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International Trade and Germany
Why foreign trade is giving the manufacturing industry a headache

© flickr/Alessandro Tortora © flickr/Alessandro Tortora

 

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Imported goods have a direct impact on Germany’s labor market and on the wage structure in the manufacturing industry: Individual unemployment rises, wages shrink. This affects stakeholders differently depending on the sector and region of Germany.

 

Over the last 25 years, Germany has increased its foreign trade ratio like almost no other country – and in fact has nearly doubled it from a good 45 percent in 1991 to almost 85 percent in 2014. On the one hand, this reflects the major economic success of Europe’s largest economy. On the other, it highlights Germany’s dependence on global change. But this well-known correlation is not the only thing that makes taking a look at foreign trade so important. Why? Our study shows that the manufacturing industry in particular is feeling the impact of increased foreign trade, especially with China and Eastern Europe.

 

2.7 million fewer jobs in the manufacturing industry

 

In 1991, almost one-fourth of the workforce was employed in the manufacturing industry. By 2012 this percentage had fallen to below 17 percent – a loss of almost 2.7 million jobs! At the same time, imports from developing nations were increasing rapidly.

Imports from China and Eastern Europe increased by almost 700 percent between 1991 and 2008 alone. Although German exports increased during this period by ten times – 660 percent to Eastern Europe and 1200 percent to China – in the end, the impact was negative for workers in the manufacturing industry. Not only had increased foreign trade built up substantial competitive pressure, it had also cost jobs.

 

import penetration and employment in selected countries

 

Not only do imports cost jobs, they put pressure on wages as well

 

However, the overall trend shows that growing foreign trade also puts pressure on wages in the manufacturing industry. The simple rule of thumb: With every increase in imports of €1000 (calculated per capita in the manufacturing industry), monthly gross wages fall by 1.3 percent. With every increase in exports of €1000 (per employee), gross wages rise by 0.8 percent. Therefore, imports place greater pressure on wages than exports can compensate for. Workers in the manufacturing industry experienced this between 1995 and 2007 with a wage decline of almost 5 percent.

This development has affected the manufacturing industry in Germany in a variety of ways. It has led to wage increases in export-heavy sectors called trade-gaining industries: chemical products, glass and glassware, metal products and machinery manufacturing were able to benefit.

Other areas of the manufacturing industry where imports dominate (called trade-sensitive industries) including textiles and apparel, leather and leather goods, furniture, jewelry and musical instruments saw a definite decrease in wages.

Low-volume trade industries including food and alcohol, tobacco and products made of paper and cardboard also saw more imports than exports. Industry wages dropped here as well.

By contrast, the ratio of imports to exports in high-volume trade industries is nearly equal. These sectors include rubber and plastic goods, office machines, data processing equipment, electronics, precision mechanics and optics as well as auto manufacturing. This balance is also reflected in the wage situation: almost no change.

 

Important message for the use of labor market policy instruments

 

The findings that imported goods increase individual unemployment in the manufacturing industry while at the same time putting pressure on wages are important to recognize. The various sectors of the manufacturing industry are distributed differently throughout individual regions in Germany. Accordingly, positive and negative effects have an especially serious impact on some German states with a heavy concentration of certain manufacturing sectors. The results of this study will enable labor market policy instruments to be implemented more effectively and preventatively as well.

 

Protectionism is not the answer

 

Despite the negative effects outlined above, cutting off imports from the regions considered here is not a good solution. An export-oriented economy like Germany’s is dependent on open borders in international trade. On the whole, the German economy benefits from trade with the countries examined here. The negative regional effects are compensated through other regions. Likewise, the calculations presented here do not take into account the positive effects that imports from developing nations bring – price-reducing effects, for example – and indirect effects through value chains.

Increasing German exports to these countries could cushion the wage and employment-reducing effects of imports from the emerging nations studied here. Increasing the competitiveness of German companies by boosting investment, for example, would be crucial as well. Improving access to markets in the developing nations would also be helpful, for example by increasing direct investment in those countries.