Module: International Economics

Assignment 2

1
 Table of Contents

Sr. No. Contents Page No.

1. Introduction 3

2. Trade Theory and its Applications 5

3. Benefits and Limitation of International Trade for Germany 7

4. Analysis of how trade could be weaponised to damage the economy 8

of Germany.

5. Resilience Mechanisms to immune economy of Germany and 8

ensure sustainability.

6. Recommendation 9

7. References 10

2
1. Introduction and Background Information

The economic growth is totally depend on the foreign trend, which is important for financial
development. Agreement and specification are fostered by the restricted structure of
interconnected economies that allow the flow of products, services, and ideas (Krugman &
Obstfeld, 2018). This essay will analyse the dual characteristics of global trading, acknowledging
its capacity to be weaponized as a form of economic warfare while also exploring how it could
possibly be used to boost economic growth. This essay will states that should be account to
guarantee strong and sustainable trade development, with a focus in particular on the case of
Germany, which is renowned for its industrial capability and export-oriented economy. This
discussion will to offer broad analysis of the chances and challenges that globalization presents in
the context of Germany's economic environment as it examines the advantages and drawbacks
of international trade.

Germany, is the essential country of Europe, has sustained its place as the leader of the world
economic growth, getting recognition for modern technology, rigorous engineering, and robust
industrial sector (Felbermayr & Jung, 2009). Germany is accepting the new changes global trade
dynamics in recent years, retaining its competitive advantage in important export markets
including technology, machinery, and automobiles (Ifo Institute, 2021).

Germany after recession and refback to into the European Union during the post-World War II
era secured its status as a key player in the international trading domain. Germany is facing new
challenges as the global economy constantly changes, including the digitization of business,
climate change issues, and disruptions from global events like the COVID-19 pandemic (DIHK,
2021).

According to Table 1, Germany's trade surplus decreased to EUR 172.5 billion in 2020 from EUR
180.4 billion. The EU-27 owns more than 60% of this surplus, with the eurozone accounting for
46.5%. Germany has been pushed by the EU to increase internal demand since 2014. German
goods imports reached USD 1.18 billion in 2021, up 18% from the previous year's 15.2% increase
in exports to USD 1.37 billion. Unexpectedly, Germany—which is typically a net importer of
services—exported USD 319.7 billion in services, marginally more than USD 317.3 billion in
imports.

But in 2022, Germany's export surplus fell sharply, falling to EUR 79.7 billion from EUR 175.3
billion, a two-decade low, primarily as a result of a sharp increase in the cost of energy imports.

3
Source: World Bank
Table: 1 Foreign Trade Indicator- Germany

4
2. Trade Theory and its Applications

A number of trade theories and tactics can be taken into consideration in order to strengthen
Germany's economy through trade.

A. Comparative Advantage Theory:

As per to David Ricardo's theory of comparative advantage, countries must focus on

manufacturing goods and services where their potential cost is lower relative to that of other
nations. This notion gives a strategic framework for economic growth for Germany, a country
famous for its high-tech industrial and technical expertise. Helpman, Melitz, and Rubinstein's
(2018) study on trading partners and volumes is one of the most recent investigations that
highlights how vital it is to notice and take advantage of comparative advantage in the
quickly changing global economy. Germany could expand its global competitiveness and
maximize resource allocation by focusing on industries where it has a comparative
advantage, such as precision machinery and automotive manufacture.

B. New Trade Theory:

The New Trade Theory states that the notion of financial scale and product variation. The
theory states that nations can achieve economies of scale and obtain a competitive edge by
emphasizing on creating distinct, differentiating products. A complete implementation of the
New Trade Theory for Germany entails making investments in R&D and embracing
digitalization. New technology in these fields have made it possible for Germany to
manufacture innovative, top-notch goods that meet changing consumer demands.
Theoretically, Germany may wisely position itself in the global marketplace thanks to
Krugman's 1980 key work on scale economies and product diversification.

Applications to Boost Germany's Economy:

 Digital Transformation: Digitalization is important part of Germany's financial strategy.

The increasing impact of technology in modern goods is complemented by the New
Trade Theory, that showcase originality of a product. This hypothesis supports Germany's
transition to Industry 4.0 and its devotion to digital innovation, which facilitates the
creation of unique high-value products.
 Benefiting from High-Tech Manufacturing: Supporting innovation and research,
Germany can get the comparative advantages in high-tech manufacturing. Both theories
support strategic expenses in areas like renewable energy, artificial intelligence, and
electric car innovation. Germany could profit from economies of scale and develop
distinctive goods thanks to this alignment (Helpman, E. et al., 2018).
 Developing worldwide Alliances: Germany is advised to expand worldwide relationships
that match its advantages with the necessity of the country, in line with the Comparative

5
Advantage thesis. A more diversified trade portfolio for Germany can be achieved via
launching joint ventures, technology transfer, and research and development
collaborations with rising economies (DIHK, 2021).

6
3. Benefits and Limitation of International Trade for Germany

1. Benefits
 Growth Driven by Exporting goods: Germany has established a reputation for itself as an
export-driven economy, earning substantial benefits from global trade. One of the
primary forces driving economic growth and the wealth of the country has been the
country's ability to sell goods and services internationally.
 Market Diversification: Germany has proven managed to expand its markets by its role
in international commerce. The German economy is stronger because it exports to a
broad range of nations, making it less vulnerable to downturns in any one market.
 Employment Creation: As an outcome of growing production and export activity
generated by the growth of international trade, potential jobs have been generated.
Sustaining employment levels and growing the labour market needs this (Kohl, T., &
Moller, J., 2020).
 Technological Exchange: Trade across countries makes it simpler for inventions and
technological advances to go around the world. Germany, which is well-known for its
smart engineering and technology, benefited from being aware of innovative
advancements from a variety of industries (Bohnstedt, A., & Mross, K, 2021).

2. Possible Limitations

 Trade Imbalances: Long trade surpluses caused concerns with trading partners, that
in effect led to issues related to international trade and the rise of safeguards
(Baldwin, 2016).
 Dependency on Particular Industries: Germany's economy is subject to shifts in the
demand for these particular industries because of this nation's major emphasis on
manufacturing, primarily in the automobile and machinery sectors. If these industries
have a collapse, issues with diversification can arise.
 Environmental Impact: International trade includes the long-distance transportation
of products, which creates environmental issues and carbon emissions. Germany, a
key exporter, is under study for the carbon footprint it has left behind from foreign
trade.
 Service Trade Deficit: Germany exports a lot of items, but it usually has a service
trade deficit. Given the growing importance of services in the global economy, such
disparity could limit the overall advantages of international commerce
(Ramanarayanan,2020).
 Financial Inequality: While trading with other countries has helped the national
economy usually there are worries about rising income disparities in Germany. Local
disparities may result from many industries and regions profiting more than others.

7
 4. Analysis of how trade could be weaponised to damage the
economy of Germany.
Studying the different ways in which trade could be weaponized to cause damage to
Germany's economy requires considering a variety of strategies and methods that other
countries or companies might use in an attempt to undermine Germany's economic security.
The main points to take into account in this analysis are listed below:

 Trade Limits and Tariffs on goods: Taxes or other trade restrictions on German
exports could restrict country's access to essential markets, which would lower
export revenues and slow economic growth.
 Supply Chain Disruption: If Germany's vast supply chains are disrupted, particularly
for sectors like automotive and machinery, it might seriously hinder production,
causing slower growth in GDP and job losses (Baldwin, 2016).
 War on Financial Services: By altering the value of the euro while causing volatility in
the financial markets, manipulating financial markets or conducting currency warfare
could affect Germany's economy (Prasad, 2014).
 Exploitation of Intellectual Property: Theft of technological know-how and
intellectual property from German businesses might decrease their competitiveness
and result in long-term financial losses (UNCTAD, 2019).
 Legal Actions Regarding Trade: Legal actions related to trade, such as complaints
made with commerce organizations, may lead to decisions that may be adverse to
Germany and have an impact on its trade policies.

5. Resilience Mechanisms to immune economy of Germany and

ensure sustainability.

Integrating economic, social, and environmental measures is required for ensuring sustainability
and build resilience in Germany's economy. Here several vital aspects of resilience:

 Sector Diversification: To reduce depend on one sector, and to support the spread of a
wide range of industries. Investments in technology, clean energy, healthcare, and other
startups can fall under this classification (Mayer-Schonberger & Ramge, 2018).
 Investment on R&D (research and development): The cost of research and development
has to be raised to promote innovation. This can assist Germany to retain its superiority
in foreign markets by regularly improving productivity, technology, and product offers.
 Digital Conversion: Embrace digitizing for greater competitiveness and productivity. This
involves executing advances in digital infrastructure, encouraging digital literacy, while
assisting businesses deploy Industry 4.0 processes.
 Workforce development and education: Invest in training and education efforts to
generate a team that is competent and versatile. By doing this, it is ensured that the
work force will adjust to the shifting demands of the economy (OECD, 2019).
 International cooperation and diversification of trade: To reduce dependence on specific
market, develop global trade partnerships and collaborations. Trade related variety can
lessen the effects of economic shocks in particular areas.

8
6. Recommendation

Below points can be use as recommendation as policy implications on Globalization for boosting
the economy of Germany.
 Constructive Globalization: Germany fosters economic interdependence as well as
cooperation through its backing of fair trade policies, so contributing to positive
globalization.
 Risk Mitigation: By limiting the potential of economic shocks, implementing robust trade
policies benefits Germany while simultaneously promoting global economic stability.
 Technological Collaboration: Fostering international cooperation in R&D creates a
worldwide innovation ecosystem that is favorable to all participating countries.
 Foster Flexibility and Adaptability: Develop policies promoting mobility in response to
changing global economic circumstances. Make plans for backups in case of severe
financial shocks or uncertainties (Belenzon & Patacconi, 2012).
 Increase Transnational Supply Chain Management: Support adaptive and robust supply
chain techniques to reduce interruptions. Increase communication with international
partners to provide seamless supply chain operations.
 Create Institutions of Support: Establish organizations that offer guidance and resources
to companies who trade internationally. Eliminate red tape by streamlining and
simplifying trade procedures (Popp et al., 2017).

Monitoring and Evaluation:

 Establish a robust monitoring and evaluation framework to regularly assess the effectiveness
of implemented policies.
 Use key performance indicators (KPIs) to measure the impact on economic growth, trade
balance, and other relevant metrics.
 Periodically review and adjust policies in response to emerging global economic trends and
challenges.

The implementation of these policies and their ability to adjust to shifting global dynamics
will impact their efficacy. While Germany uses these tactics to support its own economic
stability, the effects on globalization emphasize how linked all countries are and how
teamwork is required to navigate a world that is becoming increasingly intricate. The crucial
role of international trade in determining the fate of nations grows as the world continues to
change. Germany has the chance to set an example for others by demonstrating how prudent
and purposeful participation in international business can lead to long-term prosperity and
maintain global peace. Germany has a long history of economic brilliance. In conclusion,
international trade is a double-edged sword, offering opportunities for economic growth but
also posing risks when weaponized for economic warfare. Germany, as a major player in the
global economy, must navigate this complex landscape with strategic policies that harness the
benefits of international trade while safeguarding against potential threats.

9
7. References
1. UK and Japan agree historic free trade agreement, (2020). The British Chamber of Commerce in
Japan. Available at: https://bccjapan.com/news/uk-and-japan-agree-historic-free-trade-
th
agreement/. [Accessed on 27 Oct. 2023).
2. Benz, S., and Gonzales, F. (2019), ‘Intra-EEA STRI Database: Methodology and Results’, OECD
Trade Policy Paper 223, Paris, OECD Publishing.
3. Fella, S. (2021), ‘The UK–EU Trade and Cooperation Agreement: Governance and Dispute
Settlement’, House of Commons Library Briefing Paper 09139.
4. Ilaria Fusacchia, Luca Salvatici, L Alan Winters, The consequences of the Trade and Cooperation
Agreement for the UK’s international trade, (2022). Oxford Review of Economic Policy, Volume
38, Issue 1, Spring 2022, Pages 27–49, https://doi.org/10.1093/oxrep/grab052
5. J.J. Reimer Global production sharing and trade in the services of factors, (2006). Journal of
International Economics Volume 68, Issue 2.
6. Ramanarayanan, Ananth, 2020. "Imported inputs and the gains from trade," Journal of
International Economics, Elsevier, vol. 122(C).
7. Mayer-Schonberger, V., & Ramge, T. (2018). "Reinventing Capitalism in the Age of Big Data." Basic
Books.
8. OECD. (2019). "Social Protection System Review of Germany."
9. WTO. (2020). World Trade Report 2020: Government Policies to Promote Innovation in the
Digital Age. World Trade Organization
10. Popp, D., Hascic, I., Medhi, N., & Upadhyaya, S. (2017). Technology and the diffusion of
renewable energy. Energy Economics, 63, 199-209.
11. Maskus, K. E. (2020). The Globalization of Intellectual Property Rights: A Reassessment. Oxford
University Press.
12. Belenzon, S., & Patacconi, A. (2012). The selection of high-impact ideas for European research.
The Economic Journal, 122(560), F289-F320.
13. OECD. (2018). The Future of Education and Skills: Education 2030. OECD Publishing.
14. Popp, D., Hascic, I., Medhi, N., & Upadhyaya, S. (2017). Technology and the diffusion of
renewable energy. Energy Economics, 63, 199-209.
15. Bergeaud, A., Cette, G., & Lecat, R. (2020). Productivity trends in advanced countries between
1890 and 2012. Review of Income and Wealth.

10