Trade Finance and Foreign Exchange in Germany - Assignment Example

Trade Finance and Foreign Exchange in Germany Customer Inserts His/ Her Name Customer Inserts Name of Tutor Customer Inserts Grade/ Course (September 17, 2014) Introduction Germany is a country found in the Europe where it happens to be the largest economy in its continent. It also comes number four in the world in terms of nominal Gross Domestic Product (GDP). Germany is also the third largest economy in terms of exports, which are more than one-third of the world’s total exports. For instance, in 2013, Germany managed to record a trade surplus of about $270 billion, which was in fact the highest in the world. All this, it has attained because of its innovation and the fact that the country operates on social market economy concept (Braun, 1990, p.102). Most of Germany’s exports are machinery and equipment, motor vehicles, chemical products, electronic products like computers and pharmaceuticals just to mention a few. On the other hand, Germany imports metals, textiles, and food products among other commodities. By the year 2013, the most important trading partner of Germany was France accounting to 9.2% of the country’s total exports. The United States and United Kingdom came second and third, each taking a percentage of 8.1% and 6.9% respectively (Bhimani, 2003, p.76). On the other hand, Netherlands is Germany’s biggest importers with others like China and France taking second and third positions in rank. From the above statistics, France becomes Germany’s most important trading partner because of the large amounts of exports and imports between the two countries. This paper is therefore an in-depth analysis of Germany’s most important trading partner over a period of three years as well as looking at the trade relationship that exists between the two. The trade flows between Germany and France over last three years Trade between Germany and France is of importance to both countries because they exchange imports and exports. However, France is the biggest importer of Germany’s exports while being the third largest exporter to Germany. The table below shows the trade flows between the two countries from 2011 to 2013 (Destais, 2014, p.1). a. Germany’s exports to France Year 2011 2012 2013 Exports in Figures 101 billion euro 104 billion euro 100.3 billion euro b. Germany’s imports from France Year 2011 2012 2013 Imports in Figures 66 billion euro 65 billion euro 64.1 billion euro Whether Germany has a trade surplus or a trade deficit with France A trade surplus in economics comes about when the balance of trade between countries is positive. This is to mean that the exports to a country exceed the imports from the same country. When this happens, there is a net inflow of the country’s currency from the international market, which operates using foreign currency. A trade deficit comes about when the balance of trade is negative. In this case, the imports exceed the exports to a country leading to net outflow of domestic currency to the international market. The economic measure of trade between Germany and France from the trade flows tabulated above shows a positive balance of trade over the three years. This is because the exports from Germany to France exceed the imports from France to Germany. As such, Germany has a trade surplus while France has a trade deficit. This can be further illustrated in the table below: Year 2011 2012 2013 Exports to France 101 billion euro 104 billion euro 100.3 billion euro Imports from France 66 billion euro 65 billion euro 64.1 billion euro Trade surplus 35 billion euro 39 billion euro 36.2 billion euro From the table above, it can be clearly seen that there is a trade surplus in the trade between Germany and France of 35 billion euro, 39 billion euro, and 36.2 billion euro in years 2011, 2012, and 2013 respectively. In a situation of trade surplus, the superseding nation normally has control over its trading partner thus being able to control a larger part of its currency (Krugman and Wells, 2006, p. 87). Therefore, in the case of Germany and France, Germany has control of over majority of France’s currency making the latter’s currency drop in value. When the currency of France drops in value, it becomes even more difficult for France to buy Germany’s exports thus causing an even bigger difference in the balance of trade. In turn, the trade surplus becomes greater than before. Other than Germany having a trade surplus with France, the country also records a general trade surplus with its other trading collaborates (Rising, 2014, p.1). For instance, the Federal Statistical Office reported that “Balance of Trade in Germany averaged 4299.73 EUR Million from 1950 until 2014, reaching an all-time high of 23400 EUR Million in July of 2014 and a record low of -535.91 EUR Million in April of 1991” (Trading Economics, 2014, p.1). The TWO main drivers of trade flows between Germany and France Trade between Germany and France can be described as mutual beneficial. This is because, both countries benefit from the trade relationship. Nevertheless, this is because of several trade drivers with the two main drivers being the nations’ economic and social infrastructure as well as political safety. For a very long time in history, Germany has been in the forefront in terms of industrial development especially in the sector of economic and social infrastructure. A look at Germany’s exports, which include machinery and motor vehicles among others, it shows that the country is rich in infrastructure. For example, the country’s social market economy is made up of a labour force that is highly skilled. This makes it possible for the country to manufacture high quality machines, equipment, and motor vehicles hence creating a bigger exports market for its products. In addition to this, the country’s infrastructure in terms of transport network is well developed. Germany is globally known for its established modern transport system, which includes a network of high-speed trains, extensive motorway, extensive pipeline, and large modern airports. This contributes greatly to trade as it facilitates movements of exports and imports out and into the country (Sullivan and Sheffrin, 2003, p.462) Secondly, the political climate of both Germany and France has significantly influenced trade flows between the two nations. Both nations have been known to maintain peace, which is a key driver of trade flows between them. Research has indicated that political differences between nations have a negative impact on trade as well as other sectors. “Political turmoil, for example, can cause a loss of confidence in a currency and a movement of capital to the currencies of more stable countries” (Baun, 1996, p.83).  Therefore, the peaceful political relationships of Germany and France have made it possible for the two countries to exchange products in trade. This cordial relationship has been depicted in various ways and events with the recent one being ‘”On 3 August 2014, French President Francois Hollande and German President Joachim Gauck together marked the centenary of Germany's declaration of war on France by laying the first stone of a memorial in Vieil Armand”(Baun, 1996, p. 85). How an increase in interest rate will affect the exchange rate between Germany and France Most often, the trade between nations is normally carried out in a common currency thus requiring that the domestic currencies of each country be converted to international market rate (Fletcher, 2011, p.195). This therefore means that the domestic interest rates will definitely have an impact on the exchange rates. Interest rates can be defined as the price that an individual or country pays for use of a currency different from theirs. “The interest rate influences the exchange rate because it influences the demand and supply of currencies on the foreign exchange markets” (Nine Stocks, 2012, p.1). In case of an increase in interest rate of one country, the demand for that specific currency increases making its value appreciated. The vice versa is also true, that is a decrease in interest rates lowers demand for that country’s currency hence making its value depreciate (Nine Stocks, 2012, p.1). Thus, if the interest rate of Germany increases, the demand for Euro will go up making its value appreciate against the dollar, which is the international market currency. How an increase in interest rate will affect the trade flows between Germany and France An increase in interest rate is considered healthy in the trade environment (Samuelson and Marks, 2003, p. 126). This is because in addition to making the domestic currency strong it increases the number of investors in the foreign exchange market. Investors will be willing to invest more in a country that has strong currencies than those with weak fluctuating currencies (Hopwood et al, 2004, p.183). As for the case of Germany and France, increase in Germany’s interest rate will further increase the demand for its exports. This will make France as well as other countries buy more of Germany’s exports hence further the trade surplus of Germany and France trade relationship. Research indicates, “Higher interest rates offer lenders in an economy a higher return relative to other countries” (Duncan, 2005, p.102). As such, Germany will be getting a higher return over France making it export even more to France than it has been doing in the past years. At the same time, France will be demanding more of Germany’s products making it import than it has been importing in the previous years. The trade flow after Germany’s increase in interest rate is expected to be in the same direction though the export figures to France are expected to be higher. As for the case of France, the exports to Germany could stagnate or go lower depending on the strength of its domestic currency in the foreign exchange market. If Germany finds imports from France quite expensive, it could turn away and start importing the same commodities from other countries that offer prices lower than France. Alternatively, the import figures of Germany from France could stagnate if Germany still finds France’s prices reasonable when compared to those of other nations. Regardless of the decision that Germany takes on its imports from France, the trade surplus figures are expected to go higher because of the increasing exports to France. Conclusion From the above discussion, it can be concluded that trade between Germany and France has played significant roles in the economy of both countries. Having had cordial relationships from long ago, the two countries have had what can be defined as a successful trade relationship in the recent past. The two merged to create a Franco-German industrial alliance that has seen the creation of enterprises such as Aventis among others. However, there have been allegations that Britain is taking over France to become Germany’s largest trade partner (Pritchard, 2013, p.1). These allegations are yet to be proven since, as at 2013; France was top on the list of Germany’s trading partner. Reference List Baun, M. (1996). The Maastricht Treaty as High Politics: Germany, France, and European Integration. Political Science Quarterly. Bhimani, A, (2003). Management accounting in the digital economy. Oxford University Press, Oxford. Braun, H. (1990) "The German Economy in the Twentieth Century”. New York: Routledge Bergen, J. (2014). 6 Factors That Influence Exchange Rates. Retrieved from http://www.investopedia.com/articles/basics/04/050704.asp Destais. (2014). Germany’s most important trading partners 2013. Retrieved from https://www.destatis.de/EN/FactsFigures/NationalEconomyEnvironment/ForeignTrade/TradingPartners/Current.html Duncan, R (2005). The Dollar Crisis: Causes, Consequences, Cures. New York: Wiley. Fletcher, I. (2011). Free Trade Doesn't Work: What Should Replace It and Why (U.S. Business & Industry Council 2011 Edition Hopwood, A, Leuz, C & Pfaff, D. (2004).The economics and politics of accounting: international perspectives on research trends, policy, and practice, Oxford University Press, Oxford. Krugman, P and Wells, R. (2006). Economics. New Jersey: Worth Publishers Nine Stocks. (2012). How Interest Rates Affect Foreign Exchange. Retrieved from http://www.ninestocks.com/2012/01/how-interest-rates-affect-foreign-exchange/ Pritchard, A. (2013). Britain becomes Germany's biggest trade partner as Berlin- London pact deepens. Retrieved from http://www.telegraph.co.uk/finance/newsbysector/industry/9816643/Britain-becomes-Germanys-biggest-trade-partner-as-Berlin-London-pact-deepens.html Rising, D. (2014). German trade surplus hits record high in 2013. Retrieved from, http://news.yahoo.com/german-trade-surplus-hits-record-high-2013-094101551--finance.html Samuelson, W. & Marks, S. (2003). Managerial Economics. 4th ed. Wiley. Sullivan, A., and Sheffrin, S. (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. Trading Economics. (2014). Germany Balance of Trade. Retrieved from http://www.tradingeconomics.com/germany/balance-of-trade Read More