significant consequences for the structure of exports either in terms of the goods exported or of the regions to which they are exported. 40 At the same time, economic policy to some extent even tends to impede exports as it restrains the import of intermediate products in some cases through duties and quotas; import protection thus works as a tax on exports. The mechanical engineering, motor vehicle construction and electrical engineering industries are considered to be particularly disadvantaged in this way. 41
As far as import policy is concerned, it is common to distinguish between border measures and non-border measures. Whereas in the former category of import policy Germanys scope for independent action is very limited indeed, and is often virtually non-existent, it is broader in the latter. Among the border measures, voluntary export restraint arrangements (VERs) and quantitative import restrictions (quotas) have been domains of relatively autonomous policy making by member states within the Community. However, with the exception of the 1981 car agreement with Japan which limited Japanese car exports to Germany to 110 percent of the previous years level, 42 Germany has hardly ever made use of VERs. As regards quotas, Germany maintains a number of import restrictions against the Peoples Republic of China, the economic impact of which has recently been analysed. 43 The study concludes that the quotas cannot be justified economically and should therefore be abolished.
Prominent among non-border import measures is the definition of industrial norms and standards and the allocation of public contracts. Even though in both areas international and European rules limit the possibilities of national policy, a number of loopholes still exist. In the field of standards, health and safety provisions, for instance, are commonly exempted from existing harmonisation or mutual-recognition requirements. This creates scope for industrial policy in industries such as pharmaceuticals, engineering, foodstuffs, and precision medical equipment in particular. Empirical investigation nevertheless leads one to believe that Germany has made little use of these options so far. 44
With regard to public procurement, the very low percentage of contracts awarded to foreign businesses suggests that true liberalisation is still a far cry in this area. 45 Complaints raised by foreign companies constitute a further indicator. American steam turbine suppliers, to give an example, complain that they have no chance in the German electricity market because the international invitations for tenders in the electricity market are allegedly not serious. 46 Without being able to examine these cases in detail, they do demonstrate that within the current legal framework there are ways and means to fight off imports and favour national court suppliers.
Globalisation and the related intensification of international competition is hardly the principal reason for the economic ills that have plagued Germany in recent years. Rather than creating the problems, globalisation has probably only intensified them and unveiled their causes. 47 Its chief characteristic is to enhance the flexibility of production structures, with specialisation along activity/value-added lines increasingly replacing product-related division of labour. This entails continuous structural change, typically within industries and companies, but at the same time reduces the risk of structural shocks. 48 Globalisation also means that locational competition is increasingly gaining in importance. In a broad sense, locational competition has three interdependent dimensions. 49 It is competition (1) between companies on global product markets, (2) between governments on the international markets for mobile factors of production, in particular physical and knowledge capital, and (3) between immobile resources such as large sections of the labour force. A major implication is the growing internationalisation of policies that were previously considered to be predominantly domestic. The broad challenge to foreign economic policy in Germany is therefore to create the appropriate infrastructure (physical and human), institutions (including regulations, standards, approval procedures, etc.) and legal and economic framework, and remove market and government failures impeding the effective use of resources, in order to strengthen the position of German firms in international competition and increase the attractiveness of Germany to foreign companies.
Policies with a more indirect impact on international trade and investment concern the labour market and the tax system. Labour markets in Germany are characterised by relatively low worker mobility/flexibility and relatively high wage rigidity. Reforms would have to have a number of objectives:
ending the policy of subsidising outdated production structures which gives workers the impression that adjustment to market forces can be postponed or need not be made at all; 50
spending a larger proportion of funds on activities that make labour more flexible, that is, education, retraining, etc.;
increasing the flexibility in wage determination to allow for greater wage differentiation between companies, regions and qualifications;
relaxing rigid work rules, that is, concerning working hours and contracts;
reducing non-wage labour costs.
In the field of taxation, the challenge is to make the trade-off between the taxes levied on (foreign and domestic) investors and the public goods, for example infrastructure, offered in return as conducive to growth as possible. Reforms in this area should concentrate on lowering tax rates while broadening the tax base and simplifying the whole system; eliminating taxes that are unrelated to profits; and removing the bias against risk-bearing equity capital, and venture capital in particular, which is taxed more heavily than income from loan capital.
Among the policies more directly related to foreign economic transactions, competition control, technology promotion, subsidisation, import restriction and export enhancement are prominent. In the field of competition control, what matters most in the present context is to extend the reach of national competition policy into protecting competition on foreign markets as well. The planned abolition of the export cartel privilege in Germany would be a welcome step in this direction. Countries should also be enabled to obtain redress of foreign competitive restraints harming domestic competition. 51
The basic rationale for technology policy is to correct for market failure arising from the existence of external effects or spillovers between economic agents. It is, however, unlikely that the state will be capable of determining the scale and origin of external effects with sufficient accuracy or that government bodies will have the right information as to which technologies are vital for success in the technology race. The state might be better advised to retire to a position in which it simply stakes out the frame conditions needed to encourage innovation, while leaving the actual choice of technologies to companies themselves. The alternative to the presumption of knowledge 52 would be blanket promotion of research, which taken to its logical conclusion means the state funding an equal percentage of R&D expenditure in all fields (including the subsidisation of human capital in R&D). At least this would avoid the competitive distortions which the project-oriented approach to technology policy in Germany inevitably entails.
Given the reality of selective national technology programmes, however, non-discriminatory participation of foreign companies in such programmes should at least be guaranteed. The programmes should also seek to avoid imposing constraints on participants concerning the transfer or deployment of resulting technologies. In this context, the idea of an open international subsidy clubfor high-technology development has also been proposed. 53 It would allow club members free access to each others subsidy funds in the field of R&D. R&D subsidies might in this case even exceed internationally agreed thresholds. Foreign access would not depend on cooperation with a domestic firm. Domestic and foreign firms would have to be treated equally with respect to patents and copyrights that emerge from the funded research. Open subsidy clubs could thus be one way to cope with the problem of international knowledge spillovers.
It was shown earlier that shrinking (and internationally non-competitive) industries have won an increasing share of total subsidies in Germany. This has delayed structural adjustment, preserved outdated structures and impeded the emergence of new, innovative branches of industry and thus also of competitive jobs. It is therefore necessary both to reduce existing subsidies substantially and to redirect support policies in favour of young, technology-oriented enterprises. For these firms, a discrepancy between high innovative capabilities on the one hand and limited access to capital markets on the other has been observed. 54 Besides the granting of financial assistance, structural/institutional reforms in the financial sector are therefore needed to overcome existing market failures. A step in the right direction has been the creation of the New Market for risk capital at the Frankfurt stock exchange, which is in operation since March 1997.
Germany should remove still-existing import quotas in traditional industries like textiles, leather, ceramics and toys. These trade restrictions cannot be justified economically as the welfare costs per job saved far exceed the wages actually paid. Within the European Union, the government should support more fundamental reforms of anti-dumping policies. In this highly sensitive area of trade policy, more rigorous economic analysis of the products and markets affected by anti-dumping investigations is needed, and a broader range of economic interests (including importers, retailers and users in addition to producers) should be taken into account, so as to protect competition rather than (domestic) competitors. Germany should also promote the application of uniform technical standards in international trade as well as the mutual recognition of standards and related conformity assessment procedures among trading partners. The latter would realistically have to proceed in bilateral or plurilateral negotiations rather than at the multilateral level. In the area of government procurement, it must make sure that the new disciplines agreed in the corresponding WTO agreement, including the new challenge procedure, are effectively applied at home in order to guarantee national treatment of foreign suppliers.
Export promotion in Germany needs a common strategy and better coordination of activities between government and industry as well as between different government agencies at the federal and Länder level. A number of steps have already been taken in this direction, such as the development of regional concepts/initiatives for Asia and Latin America by the federal government (with companion committees on the industry side), the creation of German Centres for Industry and Trade (GCIT Deutsche Häuser) in Shanghai and Singapore, 55 and the establishment (in December 1995) of an inter-ministerial committee on External Economic Relations for better integration and coordination of promotional activities. Further measures could include:
providing more comprehensive information (via Chambers of Commerce, embassies, regional conferences, industry fairs, etc.) on products and solutions that German industry can offer, for example, in the field of infrastructure development and environmental protection;
centralising information on what promotional instruments are available to companies;
intensifying provision of information to SMEs, including active intermediation between German and foreign business partners 56
enhancing cooperation in education and training with less developed trading partners;
permanent benchmarkingwith regard to export promotion measures applied in competing countries.
An important instrument of export promotion in Germany is also tying exports to development aid. This may be appropriate in a situation of unemployment, in which it would be comparable to a fiscal demand stimulus and superior to a subsidy on the supply side, but aid tying may cause international friction if it is combined with commercial export financing. Such mixed credits tend to distort international competition and provoke countermeasures which are generally distortionary.
In view of the growing gap between outward and inward direct investment noted above, finally, the question of restricting cross-border capital flows has been raised in Germany. However, possible action against the relocation of production would immediately run into the problem of differentiating between good and bad relocationssomething which is hardly feasible due to lack of information. At the same time, there is little reason to accord foreign investors preferential treatment in Germany, for example, in the field of taxation. For one thing, effective relief might not occur if the investors foreign income is also taxed at home. For another, the discrimination of domestic investors would encourage tax avoidance, through the construction of international tax-saving schemes for instance. 57 Germany should also shun the international race for investment incentives and work towards a multilateral agreement on this issue. 58
Georg Koopmann is Head of the Research Group on International Trade and Services at the Hamburg Institute for Economic Research (HWWA), Hamburg.
Note 1: Limitations on space make it impossible to deal with the macroeconomic aspects of German FEP, i.e. Germanys role in the various processes and groups which have been established at the international level in an effort to coordinate macro-policies among trading partners or to organise cooperation between them in this area. Back.
Note 3: Encompassingness in Olsons sense means that the organisations involved in the decision-making process cover divergent sectional interests and thus take account of the costs that a protective measure benefiting one section may impose on other sections: M. Olson, The Logic of Collective Action. Public Goods and the Theory of Groups(Cambridge, Mass: MIT Press, 1982). Back.
Note 4: The latest BDI guidelines on trade policy bear witness to this: removal of (sophisticated) non-tariff barriers to trade, liberalisation of (industry related) services, further reform of the (trade-distorting) Common Agricultural Policy of the EU and defining (liberal) rules for trade and investment in the WTO in view of the internationalisation of production are the declared top BDI priorities in the trade field: Beurteilung des staatlichen deutschen Aussenwirtschaftsförderungssystems. Ergebnisse und Empfehlungen aus der Unternehmensbefragung (mimeo), Cologne, April 1997, p. 5; F. D. Weiss, et al., Trade Policy in West Germany (Tübingen: Mohr, 1988). Back.
Note 5: According to the 1997 report on state aids in the EU (European Commission, Fifth survey on state aid, COM (97) 170 Final/2 Brussels, 1997), Germany is second only to Italy in state aid per employee in the manufacturing industry, with an average of Ecu 2,012 in 1992-94 (Italy: Ecu 2,379), up from Ecu 1,514 in 1990-92 (Italy unchanged). The total EU average fell from Ecu 1,419 to Ecu 1,296. However, the level of per-capita state aid in the old Länder is among the lowest in the EU (with Ecu 553, down from Ecu 921), whereas the new Länder top the league by a wide margin (with Ecu 11610, up from Ecu 5415). Back.
Note 6: At the Maastricht negotiations, the first draft of Title XIII met with fierce resistance in Germany against the new Community powers for which it provided. Finally, a compromise formula was agreed staking out what the fundamental stance should be in accordance with a system of open and competitive markets, asserting the principle of unanimity in decisions on specific measures, and ensuring that competition must not be distorted by any measure taken under the provision. However, given the usual practice of bundling several issues into compromise solutions, the formula may actually provide only limited protection against a dirigiste industrial policy (Monopolkommission, Wettbewerbspolitik oder Industriepolitik. Neuntes Hauptgutachten 1990-91(Baden-Baden: Nomos Verlag, 1992). Back.
Note 10: The relative export share indicates the extent to which a countrys share in total (here OECD) exports of a specific product group (here high-tech) differs from its share in overall (here manufactured) exports. Back.
Note 15: Figures refer to combined imports into the Czech Republic, Hungary, Poland and the Slovak Republic. 1993 was chosen as reference year because separate data for the Czech and Slovak Republics are not available for earlier periods. Source: IMF Direction of Trade Statistics Yearbook 1997. Back.
Note 20: Internationale Kartellkonferenz, Wettbewerbsund Industriepolitik in West und Ost. Vorfahrt für den Markt?, Dokumentation einer Veranstaltung des Bundeskartellamtes, Berlin, 1995, pp. 75 and 95. Back.
Note 21: A study by the McKinsey Global Institute on productivity differences in nine sectors (autos, auto parts, metalworking, steel, computers, consumer electronics, soap and detergent, beer, processed food) in Germany, Japan and the United States shows that industries which face only local competition have on average a lower level of (labour) productivity than the same industries which are forced to compete on a regional or a global level; Manufacturing Productivity (Washington DC: McKinsey Global Institute, 1993). Back.
Note 26: It is also deemed to be unlikely that there will be much scope for strategically motivated support of high-technology industries in Germany in the future, as subsidies are shifted from West to East to support senile industries left over from socialist times; K.-H. Paqué, R. Soltwedel et al., Challenges Ahead. Long-Term Perspectives of the German Economy, Kiel Discussion Papers 202/203, Kiel, 1993, p. 28. Back.
Note 27: These industries attracted 55 percent of total subsidies in 1993 (up from 46 percent in 1984), while just managing to contribute a share of 2.5 percent (down from 4.8 percent) to the economys total value added; G. Koopmann, C. Kreienbaum and C. Borrmann , Industrial and Trade Policy in Germany (Baden-Baden: Nomos Verlag, 1997). Back.
Note 28: W. Bönte, F&E Spillover und ihre Auswirkungen auf die Kosten der Produktion, Institut für Allokation und Wettbewerb, Universität Hamburg, Hamburg, Diskussionsbeiträge zum Regionalen Standortwettbewerb 10, 1994. Back.
Note 30: E. Kantzenbach, M. Pfister, National Approaches to Technology Policy in a Globalising World Economy. The Case of Germany and the European Union, in G. Koopmann, H.-E. Scharrer (eds.) The Economics of High-Technology Competition and Cooperation in Global Markets (Baden-Baden: Nomos Verlag, 1996). Back.
Note 31: W. Pfähler, W. Bönte, F&E Spillover und staatliche F&E Politik. Zur theoretischen und empirischen Fundierung der F&E Politik in Deutschland, in J. Kruse, O. G. Mayer (eds.) Aktuelle Probleme der Wettbewerbsund Wirtschaftspolitik (Festschrift für Erhard Kantzenback) (Baden-Baden: Nomos Verlag, 1996) p. 77. Back.
Note 35: Figures were cited by Rupert Scholz, chairman of the Council of Experts on lean government created in July 1995 by the federal government in Die schwierige Verschlankung des Staates, Neue Zürcher Zeitung, 10 April 1997. Back.
Note 37: E. Tuchtfeldt, Exportförderung in der Markwirtschaft in D. Aldrup et al. (eds.) Weltwirtschaft und regionale Wirtschaftspolitik, Strukturprobleme der achtziger Jahre (Göttingen: Vandenhoeck & Ruprecht, 1984) p. 204. Back.
Note 38: Exchange rate losses equal to the difference between a reference rate (DM 1.80) and the (lower) actual dollar exchange rate were to be compensated by the government without anything in return, that is, payment of an insurance premium, as long as the actual exchange rate did not fall below DM 1.60. Back.
Note 39: H. Bartling, A. Hemmersbach, Technologieund Exportförderungspolitik auf der Ebene der deutschen Baundesländer, des Bundes oder der Europäischer Union, Hamburger Jarhbuch für Wirtschaftsund Gesellschaftspolitik (Tübingen: Mohr, 1995) vol. 40, p. 345. Back.
Note 40: J. B. Donges, Die Exportorientierung der deutschen Wirtschaft, Erfarhrungen, Probleme, Perspektiven, in E. Dichtl, O. Issing (eds.) Exportation Deutschland (Munich: Beck, 1992) 2 nd edition, p. 19. Back.
Note 45: The share is, for instance, 4 percent in Germany, 2 percent on average for the EU, and just 0.56 percent in the United Kingdom; D. Carl, Europäische Normen für das öffentliche Auftragswesen, Europäische Zeitschrift für Wirtschaftsrecht, vol. 5, no. 6, 1994, p. 173; L. Gramlich, Das Recht der öffentlichen Aufträge nach Abschluss der Uruguay Runde des GATT, Recht der internationalen Wirtschaft, vol. 41, no. 10, 1995, p. 795. Back.
Note 53: Institut für Wirtschaftsforschung, Institut für Weltwirtschaft, HWWANational Research Council, Conflict and cooperation in national competition for high-technology industry (Washington DC: National Academy Press, 1996) p. 206 f. Back.
Note 56: Better information could also increase the use of the export insurance instrument (Hermes-Exportversicherung) by SMEs which is mainly taken advantage of by large firms today; BDI, Beurteilung des staatlichen deutschen Aussenwirtschaftsförderungssystems, p. 38. Back.
Note 58: For a discussion of investment incentives, cf. R. Jungnickel, G. Koopmann, Investment incentives. Costs, benefits and implications for policy in OECD (ed.) Investment incentives in transition economies (Paris: OECD, 1997). Back.