In memory of Dr. Andreas Höfert

Are trade surpluses smart thing to have?

| Tags: Andreas Höfert

What a bizarre question. Trade surpluses (or their big sisters, current account surpluses) seem to be what every country is supposed to aspire to. They are the way, for example, that Germany thinks the euro crisis should be solved. The New Year’s resolution of many European politicians in the “peripheral” countries is quite likely: get our house back in order, become more competitive and achieve trade surpluses.

Pursuing the latter is the moral thing to do, according to this narrative, but the real question is whether it is the smart thing as well.
Although it is likely the most important concept in national accounting, the trade balance of a country can be computed in two different ways: from an international and an intra-temporal standpoint. This fact remains little understood not only by the public but by prominent politicians, who should know better.
Common sense has it that running a trade surplus is “good” and a deficit “bad.” Economists are usually less judgmental about such matters and refuse to attach moral terms to trade numbers – for good reason. In our world, there cannot be “good” countries with surpluses and “bad” countries with deficits. Since the surpluses of one country are the deficits of another, it is impossible for every nation on earth to run a trade surplus – short of humanity discovering a way to swap goods and services with extraterrestrials.
Moreover, from an intra-temporal perspective, a trade surplus means that a country consumes and invests less than it produces within its borders: hence it has to save and invest abroad. The mirror image of a trade surplus is a country exporting capital or investing it abroad instead of at home. A trade surplus can illustrate the preference of the population to consume more in the future than it does today and/or a lack of domestic investment opportunities.
Judgmental considerations aside, running large trade surpluses comes with problems of its own. Two German studies published in December, one by the Berlin economics institute DIW and the other by Professor Gunther Schnabl of the University of Leipzig, examined German investments abroad, which result from German trade surpluses.
According to Schnabl, if one takes the cumulated current account surpluses (as a proxy for trade surpluses) since the beginning of 2000, the astonishing sum of EUR 1.66trn has been invested by Germany abroad. Yet German net wealth abroad today only totals an estimated EUR 1.2trn, meaning that Germany has recorded a net loss of EUR 460bn on its investments. The DIW study arrives at similar estimates on losses that have occurred since 2006, which it puts at 20% of German GDP. Of the countries reviewed by the DIW, only the Netherlands, among Germany’s peers, fared worse, losing the equivalent of 40% of its GDP on its investment abroad. Austria was similar to Germany at –20%, while France, Italy and the UK suffered losses of between 5% and 15%. Switzerland broke even on its foreign investments while the US and Belgium managed to make gains of 25% and 30%, respectively.
Belgium’s success is especially telling because it shows that the German net wealth losses cannot only be attributed to the strength of the euro against other currencies.
The argument often goes that running trade surpluses is smart because they provide “reserves” for future generations or during times of hardship. However, this argument only makes sense if those surpluses are invested wisely. So the only legitimate way an economist can answer the question that headlines this article is: “It depends.”