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SAFEGUARDING OUR PROSPERITY VIA FREE TRADE AND INNOVATION

Free trade and innovation are essential for Germany, which is poor in natural resources.
Strengthening this core interest of German foreign policy requires close, strategic
partnerships.

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Free trade and innovation are essential for Germany, with its lack of natural resources. Close strategic partnerships are needed to strengthen this core interest of German foreign policy. Intensifying such partnerships beyond existing trade relations, whether with export markets in Latin America (for example Brazil) or Asia (for example Vietnam), and adopting innovation policy initiatives from similar economies (for example Switzerland), should act as a guideline for a forward-looking economic and innovation policy. In the aftermath of the coronavirus pandemic, it will be necessary to pursue new opportunities and potential because there is currently a real danger that our globalised world will drift apart, transport and supply chains will be placed under pressure, and established connections between Europe and the rest of the world will be cut.

Overall, it can be said that only a few countries have been able to utilise globalisation in the way that Germany has – with there being at the same time a gradual decoupling of economic growth and resource consumption. This is reflected in positive economic news from the labour market, solid growth figures, rising wages and pensions and stable tax revenues. Successes can also be seen from an ecological perspective, and these undoubtedly have to be sustained: the primary energy used to produce a unit of goods is declining, resource productivity is increasing, and greenhouse gas emissions are falling.

At the same time, the external risks for the German, export-oriented economic model have multiplied, including increasing protectionism worldwide (which started before the coronavirus pandemic), an erratic US trade policy, overburdened ecosystems and unstable financial markets. It must be said that Germany is also in a complicated geopolitical situation: in terms of trade policy, it is enormously dependent on China, closely linked to Russia in terms of energy policy, and, without the USA, hardly able to act in terms of security policy.

Germany is thus stuck between the policy-shaping powers struggling with each other over who will control the narrative and may have to formulate its own interests more strongly than before and be aware that economic success is not a foregone conclusion. Rather, it must be repeatedly secured via clever economic and innovation policy. Such a policy is characterised by a well-founded concept and is particularly focused on market economy aspects that can secure Germany’s future prosperity. On the one hand, this includes a commitment to open markets, free global trade and an agenda that is geared towards globalisation. On the other hand, it is about establishing a culture of innovation that understands technical and social change as necessary conditions for increasing prosperity for everyone, as defined by Ludwig Erhard.

Germany’s economic performance depends to a considerable degree on exporting German goods and services,

a significant proportion of which are exported to the EU, the United States and China. It is empirically well documented that the European single market and free trade with third countries can secure future prosperity through competition. It remains a major task to continue promoting this context politically in order to overcome societal resistance and

allay fears with regard to future trade agreements. The coronavirus pandemic and the associated trend towards single countries going it alone, along with increased protectionism, are making this task even more difficult.

 

Due to the German economy’s high degree of openness and integration into international value chains, a functioning, rule-bound, free trade regime for Germany’s jobs, tax revenues and economic strength is of paramount interest. Specifically, this means that the German economy is facing global entrepreneurial competition and thus needs to remain innovative in the light of this spur to productivity. This presupposes that Germany will not refuse to import goods from our trading partners or not complicate this process with protectionist measures such as customs duties or non-tariff trade barriers if the countries of origin are also refraining from such measures. However, fair cross-border competition between companies does require the observance of minimum ecological and societal standards. This political commitment must therefore involve fair competition rules (compliance with standards, no subsidies, respect for intellectual property, no barriers to market entry) and safeguard against protectionist tendencies.

 

As a member of the EU, Germany has transferred the competencies for international trade and investment policy, because the bargaining power of the union of states is far greater than that of individual Member States.

With a gross domestic product (GDP) of 17.4 trillion

 

US dollars, the EU is better able to negotiate with major economic powers such as the USA (GDP: 18.6 trillion US dollars) and China (GDP: 11.2 trillion US dollars) and has achieved remarkable successes

in trade policy issues in recent years to the benefit of Germany. The EU’s first comprehensive free trade agreement was that with South Korea (in force since 2011). The agreement with Japan entered into force in February 2019 (JEFTA), and the European Parliament also approved the agreement with Singapore. Since 2014, the EU’s free trade negotiations with Ukraine, Canada (CETA), Vietnam and the South American Common Market (Mercosur) have officially ended. The ratifications are still pending, with the final approval of the agreement with Vietnam expected shortly. In contrast, the Mercosur agreement is meeting with considerable social resistance due to the slash-and-burn farming in the Amazon and the political priorities of the Brazilian President, Bolsonaro.

Further attempts at free trade (e.g. with Indonesia, Malaysia, India, USA) are proving difficult. This will probably also be the case with the negotiations with Great Britain, which began on 31 January 2020 after Great Britain left the EU and are to be completed by the end of 2020. The UK’s exit from the EU has a considerable impact on German industry, which is why maintaining solid trade relations will continue to be of great importance in the future: Great Britain is the fifth largest partner in German foreign trade and will soon be one of the most important markets outside the EU. For this reason alone, it is important to maintain the closest possible connection to the EU and to view the negotiations as an opportunity. The political design of a new agreement could set an example for future association agreements.

Since 2017, the ambitious free trade agenda of Europe has contrasted sharply with the priorities of the American government, which under Trump has initiated a change in foreign and trade policy. China has suffered from this new focus in trade policy, which has led to an accelerated spiralling of tariffs. Overall, the US government is using various measures to decouple its economy from that of China.

Uncertainty about the future relationship between the two largest economies, the USA and China, will not fail to leave its mark on the global economy, as global value chains are changing along with the conflict. The coronavirus pandemic will also act as an accelerator to Sino-American decoupling. Germany is directly affected, and it must save transatlantic relations beyond the lost government years of the Trump era and – together with European partners – arrive at a new economic policy line with regard to China, since the US President’s criticism of China’s global economic conduct has a kernel of truth. The regime in Beijing has a steering influence on the economy, protects and develops powerful companies via industrial policy interventions and has benefited greatly as a freeloader in the global trade regime since it joined the World Trade Organisation (WTO). Chinese decisions in trade and foreign policy (such as the Made-in-China 2025 strategy, the Belt and Road Initiative (BRI), a new cybersecurity law, and a so-called social credit system) have made it clear to Europeans that China is willing to go its own way, and that it is not striving for seamless integration into the global economy.

In spite of this, the EU started bilateral investment negotiations with China at the end of 2013 in order to establish a common level playing field for the global economy, to reduce access restrictions, and to create more fairness and reciprocity in the exchange of goods and services. In April 2019, the EU and China set themselves the goal of concluding their negotiations in 2020. It remains to be seen whether China will go part of the way towards meeting the Europeans on the points of criticism that have been raised for years (market access, subsidies, forced technology transfer).

Not only is the relationship with established trading partners and the initiation of new economic relations of immense importance for Germany as an export nation, so too is a global trading regime that ensures the smooth cross-border exchange of goods and services. This is the task of the WTO which intends to promote multilateral cooperation by reducing tariffs and trade barriers. But more and more countries are concluding bilateral free trade agreements and thus circumventing the WTO, partly because the organisation often acts too sluggishly as a member-driven institution. Since Trump took office, the USA’s WTO membership has even been openly questioned. The US administration dealt the institution its heaviest blow to date by blocking the replacement of judges who negotiate the intergovernmental arbitration proceedings. The WTO’s central appellate body has been unable to work since December 2019, thus demolishing a pillar of the multilateral trade order. The WTO will still be needed as an arbiter in an interconnected global economy so that emerging and developing countries can bring their interests to the table. Germany has no interest in global economic disorder, and thus needs to work vigorously with partners such as Brazil or Switzerland to reform and strengthen the WTO, and, in pursuit of that, must also influence the US administration.

Just as significant as trade policy is Germany’s ability to engage the future with creative answers. Innovation policy and the systematic expansion of national innovation systems are high on the agendas of the leading economic nations. Developing and emerging countries are also increasingly pursuing an innovation-oriented development strategy and relying on strengthening potential in the areas of science, innovation and human capital. The example of China, in particular, shows that a strategic medium and long-term plan towards an innovation and knowledge-based society can work. Developments in Saudi Arabia and Vietnam, for example, appear similarly dynamic.

The rise of new industrial competitors has given new impetus to the industrial policy debate in Germany, freeing up political forces and financial resources to further optimise the framework conditions and infrastructure for research and innovation. It is essentially clear to everyone involved that, in the long term, Germany cannot limit itself to continuous improvement in the conventional sectors (motor vehicles, mechanical engineering, chemicals). Rather, the task is to inspire a new entrepreneurial spirit within society and to remain ready to change and open to technology. In ageing, saturated, rather risk-averse societies, this is probably one of the most difficult tasks for government action.

Nevertheless, the German 2025 high-tech strategy, with its numerous innovation policy initiatives, is shaped by this intention. It identifies six challenges that are of particular relevance for economic growth and societal prosperity in Germany, and which are to provide an impetus for innovation policy: Economy and Labour 4.0; Security; Town and Country; Mobility; Sustainability, Energy and Climate; Health and Care. However, it is obvious that the state only has limited tools to promote promising technologies in these areas or to accelerate the transfer from research to application.

Thus, more important than discretionary programmes and support initiatives such as these is the long-term state commitment to pay the utmost attention to educational, innovation and research policy, and to provide the necessary funds. Germany is currently spending around 3 percent of its GDP on research and development but is aiming for a medium-term target of 3.5 percent with an eye on its leading competitors, such as Switzerland and South Korea. Such increases must, of course, take place simultaneously between the public and private sectors.

This interaction will be crucial for promoting the structural change towards technology-intensive industries and could also become a competitive advantage, already established in the cooperative approach of the social market economy. In a market economy, it is private actors (medium-sized companies, family businesses and large companies) that generate exploitable innovations – given the right framework conditions. These include corporate taxes which, in terms of their amount and structure, do not disadvantage German companies in the competition between industrial locations for less bureaucracy, a future-proof infrastructure, an effective education system, qualified specialists, competition and data law regulations that are suited to digitisation, and improvements to innovation financing.

Indicators show that there is a need for improvement in all of these areas. It is also correct, however, that international indices acknowledge Germany’s efforts in innovation policy. In a comprehensive analysis, the Bloomberg Innovation Index comes to the conclusion that Germany is the most innovative country in the world. Various criteria are given for the ranking, from which an overall winner emerges. Germany scores particularly well with its patent applications, density of high-tech companies, and added value in local factories. In the tertiary education sector, on the other hand, i.e. universities and other colleges, the Federal Republic has only a medium ranking internationally. While taking into account the caution with which international rankings should be viewed, they show that the ongoing debate about economic and innovation policy challenges can lead to remarkable political developments in the long term. This can be an incentive to access untapped potential.

The size of the German economy and the lack of any significant resources are enough to justify strategic engagement with innovations and potential trading partners, such as Vietnam, Kenya, Saudi Arabia, Brazil or Switzerland, as a necessary condition for maintaining and expanding German prosperity. In the aftermath of the coronavirus pandemic, this task will become even more pressing. From exploring the topics in the previous section, two principles can be derived for maintaining Germany’s economic momentum and for counteracting the virus-induced global economic slowdown.

First: A common level playing field must be respected in international trade, monitored by a reformed WTO based in Geneva, Switzerland, the importance of which should be recognised by the G20. This requires a critical dialogue with important trading partners so that globalisation can work to everyone’s benefit. The conclusion of new, or the modernisation of existing free trade and double taxation agreements can provide important incentives, in that they can incorporate high standards and fair market access regulations. Brazil, for example, will play a key role in the EU-Mercosur negotiations for strengthening ties with South America. At the same time, the agreement is a litmus test for implementing the Paris climate resolutions as legally binding standards. The already ratified trade and investment protection agreement between the EU and Vietnam, from which Germany should especially benefit, pushes the door to Asia a little further open.

Second: Germany must be open to technological progress, taking into account not only the ethical and technological risks, but also and especially the opportunities for innovation. It is obvious that innovations should help people to live better lives. This requires a culture that promotes optimism about the future, courage, and a willingness to innovate (instead of a pessimistic attitude towards progress). A lot can be learned from other countries in this respect, especially for designing entrepreneurial framework conditions. For example, due to its start-up culture and enthusiasm for digitisation, Kenya in East Africa is considered to be the model country on our neighbouring continent. In Saudi Arabia too, a lot is being done to emerge from the dependency on oil. With a reform-oriented, though not uncontroversial, crown prince, the country could become a laboratory of German engineering or a test site for German services.

If the two principles emphasised here are reflected in practical policy, Germany can strengthen its competitiveness, participate as a major player in Europe and increase its prosperity.

David Gregosz was Policy Advisor for Economy and Trade in the Analysis and Consulting department until August 2020.

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SWITZERLAND

Safeguarding our prosperity via free trade and innovation

In many ways, Switzerland is a central partner for Germany in terms of values and interests, particularly in the area of trade and innovation. The economies of both countries are closely intertwined: Germany has been Switzerland’s most important trading partner with more than 22 percent of foreign trade. Conversely, Switzerland is also a key economic partner for Germany: in 2018, it was number 9 among Germany’s foreign trade partners (and thus the fourth largest non-EU country after the USA, China, and the United Kingdom).

SAUDI ARABIA

Safeguarding our prosperity via free trade and innovation

The relevance of Saudi Arabia for Germany’s economic interests results from the country’s fundamental importance for stability and development in the Near and Middle East, the efforts to modernise its economy, and its oil wealth.

KENYA

Safeguarding our prosperity via free trade and innovation

Kenya is the most stable country in East Africa and is an economy that is oriented toward the west. With consistently strong economic growth in the twelve years before the coronavirus crisis and a GDP of just under 88 billion US dollars (2018), Kenya is the largest economy in East Africa and a growth engine for the entire region. Thanks to the port of Mombasa and the airport in Nairobi, the country is an important hub for trade and finance. Many international companies have chosen Kenya as the seat of their (East) Africa branches.

BRASILIEN

Safeguarding our prosperity via free trade and innovation

Brazil is the largest economy in Latin America and, with a GDP of approximately 2 trillion US dollars, is one of the most important emerging markets in the world. The country has a domestic market of 210 million inhabitants and is rich in natural resources.

VIETNAM

Safeguarding our prosperity via free trade and innovation

Vietnam is one of the few communist countries. A “socialist-oriented market economy” determines the country’s economic status, the communist party vigorously enforces its claim to total power, and the country is subject to fierce criticism in reports on human rights. At the same time, more than three decades of economic growth and political stability have led to Vietnam establishing itself as an influential player in Southeast Asia. An early and vigorous response to the coronavirus crisis has so far managed to limit the dangers to health and the economy.