EXECUTIVE SUMMARY -
German living standards depend on unfettered access to foreign markets for its highly competitive manufacturing sector. Protectionism by trading partners and the uncertainty that it generates are inimical to the interests of German exporters, including its substantial mechanical engineering sector. Lost export orders are a threat to employees and to the families and taxpayers who depend upon them. The events of the past four years have highlighted the importance of defending a rules-based world trading system. Effective trade policy advocacy requires high-quality information on policy developments abroad and their commercial significance. Such advocacy is at a premium during periods of crisis as governments are tempted to turn inwards and resort to protectionism irrespective, it seems, of the lessons from history. The objective of this project is to enable the VDMA to identify where foreign trade distortions put at risk significant shares of the exports of the German mechanical engineering sector. Although initiated before the COVID-19 pandemic, by focusing on the policies holding back German mechanical engineering exports at the beginning of 2020, this study provides a benchmark against which pandemic-era policies affecting trade can be judged. Consequently, the findings presented here cannot be attributed to the pandemic responses of foreign governments.
This study goes beyond traditional import restrictions, such as tariffs and anti-dumping duties and takes account of subsidies to import-competing firms, export incentives provided by foreign governments to their firms selling into third markets, as well as new regulations that may become barriers to trade. Estimates of the percentage of German mechanical engineering exports facing each of these policies in every foreign trading partner have been calculated. These estimates reveal the degree to which German exports are at risk to policies abroad that discriminate in favour of local firms. 1 The largest available evidential base on commercial policies affecting world trade (the Global Trade Alert database) plus the World Trade Organization’s database on government notifications on Technical Barriers to Trade were employed, along with fine-grained data on international trade in mechanical engineering products, to produce estimates of the percentages of German exports at risk across the globe at the beginning of this year (2020).
A methodological note accompanies this summary. Foreign export incentives matter—don’t just focus on import restrictions German mechanical engineering exporters frequently have to compete against foreign rivals that have received tax breaks and other incentives to export across the globe. Such tax breaks and export incentives enable foreign firms to undercut German rivals, forcing the latter to accept lower profit margins or to lose contracts and market share. A key feature of these export incentives is that they are designed to influence sales in third markets.
Consequently, a finding that German engineering shipments to a particular destination market are particularly exposed to foreign export incentives does not mean the destination market’s government is responsible. Map 1 reveals the exports at risk from all state-provided foreign export incentives in force at the beginning of this year.
German mechanical engineering exports to many G-20 members are particularly exposed to foreign rivals benefiting from export incentives.2 This does not mean that importing policies do not matter— but it does mean that a focus on import restrictions and the like misses important threats to German mechanical engineering exports. Technical barriers to trade are a concern in seven trading partners The implementation of new regulations whose stated purpose may have nothing to do with industrial policy, promoting competitiveness, or protectionism may still disproportionately increase the costs of foreign suppliers, putting them at a commercial disadvantage.
Uncertainty over how a regulation will be enforced can also deter foreign suppliers. In the mechanical engineering sector German exposure to foreign regulatory change is concentrated in seven major trading partners, see Map 2. Over 97% of German exports to Brazil, Canada, China, South Africa, and the United States face regulatory changes that have been notified to the WTO since 2009. For five jurisdictions between 50% and 90% of German mechanical engneering exports are at risk. A further 10 emerging markets plus Japan have implemented technical barriers to trade covering more than a quarter of #German mechanical engineering exports. To the extent that governments fail to notify the WTO of regulatory changes, this problem is likely to be worse than represented in Map 2. Substantial exports at risk due to policies limiting imports in Brazil, China, India, and Russia Governments can limit imports in many ways. For example, they can subsidise import-competing firms enabling them to undercut foreign #suppliers, which is bad news for German #mechanical #engineering #exports.
Careful examination of the import dampening policies in force on 1 January 2020 shows that this particular subsidy problem is concentrated in five of Germany’s trading partners. Map 3 shows that almost all German mechanical engineering exports to Russia currently face one or more local rivals that have received state aid from Moscow.
Over half of German exports to China similarly face competition from subsidised #local rivals. Between a fifth and a quarter of German #exports compete against subsidized local firms in Brazil and India. Brazil, China, and India are among the 19 trading partners that charged import tariffs exceeding 8% on German mechanical engineering products at the beginning of 2020 (see Map 4). More than half of German exports to India and Russia faced other non-tariff barriers in force at the start of this year (see Map 5 and see box below for examples). With the exception of Brazil, none of the emerging markets mentioned above have regional trade agreements with the European Union or are negotiating such accords.
As a result, German officials will need to find other tools to safeguard German mechanical engineering exports from #foreign protectionism. Four maps at the very end of this report reveal the exposure of Germany’s leading trading partners to policies that limit or influence imports of mechanical engineering goods into Germany. These trading partners’ exposure to German technical barriers to trade and foreign export incentives is significant (see Map 1G on page 60 and Map 4G on page 61). Foreign exposure to locally subsidized German rivals appears to rise with distance from Western #Europe (see Map 2G on page 60). Differences in foreign export exposure to import tariffs in the German market reflects varieties in the mix of mechanical engineering #products shipped (see Map 3G on page 61). Implications for German policymakers ● Even before the COVID-19 pandemic hit, German mechanical exports were held back by a diverse range of policies implemented by governments abroad. ● A focus on import tariffs and trade remedy measures would miss many of the disadvantages faced by German #exporters in foreign markets. ● The ramping up of tax-based incentives for exporters and dubious export finance deals is harming the German mechanical engineering sector, even when bidding for contracts inside the Single Market. ● The export subsidy race has gone too far—Germany should encourage international initiatives to encourage a level playing field. ● Reducing tax breaks for exporters and curbing export finance has public finance benefits as well. ● Importer policies threatening German mechanical engineering exports are concentrated in a small number of larger trading partners, in particular the so-called BRICs. ● Working with the European Commission, a focused engagement strategy would make the most sense. ● Some of the most problematic trading partners have trade agreements with the European Union, so consultation procedures can be invoked as a first step. ● If the findings of this study startle policymakers and senior corporate executives, then German officials and the European Commission ought to undertake more rigorous monitoring of policy interventions by trading partners. ● Transparency in trade policy is a global public good.
For each type of mechanical and plant engineering product, the objective was to represent on a world map the share of German exports that face different types of policies implemented by the 40 most important trading partners on 1 January 2020.3 Such maps reveal the degree to which German exporters face policy-induced constraints or uncertainty in foreign markets, both of which are thought to hold back German penetration of those markets. To that end, information on the public policies that discriminate against imports was extracted from the Global Trade Alert database for the relevant German export products and destination markets. That database tracks over time the entry into force and, where relevant, suspension and withdrawal of public policies affecting international commerce. The coverage of the Global Trade Alert database goes beyond tariffs and trade defence measures and includes a wide range of policies that distort trade, including state aid to import-competing firms. As of July 2020, this database includes information on over 26,000 public policy interventions affecting international commerce that have been implemented since November 2008. For each public policy intervention in this database the relevant six-digit Harmonized System product codes was identified, where appropriate. A full description of the Global Trade Alert database can be found here. Information on ad valorem import tariff rates on mechanical engineering products was downloaded from the WTO Tariff Download Facility. The latest available import tariff data there was used in this study. To access this Download Facility, go here. Technical Barriers to Trade (TBT) are not covered in the Global Trade Alert database precisely because the World Trade Organization maintains an extensive database on such regulatory changes that are notified by member governments. Consequently, information was extracted from the WTO’s Technical Barriers to Trade Information Management System on changes to regulations affecting mechanical and plant engineering products exported by Germany. Entries in this WTO database can include reference to either the relevant Harmonized System (#HS) product codes or to the product classification under the International Classification of Standards system (#ICS). A correspondence was constructed between the HS codes of products that the VDMA identified as being exported by its members and the relevant ICS product codes. With this correspondence, using the most fine-grain international trade data available globally (supplied by the United Nations in its #COMTRADE database at the six-digit level of disaggregation) it was possible to identify those public policy interventions by Germany’s trading partners that implicate German exports of mechanical and plant engineering products. Moreover, the share of German exports of each type of product to each trading partner affected by public policy interventions in force at the start of 2020 was calculated. Rather than represent the results in tabular form, a map was constructed that shows the variation across trading partners in German exports at risk. For each major type of mechanical and plant engineering product five graphs were prepared: one showing #exposure of German exports to all state-provided foreign export incentives in force, one showing the exposure of German exports to #Technical Barriers to Trade imposed in the importing nation, one revealing the exposure of German exports to competition from subsidised local firms, one showing the simple average tariff rate imposed by a trading partners on these products, and one showing exposure to other public policy interventions affecting imports. On these maps the redder the shading the greater the exposure of German exports. Since the mechanical engineering sector includes many different types of products, and given that foreign #governments policies towards trade may vary across classes of mechanical engineering products, we have prepared maps for 17 separate types of such products, each with a distinct United Nations sectoral code (technically, a three-digit sectoral code using the Central Product classification, version 2.1 or CPC 2.1). Exporters of specific mechanical engineering products may find the maps relevant to their sub-sector more useful than the aggregate maps mentioned at the beginning of this paragraph. For each sub-sector of the German mechanical engineering sector which is represented by a separate three-digit CPC code, we identified the associated products classified at the six-digit level of disaggregation of the United Nations HS. In all cases, the export exposure estimates take account of the actual value of German exports to the foreign market in question. Thus, the export exposure information presented in this report is not approximated by counts of policy interventions adverse to German commercial interests. Given that some governments may not report some of their TBT in a timely fashion, and given that some state measures affecting German exports may not have been documented by the #Global #Trade #Alert team, then the export shares represented in the graphs could be underestimates. The maps, then, should be seen as conservatively characterising the German exports at risk from policy intervention by trading partners at the start of this year. So that no single year’s international trade data distorts the findings, the mean value of German exports of each type of mechanical engineering product to each export destination for the years 2016, 2017, and 2018 was used (along with information on policies affecting trade in markets in each export destination) to estimate the percentage of German exports facing policies in force on 1 January 2020. (As of this writing, detailed global trade data for 2019 has not been published by the United Nations). There are the foreign economies selected by the VDMA that did not buy German mechanical engineering products during the years 2016 to 2018, at least according to United Nations’ international trade statistics. Readers are cautioned that the absence of reported German exports may not necessarily reflect low levels of intrinsic demand. Rather, it could reflect prohibitive trade barriers. Without additional information, it may not be possible to differentiate between these two explanations. This provides another reason for surmising that the export exposure statistics presented in this study understate the problem of foreign protectionism. Recall, also, that the statistics presented in this report were calculated before any protectionism or trade distortions associated with the COVID-19 pandemic were implemented.