Both the U.S. and Germany are high-wage economies with a substantial union workforce. However, Germany is an export powerhouse, while the U.S. runs massive annual trade deficits. Why is this the case?
Washington Post columnist Harold Meyerson suggests that Germany offers lessons in how an advanced economy like the U.S. can compete globally and actually raise living standards.
In a conference call today, Meyerson said that Germany’s economy is doing better than any other developed country. He explains that while U.S. manufacturing has fallen from 25% of the economy to 11% today, in Germany it remains at roughly 22% of GDP. Similarly, the U.S. manufacturing workforce has fallen a “tremendous amount,” while the German manufacturing workforce is roughly 20-25% of the working population. German manufacturing wages are 50% higher than for comparable U.S. factory positions.
Meyerson says that the U.S. has famously become the world’s greatest consumer, while Germany has specialized in manufacturing goods for export. Germany even shares the same high positive trade balance profile as China.
Why then is Germany succeeding? A number of reasons, including:
- Germany benefits tremendously from the low level of the Euro. This currency exchange rate aids in exporting to the U.S. and other industrialized nations.
- About 80% of Germany’s manufacuring GDP come from small- and mid-sized companies. Many of these companies are family-owned and provide niche, specialized products. One example: axle box housing for high-speed rail. Another example: one German company is the primary worldwide supplier of the twist-wire used to hold the corks of champagne bottles.
- Many of Germany’s manufacturers access funding from municipal banks. The banks are local and specifically support neighboring employers. These banks are statutorily directed to assist local businesses.
- Many German businesses are privately held, and thus are not responsible to vast shareholders and market fluctuations. They can move nimbly and swiftly to respond to market conditions. German labor policy also directs that, during an economic slowdown, workers are shifted to smaller work weeks rather than being laid-off. Similarly, a percentage of wages are set aside during robust times to provide a cushion during lean times. This helps to keep a trained, specialized workforce in continual operation.
Meyerson believes that portions of Germany’s approach are applicable to the United States, particularly their wise focus on specialized, niche production. He also points to their particular banking policies in support of local manufacturers, which are exceptionally helpful in ensuring a diverse, thriving industrial base.
Alliance for American Manufacturing (AAM) executive director Scott Paul recently suggested some similar policies during testimony before a Congressional Joint Economic Committee Hearing entitled “Manufacturing in the USA: Why We Need a National Manufacturing Strategy?” Specifically, Paul urged access to credit for manufacturing expansion and innovation. He also cited Germany’s integrated strategy for boosting manufacturing by focusing on skills, technology, investment, demand-side incentives, and labor-business-government collaboration.
These proposals help to form the basis of a national manufacturing strategy, something AAM has continually proposed.