TRADE POLICY IN A NORTH AMERICAN AND GLOBAL CONTEXT CPL

Transcription

1 TRADE POLICY IN A NORTH AMERICAN AND GLOBAL CONTEXT CPL KENNETH MATZIORINIS REGIONAL TRADE REPORT BRIEF ON THE FEDERAL REUBLIC OF GERMANY To MINISTER OF EXTERNAL AFFAIRS DEPARTMENT OF EXTERNAL AFFAIRS By Nassima Bekhechi Mona Timmons March 2, 2006

2 TABLE OF CONTENTS 1.0 INTRODUCTION 1.1 Overview 2.0 COUNTRY PROFILE 2.1 Population 2.2 Geography 2.3 Economic Indicators 2.4 Government Finances 2.5 Balance of Payment 2.6 Politics 2.7 International Organizations 2.8 Global Rankings 3.0 INTERNATIONAL TRADE 3.1 Exports and Imports 3.2 Foreign Direct Investment 3.3 Bilateral Relations with Canada 3.4 Trade with US 3.5 Trade with Mexico 3.6 International Trade Issues 4.0 TRADE POLICY 4.1 Overview 4.2 Assessment and Outlook for Trade APPENDICES 1

3 1.0 INTRODUCTION The following report provides an overview of Germany and its current trade policies. It is broken down into three distinct parts: Country Profile International Trade Trade Policy The report also provides a synopsis of Germany s position within the EU at the Doha Round. 1.1 Overview In October 1990 German unification began, consisting of the incorporation of East Germany (German Democratic Republic) into West Germany (Federal Republic of Germany). A 1000 page treaty outlined the terms of the political union, including the extension of existing political structures and policies of the west to the east. Germany, Europe s largest economy is also the second most populous nation. 1 Member of the WTO since January 1, 1995 and member state of the European Union since 1999 and a founding member of EU. Competition has intensified since the Union began, due to the stronger integration between member states. This has resulted in increased demands for a coordinated economic policy. That applies to both tensionfree interaction between the macroeconomic policy areas (monetary, fiscal and wage policy) and the reform processes on the goods, capital and labour markets in the member states. 2 Germany has been facing problems in three interrelated areas: 3 Low and declining trend growth High and long lasting unemployment Persistent fiscal pressures Solutions envisaged are: Fiscal consolidation Labour market reforms Product and Service market reforms Financial sector Reforms To help reduce unemployment Germany is guaranteeing all young people between the ages of 15 and 24 an offer of a job, training, qualification or occasional work. 4 Germany is well positioned to show increased economic activity however, Germany is very page

4 dependent on exports and therefore this is a potentially precarious recovery. Positive signs include: Increased investment in machinery and equipment Levelling of the decline in construction Increase in consumer confidence Implementation of the recommendations contained in the Coalition Agreement, including a 3% VAT increase will no doubt slow consumer spending and may delay any significant recovery. Additionally, Germany s economy will be impacted by any disruption in the world economy that may impact its exports. Other changes envisioned include health care and corporate tax reform. We expand further below. 2.0 COUNTRY PROFILE 2.1 Population 5 As at July 2005, the population of Germany was estimated at 82,431,390 people with an age structure as follows: Age Percentage of Population Breakdown by sex in Millions 0-14 years 14.4% Male 6.1 /5.8 female years 66.7% Male 28 /27 female 65 years and over 18.9% Male 6.4 /9.2 female The median age was years males/43.53 years females) Germany is experiencing a negative growth rate with 8.33 births/1000 population versus deaths/1000 population. The life expectancy is years for males and years for females. Germany s population is composed primarily of Germans at 91.5% with only a small percentage of Turkish 2.4% and various other mixed ethnic groups (6.1% composed of Greeks, Italians, Polish, Russian, Serbo-Croatian and Spanish origin). Language spoken is German. 68% of the population is either Protestant or Roman Catholic (34% each) with a small percentage of Muslim at 3.7% and unaffiliated or other at 28.39%. 2.2 Geography Germany is located in central Europe, borders the Baltic and North Seas, and is situated between several countries, including the Netherlands, Poland, Czech Republic, 5 3

5 Austria, Liechtenstein, Switzerland, France and Belgium and is south of Denmark. Germany has a strategic location on the North European Plain and along the entrance to the Baltic Sea. 6 Germany has an area of 349,223 square kilometres of land and 7,798 square kilometres of water for a total area of 357,021 square kilometres 7. Germany s terrain is quite varied with lowlands in the north, uplands in the center of the country and Bavarian Alps in the south 8. The capital of Germany is Berlin located in the northern part of the country; its main cities are Munich in the south and Frankfurt in the mid-west of the country. 2.3 Economic Indicators: Germany is considered the fifth largest economy in the world with an affluent and technologically powerful economy. Unfortunately, despite this title, Germany has become one of the slowest growing economies in the Euro zone. 9 Part of the problem is the integration and modernization of Eastern Germany; anticipated to be a long-term process. Annual transfers from west to east amount to roughly $70 billion. 10 Most transfers are designated for infrastructure improvement however; a majority of the funds are spent on annual budget deficits due to a constant shortfall in revenues

6 Germany is faced with an aging population and high unemployment, currently at 11.6%, resulting in social payments exceeding contributions from workers. In addition, strict regulations on the laying off of workers and the setting of wages, have also contributed to Germany s chronic unemployment problem, translating into decreased government revenues, an increase in expenditures and ultimately an increase in the deficit - above the 3% EU debt limit. The unemployment trend for the past 6 years is listed below: % 10.6% 9.6% 8.7% 7.8% 7.7% According to the OECD (Organization for Economic Co-operation and Development), Germany s government deficit is likely to total 3.9% of GDP in both 2005 and 2006 but is projected to fall in 2007 due to a planned increase in the value added tax rate. 11 Inflation stood at 2% for GDP figures for 2005 (latest figures) were as follows: GDP (official exchange rate) was estimated at US $2.83 trillion 2005 GDP (purchasing power parity) was estimated at US $2.446 trillion in 2005 GDP real growth rate was.8% in 2005 GDP per capita was estimated based on purchasing power parity at $29,700 GDP per capita in current terms was estimated at $34,330 GROSS DOMESTIC PRODUCT PRIOR YEARS IN BILLIONS USD , , , , , A diagram showing the projection for 2005 is listed under Appendix A: Investment rate (gross fixed) was 17.1% of GDP Structure of Economy Germany s economy is highly concentrated in the service sector. Listed below is the percentage distribution between agriculture, manufacturing and services, as well as the main industries: GDP Composition by Sector Agriculture 1.1% Industry 28.6% Services 70.3%

7 Labour Force by Occupation Agriculture 2.8% Industry 33.4% Services 63.8% Germany is amongst the world's largest and most technologically advanced producers of iron, steel, coal, cement, chemicals, machinery, vehicles, machine tools, electronics, food and beverages, shipbuilding and textiles Government Finances 13 Germany s total intake of revenues was $1.249 trillion during 2005 offset by $1.362 trillion in expenditures, including capital expenditures of NA (2005 est.), resulting in a budget deficit of $113 billion. Public Debt was estimated at $1.927 trillion for 2005 representing 68.1% of GDP for Industrial Production Growth Rate was 1.7% for Balance of Payments 14 Although world trade grew by an estimated 9% in 2004, exchange rates and the sharp rise in the Euro placed a burden upon German exporters. However, as a result of a broad range of products and regional diversification, German exports increased by 10% in Both exports to non-euro countries as well as euro-area countries grew by approximately 10.5%, with significant increases to Ireland (15.5%), Spain (13.5%) and Greece (13%). Despite these increases, these countries make up less than 1/7 th of German exports. During 2004 Germany lost ground to their Asian competitors in noneuro countries. Positives are the inroads made in exports to China in 2003 of +15%, and increased trade with Russia and the OPEC countries. The end result is record trade surpluses in their trade account. The following are the key balance of payment figures for 2004 (latest available): In Billion Euro Current Account Trade Services Income Balance on Current Account Balance of Capital Transfers

8 Balance on Financial Account Change in Foreign Reserve Transaction Balance of Unclassifiable transactions Appendix A attached provides an overview of the balance of payment account as well a graph showing the increase in competitiveness of Germany s trade. In 2004 Germany had estimated foreign exchange and gold reserves of $97.17 billion Germany s estimated current account balance for 2005 was $119.8 billion. Foreign debt was listed at $3.626 trillion as at June 30, 2005 Currency is Euro Exchange rate Euros per US dollar in 2005 Current exchange rate is Canadian to Euro or US to Euro GDP (official exchange rate) estimated in 2005 was $2.83 trillion GDP (purchasing power parity) was listed at $2.446 trillion Foreign debt as % of GDP would then be 148% (See Appendix A for Trends) 2.6 Politics Until 1989, the actual Federal Republic of Germany was divided between East and West Germany that lived four decades of Cold War division. Achieved in October 1990, after the fall of the Berlin Wall, German unification consisted of the incorporation of the German Democratic Republic (GDR, or East Germany) into the Federal Republic of Germany (FRG, or West Germany). The unified country, rather than reflecting a mix of both state systems, largely represented a continuation of the West German political and economic system. It is defined in the Constitution of May 23 rd, 1949 that became the Constitution of the unified Germany on October 3 rd, The constitution is known as the Basic Law. The German system of government, outlined in the Basic Law, consists of a federal system of government with the following branches: - The Executive branch: o The President: The Chief of State in Germany is the President and his position is mostly symbolic. At the international level, the president represents his country by signing treaties, receiving foreign dignitaries and representing Germany abroad. At the national level, the President has largely ceremonial functions. A Federal Convention elects him for a fiveyear term. The current German president is Horst Kohler elected in 2004 by the Federal Convention and his residence is the Bellevue Palace in Berlin. 7

9 o The Chancellor: The central executive authority in Germany is the chancellor. This authority emanates from the provisions of the Basic Law and from his or her status as leader of the party or coalition of parties holding a majority of seats in the Federal Assembly. Every four years, after national elections and the seating of the newly elected Federal Assembly members, the federal president nominates a chancellor candidate to that parliamentary body; the chancellor is elected by absolute majority vote. The actual German chancellor is Angela Merkel and was elected in November o The Cabinet (Bundesminister): All federal ministers form the cabinet and are appointed by the president on the recommendation of the Chancellor. According to the Basic Law, the chancellor may set the number of cabinet ministers and dictate their specific duties.! Current Minister of Economics and technology: Michael Glos appointed in November 2005.! Current Minister of Economic Cooperation and Development: Heidemarie Wieczorek-Zeul appointed in October 1998.! Current Minister of Foreign Affairs: Franck Walter Steinmeir, since November The Legislative branch: o The Bundestag or the Federal Assembly has 603 seats elected by popular vote under a system combining direct and proportional representation. o The Bundesrat or the Federal Council and it consists in 69 votes representing the state governments. Each state has 3 to 6 votes depending on its population. There are no elections for the Bundesrat because the composition is determined by the composition of the statelevel governments. - The Judicial branch or the Federal Constitutional Court: Half the judges are elected by the Bundesrat, and half by the Bundestag. 2.7 International Organizations Germany is an important member of all major political and economic international organizations and is actively engaged in securing peace, safeguarding human rights and combating terrorism around the world. Development and aid policy remain a cornerstone of the German foreign relations showing the government s commitment to peace and cooperation. Here are the main organizations where Germany is involved: The United Nations (UN) Germany joined the UN in 1973 and is today the third largest contributor to the UN budget (contributing to almost 10% of the budget in 2003 and 8.8% in ). This 15 Facts about Germany : 8

10 makes Germany an important member in all UN related organizations, like the World Bank, the IMF, the UNDP, the UNESCO, amongst others. North Atlantic Treaty Organization (NATO) The North Atlantic Treaty was originally signed in 1949 by 12 European states and North America with the mission to provide security and stability to the entire European- Atlantic region, in the form of alliances and cooperation, conflict prevention and crisis management. Germany joined NATO on May 6 th, German Armed Forces have a mission derived from the German constitutional mission and the objectives of security and defense policy, in accordance with the mission of NATO. The German Armed Forces guarantee the nation s ability to implement its foreign policy, make a contribution to stability at the European and global level, ensure national security and defense, and assist with defense of its allies, as well as promoting multinational cooperation and integration. The European Union (EU) On April 18, 1951 Belgium, Germany, France, Italy, Luxembourg and the Netherlands set up the European Coal and Steel Community (ECSC). This process was incorporated into the Treaty of Rome signed on March 25, 1957, which created the European Economic Community (EEC) and the European Atomic Energy Community (EURATOM). Under this treaty, the six founding member states of the ECSC agreed to operate a free market by eliminating all trade barriers, adopting a joint economic policy and harmonizing the standard of living in the member states. Germany s Walter Hallstein was appointed the first President of the EEC Commission in Brussels. The strong economic position of Germany worldwide and its position as a founding member make Germany a very important member of EU. The German European policy played a considerable role in the drafting of the European Constitution proposed to the EU members. The World Trade Organization Germany is a member of WTO since January 1 st, 1995 as are all members of the EU and the EU itself. The Organization for Economic Co-operation and Development (OECD) Germany is one of the 19 founding members of the OECD. The German government maintains a permanent delegation to monitor the work of the organization. Apart of this, Germany is also a member of the following international economic and political organizations 16 : AfDB, AsDB, Australia Group, BIS, BSEC (observer), CBSS, CDB, CE, CERN, EAPC, EBRD, EIB, EMU, ESA, EU, FAO, G- 5, G- 7, G- 8, G-10, IADB, IAEA, IBRD, ICAO, ICC, ICCt, ICFTU, ICRM, IDA, IEA, IFAD, IFC, IFRCS, IHO, IlO, IMO, Interpol, IOC, IOM, ISO, ITU, MIGA, NAM (guest), NATO, NEA, NSG, OAS (observer), OPCW, OSCE, Paris Club, PCA, UNAMSIL, UNCTAD, UNESCO, UNHCR,

11 UNIDO, UNMEE, UNMIS, UNMOVIC, UNOMIG, UPU, WADB (nonregional), WCO, WEU, WHO, WIPO, WMO, ZC. A list of abbreviations is provided in Appendix C. 2.8 Global rankings Germany is the largest economy in Europe and the third economy in the world. In general, it has good rankings when it comes to comparing its economic and development indicators to the rest of the world. Here are some of the global rankings of Germany, compared to the NAFTA countries: Growth Competitiveness Index 17 Country GCI rank GCI rank GCI rank 2003 United States Germany Canada Mexico Note: GCI captures economic data and surveys from business leaders around the world to have a measure of their perception towards a country s future development. Human Development Index Country HDI HDI rank Canada United States Germany Mexico Note: HDI is a comparative measure of poverty, literacy, education, life expectancy and other factors to measure the average development achievements in a country. The index number, reported in the Human Development Report, is an indication of where a country is development wise. Countries with an index over are part of the High Human Development group. Between and 0.800, countries are part of the Medium Human Development group. Corruption Perception Index 19 Country CPI 2005 rank Canada 14 Germany 16 United States 17 Mexico Human Development Report UNDP:

12 Note: CPI ranks countries in terms of the degree to which the corruption is perceived to exist among public officials and politicians. 3.0 INTERNATIONAL TRADE 3.1 Exports and imports West Germany has been a major trading nation since the economic miracle of the early fifties. Ludwig Erhard set the tone for the future of German trade policy and practice when he was the minister of economics, saying in 1953 that: Foreign trade is not a specialized activity for a few who might engage in it, but it is the very core and even the precondition of our economic and social order. Since this period, Germany has always had high trade and current account surpluses, except during the period of unification where the trade balance of West Germany shrank. Exports Germany is the first exporting nation in the world. Companies generate almost a third of their profits through exports, and almost one in four jobs are dependent on foreign trade. The export sector has a powerful voice in German economic and commercial policy-making, including a special Foreign Trade Advisory Council located in the Ministry of economics. German politicians rarely make visits abroad without including select German business people in their official delegations. Total exports for Germany in 2005 reached trillion USD, which represents almost 36% of the total GDP for this year. The following chart gives the total amount of exports for the last five years 20 : Total exports (billion USD) Total exports (billion USD)

13 Main exports are machinery, vehicles, chemicals, metals and manufacture, foodstuffs, and textiles 21. In 2004 Germany lists its main export partners as 22 Country France 10.3% 10.6% US 8.8% 9.3% UK 8.3% 8.4% Italy 7.2% 7.4% Netherlands 6.2% 6.2% Belgium 5.1% 5.6% Austria 5.4% 5.3% Spain 5% 4.9% Switzerland 4% Imports Germany is also a big importing nation while maintaining a positive balance of payments. Total imports reached 801 billion USD in 2005, which comes to 28% of GDP for the same year. The following chart provides the total imports of Germany in the last five years 23 : Total Imports (Billion USD) Total Imports (Billion USD) Main imports are machinery, vehicles, chemicals, foodstuffs, textiles and metals

14 In 2004 Germany lists its main import partners as 25. Country France 9% 9.2% Netherlands 8.3% 8.4% US 7% 7.3% Italy 6.1% 6.3% UK 5.9% 6% China 5.6% 4.7% Belgium 4.9% 4.9% Austria 4.2% 4% 3.2 Foreign Direct Investment (FDI) Inflow of FDI for 2003 was 12,878 million USD Outflows of FDI for 2003 was 2,562 million USD The following charts give the total FDI inflows and outflows of Germany compared to those of Canada, the United States, the EU (15) and the OECD 26. FDI Inflows Amount in million USD Year Canada Germany United States EU15 OECD total OECD : 13

15 FDI outflows Amount in million USD Canada Germany United States EU15 OECD total Year 3.3 Bilateral relations with Canada Germany and Canada have good and problem-free bilateral relations and there are many factors that strengthen these relations at many levels: Political relations: Canada and Germany have a common approach when it comes to the organization of its government (federalism with provinces in Canada or Landers in Germany) and this has resulted in an increasing cooperation between the provinces of Canada and the German federal states. Alberta, Ontario and Quebec have offices in Germany. Some German experts are interested in the Canadian system as a point of comparison. Moreover, as longtime members of NATO, both countries have closely cooperated in the field of defense and remain committed to arms reduction, non-proliferation and human security through multilateral organizations such as NATO and the UN. Economic relations: Germany and Canada have maintained good trade and investment relationships through the last decade. Germany is Canada s sixth largest exporter and supplier. Moreover, Germany is the seventh foreign direct investor in Canada. (Details about economic relations are provided in the next section). Cultural and academic relations: there are many cultural and educational partnerships between Canada and Germany that are shaped through hundreds of exchange and work-study programs. This results in extensive interaction between the citizens of the two countries. Each year, over 420,000 German tourists visit Canada, injecting approximately $500 million into the Canadian economy, about 1,000 Germans immigrate to Canada, some 1,700 come to study and another 2,000 to work temporarily. Science and technology: Canadian and German researchers have collaborated in joint projects since 1971 under the bilateral Scientific and 14

16 Technological Cooperation Agreement, resulting in the sharing of scientific expertise and the co-financing of joint projects. This benefits Canada since Germany is a worldwide leader in high-tech production machines and control systems and the second largest patent holder. The potential for new cooperation and strategic alliances is very high. Imports and exports with Canada Germany is Canada s sixth import and export partner, but the percentage of Canada s exports and imports with Germany is not very high (2.7% of total exports and 0.7% of total imports in ), which presents an opportunity for Canada to expand its relations with Germany and diversify its international trade partners. On the other hand, Canada does not figure with the most important trade partners of Germany. The following table gives the total amount of imports and exports in millions CAD: Canada s Trade with Germany Exports Merchandise 2,415 3,154 2,930 2, ,669 Services 1,486 1,594 1,764 1,649 1,756 N/a Total 3,901 4,748 4,694 4,604 4,651 2,669 Exports Imports Merchandises 6,948 7,773 7,999 8,293 8,637 9,414 Services 1,074 1,218 1,501 1,649 1,818 N/a Total Imports 8,022 8,991 9,500 9,942 10,455 9,414 Trade Balance -4,121-4,243-4,806-5,338-5,804-6, The main exports and imports between Canada and Germany are described in Appendices D and F, by industry. Foreign Direct Investment in Canada German FDI in Canada (in million CAD) Year rank Inflows 4,572 6,120 7,835 8,158 8, Outflows 7,375 6,175 6,801 7,090 7, Trade date online- Industry Canada: 28 International Trade Canada : 29 This amount excludes the trade in services. 15

17 Germany was the seventh largest foreign direct investor in Canada in Most German multinational companies are represented in over 1500 locations in Canada through more than 600 subsidiaries 30. Among these firms, we can list: Bayer, BASF, Siemens, Daimler-Chrysler, Mannesmann and Thyssen-Krupp. Big Canadian companies are also represented in Germany like: Alcan, CAE, Bombardier, Pratt & Whitney, Trizec-Hahn and Magna. 3.4 Trade with the United States The US remains the second largest market, behind France, for German exports. And the US is the third largest importer, behind France and the Netherlands, of goods from Germany. In fact, 8.8% of German exports went to the US in 2004 and 7% of Germany s imports came from the US. In 2005, the total US exports to Germany reached $34 billion USD and the total imports from Germany reached $85 billion USD. In 2002, Germany was the third largest foreign direct investor in the US after Japan and the United Kingdom, and the United States was the major foreign direct investor in Germany. US Trade with Germany Amount in million USD 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Imports Exports Year 3.5 Trade with Mexico In 2004, Germany was Mexico's fourth-largest trading partner. However, compared with the US, which accounts for almost 75% of Mexico s total foreign trade, Germany s share remains relatively small (about 2%). Again in 2004, German exports to Mexico totaled 6.2 billion USD and imports from Mexico, $1.1 billion USD. 3.6 International trade issues 30 Canadian Embassy in Berlin: 16

18 According to the official website of the CIA and to the website of the WTO, Germany does not have any case of international dispute. So there are no particular trade issues with Canada. 4.0 TRADE POLICY 4.1 Overview Germany views foreign trade as the driving force behind Germany s economic relations abroad - it is considered of the utmost importance for the German economy. 31 Both global trade and international investments are seen as the key to sustained growth, improvement in employment and ultimately overall prosperity. Germany is considered the world s leading export country and as much as 33% of Germany s GDP consists of exports. Germany is ranked as number one in merchandise exports in the world and number two in importers of merchandise. See Appendix F for an insight into Germany s market share Over 20% of all jobs in Germany are dependent upon the export of goods and services and Foreign Direct Investment is a major driver of its economy. 32 Increased competition on international markets and the rapid development of technology pose German industry with the challenge of maintaining and increasing its leading position in important sectors. 33 For Germany to improve its economic dilemmas, the new government will have to place more emphasis on reforming labour and product markets. Germany is supportive of a successful conclusion to the Doha trade talks. 34 (See Appendix G for Status of Talks) Germany has worked with the EU to submit a substantive offer in the agricultural sector, and its offer created intense discussions between all partners of the EU. Germany also recognizes the need for a parallel opening of the markets for industrial goods and services 35 failing which, progress will not be possible on the farm sector. Germany has furthermore undertaken to put together a Development Package for the benefit of the least developed countries, and supports an undiluted development mandate in the Doha Declaration. 36 Market access however, is the true answer to development. Although Germany is very supportive of the Doha Development Agenda, they stress that the current rules-based multilateral trading system is at stake. 37 According to Dr. Bernd Pfaffenbach, State Secretary in the Federal Ministry of Economics and Technology of Germany, World commerce requires a strong multilateral framework. And only the WTO can establish the conditions to guarantee all countries an equal voice, independent of size, political influence, or economic power. 38 The current system is still attractive evidenced by the accession of large trading partners such as Saudi Arabia, in addition to smaller ones

19 Germany s new government must focus on its economic reform, and economic recovery is its main focus for the next 4 years. Germany is faced with an aging population and high unemployment, currently at approximately 11.6%, resulting in social payments exceeding contributions from workers. Strict regulations on the laying off of workers and the setting of wages, have contributed to Germany s chronic unemployment problem, translating into decreased government revenues and an increase in expenditures, resulting in an increase in the deficit above the 3% EU debt limit. In order to resolve some of these structural problems - Big companies have restructured with the help of the trade unions, who were ready to accept more decentralised pay bargaining, longer hours and even wage cuts. 39 Unit labour costs have been decreasing, resulting in a competitive edge compared to some of their EU counterparts. These initiatives will continue. The World Bank counts Germany within the top 12 reform countries. 40 Germany has a significant number of positive elements to attract foreign investment including: Infrastructure Amongst the world s best Training of Workers Highly educated working population Low Inflation Rate one of lowest in the Euro area at 2% Legal Certainty Personal and corporate taxes have decreased significantly since 1998 to one of the lowest in the OECD Peaceful Industrial Relations Highest number of registered patents Significant spending on research and development compared to other European countries In the first 6 months of 2005 GDP increased.75% over 2004 and is expected to increase by approximately 1.5% in Although exports are the main force, improvement in domestic demand appears to also be evident, increasing by.3% in the 2 nd quarter of Additional favourable trends include a continued increase in the investment in plant and equipment, significantly improved corporate profitability, and ongoing restructuring by companies contributing to increased competitiveness key factors in translating foreign trade impulses to the domestic economy 4.2 Assessment and Outlook for Trade German export of goods and services are expected to grow by 6.5%for Competitiveness within the Euro-zone is strong due to the powerful appreciation of the Euro as well as an under-proportional increase in unit wage costs. 41 The appreciation in the Euro however, disadvantages German foreign trade. Despite strong exports, Germany has yet to experience an increase in household spending

20 Structural labour market weakness resulting in slow employment and weak development of incomes contributed to stagnation in consumer spending. 42 Potential global imbalances as well as higher oil prices could negatively impact any chance of recovery. Rising energy prices, job insecurity, and an increase in the need for private retirement savings, have all contributed to an increase in the household savings rate from 9.2% in 2000 to 10.5% in Consumer confidence and the labour market are both key factors in stimulating internal demand. Despite energy increases, the decrease in unit labour costs contributed to price stability, with a 1.4% increase in consumer prices. A decrease in construction investment decreased the GNP by -.3%. Growth is projected at 1.5 percent for 2006, which could translate into a gradual recovery. This recovery is still fragile, and therefore fiscal goals must avoid jeopardizing this. Several objectives have been stated: In the Coalition Agreement issued in November 2005 and Agenda 2010 Structural Reforms required include: Goal to lower fiscal deficit to below 3% of GDP in Maastricht limit Lower structural deficit by ¼% of GDP in 2006 Durable adjustment equivalent to ¾% of GDP in 2007 Fiscal consolidation estimated based on the proposed reforms Increase in the VAT rate by 3% by January 2007 Risk that if the economy is weak it may stave off growth if economy is strong may the full 3% may not be required. Gradually increasing the pensionable age currently increased by 2 years Restart Federalism Reforms Current difficulty managing the various levels of government Slightly lower the non-wage labour costs Corporate income tax reform planned for 2008 Strengthening of health care financing in 2006 potentially moving away from payroll taxes. The fiscal deficit is projected at 3.75% of GDP in 2005 with some improvement from labour market reforms and pension outlays and a lower than expected improvement from healthcare reform. The financial system is recovering from the difficulties of 2003 but there is still a need for market driven restructuring and de-fragmentation of the banking system, which has underperformed its EU peers. 44 Despite this bank profitability has improved and there is a reduction in nonperforming loans and banks have become more cost efficient. Germany envisions abolishing limits in interregional competition and opening up public sector banks to private capital would facilitate market-driven restructuring, offer higher

21 returns to scale and bolster profitability. 45 These improvements would ultimately help the banks redirect funds to areas of highest investment needs. The new German Government has undertaken to meet the challenges of globalization and demographic change. 46 Some of the reforms include: Fiscal restructuring to substantially reduce the deficit is a key focus. Significant and politically difficult labour market reforms have been undertaken resulting in increased incentives to work and increased competitiveness and flexibility Future additional labour market reforms are envisaged. Challenges due to low growth and high unemployment The results have been positive thus far with ongoing business restructuring, cost cutting, and sustained wage moderation that has contributed to rebuilding competitiveness, resulting in strong export growth. 47 The reliance however, is on foreign demand with domestic demand still lacking. Some improvement is seen in investment in machinery and equipment and labour market trends. Additional deficit reduction, expenditure cuts, entitlement reform, eventual elimination of the structural deficit are reforms needed post Deeper and broader reductions in subsidies and tax expenditures 48 will be required to produce sustainable government finances. Directors of the IMF Executive Board also recommended additional steps to limit spending growth on pensions, long-term care insurance, and health care. 49 Germany s decline in the working age population, will ultimately impact the economy s growth and public finances and therefore, more emphasis on increasing the labour supply is necessary. Such initiatives as: Welfare to Work of their UE benefits program Loosen employment protection legislation More testing of those qualifying for benefits Tax wedge on labour Greater wage differentiation Reduction of centralized wage bargaining to firm-level bargaining (allowing wages to be set more closely to productivity levels) as well as liberalization in the hiring/firing decisions of firms. 50 Increase in probationary periods from 6 months to 2 years Deregulation of product and service markets resulting liberalization would lower prices and increase growth and output volumes, which would ultimately help employment. Emphasis will be primarily on service market reforms. Germany is committed to trade liberalization and increasing its development aid. The increased investment activity and private consumption has increased the development

22 of imports, which is also influenced by the favourable trends in exports. Germany formally announced its desire to increase trade and create a long-term energy partnership with Russia 51, opening additional markets. Germany s economy is export oriented; therefore the world environment is critical to the successful attainment of its proposed reforms. IMF Directors encouraged Germany to work toward successfully concluding the Doha Round, which they have undertaken to do. RECOMMENDATIONS Canada should diversify its international trade to diminish the risk related to its high dependency on the American economy. For FDI, Germany is the largest market in Europe and entering it is a good entrance point to the whole European market. Germany is strategically located between west and east Europe, allowing entrance into other surrounding markets. Canada should tighten its scientific and technological links to Germany and create a synergy. Germany is known for its superior quality and advanced technology and Canada can benefit from this

23 APPENDIX A 22

24 APPENDIX B 23

25 APPENDIX C List of Abbreviations (International organizations and groups) Abbreviation Full name of organization or group AfDB African Development Bank AFESD Arab Fund for Economic and Social Development AsDB Asian Development Bank BIS Bank for International Settlements BSEC Black Sea Economic Cooperation Zone CBSS Council of the Baltic Sea States CDB Caribbean Development Bank CE Council of Europe CERN European Organization for Nuclear Research DDT dichloro-diphenyl-trichloro-ethane EAPC Euro-Atlantic Partnership Council EBRD European Bank for Reconstruction and Development EIB European Investment Bank EMU European Monetary Union ESA European Space Agency EU European Union FAO Food and Agriculture Organization G-5 Group of 5 G-7 Group of 7 G-8 Group of 8 G-10 Group of 10 IBRD International Bank for Reconstruction and Development (World Bank) ICAO International Civil Aviation Organization ICC International Chamber of Commerce ICCt International Criminal Court ICFTU International Confederation of Free Trade Unions ICRM International Red Cross and Red Crescent Movement IDA International Development Association IEA International Energy Agency IFAD International Fund for Agricultural Development IFC International Finance Corporation IFRCS International Federation of Red Cross and Red Crescent Societies IHO International Hydrographic Organization ILO International Labor Organization IMF International Monetary Fund IMO International Maritime Organization Interpol International Criminal Police Organization Intersputnik International Organization of Space Communications IOC International Olympic Committee IOM International Organization for Migration ISO International Organization for Standardization ITU International Telecommunication Union MIGA Multilateral Investment Geographic Agency NAM Nonaligned Movement NATO North Atlantic Treaty Organization NEA Nuclear Energy Agency NSG Nuclear Suppliers Group OAS Organization of American States OPCW Organization for the Prohibition of Chemical Weapons OSCE Organization for Security and Cooperation in Europe PCA Permanent Court of Arbitration UNAMSIL United Nations Mission in Sierra Leone UNCTAD United Nations Conference on Trade and Development UNESCO United Nations Educational, Scientific, and Cultural Organization UNHCR United Nations High Commissioner for Refugees UNIDO United Nations Industrial Development Organization UNMEE United Nations Mission in Ethiopia and Eritrea UNMIK United Nations Interim Administration Mission in Kosovo UNMOGIP UNMOVIC UNOMIG UPU WADB WCO Wetlands WEU United Nations Military Observer Group in India and Pakistan United Nations Monitoring, Verification, and Inspection Commission United Nations Observer Mission in Georgia Universal Postal Union West African Development Bank World Customs Organization Convention on Wetlands of International Importance Especially As Waterfowl Habitat Western European Union 24

26 APPENDIX D 52 Canada's Marchandise Exports to Germany by Industry (in 000 CAD) Iron Ore Mining 205, , , , ,489 Pulp Mills 413, , , , ,806 Coal Mining 75,880 74,744 99, , ,840 Aerospace Product and Parts Manufacturing 582, , , , ,680 Other Basic Inorganic Chemical Manufacturing 12,141 18,719 45,167 40, ,104 Engine, Turbine and Power Transmission Equipment Manufacturing 265, , , , ,411 Navigational, Measuring, Medical and Control Instruments Manufacturing 49,295 56,805 81,967 92,508 99,744 Other Metal Ore Mining 69,972 85,507 78, ,284 92,985 Telephone Apparatus Manufacturing 12,877 26,458 49,421 42,397 87,703 Paper Mills 69,368 84,566 75,258 69,199 77,410 Petroleum Refineries ,684 66,894 Non-Ferrous Metal (except Aluminum) Smelting and Refining 43,674 31,043 44,676 37,225 63,415 Sawmills and Wood Preservation 70,055 63,827 59,130 65,138 58,798 Pharmaceutical and Medicine Manufacturing 39,791 24,889 35,955 40,978 52,135 Computer and Peripheral Equipment Manufacturing 37,914 25,720 32,779 42,993 48,520 Commercial and Service Industry Machinery Manufacturing 84,314 60,538 42,236 62,799 47,703 Semiconductor and Other Electronic Component Manufacturing 25,138 16,712 23,890 29,422 44,726 Other Basic Organic Chemical Manufacturing 7,150 11,948 6,961 10,118 40,769 Other Industrial Machinery Manufacturing 58,100 43,969 52,254 45,568 40,664 Automobile and Light-Duty Motor Vehicle Manufacturing 11,120 16,525 42,369 56,011 38,888 All Other General-Purpose Machinery Manufacturing 8,810 15,601 17,653 23,388 32,644 Printing 28,126 46,258 42,937 22,179 30,107 Iron and Steel Mills and Ferro-Alloy Manufacturing 15,621 13,757 20,082 21,971 28,331 Seafood Product Preparation and Packaging 37,010 22,992 38,480 38,591 28,175 Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing 20,664 12,839 20,241 23,250 25,819 SUB-TOTAL 2,244,202 2,161,808 2,170,067 1,866,239 2,384,760 OTHERS 685, , , , ,619 TOTAL (ALL INDUSTRIES) 2,930,170 2,955,155 2,895,752 2,666,675 3,222, Trade Data Online- Industry Canada- Source : Statistics Canada (27 February 2006) 25

27 APPENDIX E 53 Canada's Marchandise Imports from Germany by Industry (in 000 CAD) Automobile and Light-Duty Motor Vehicle Manufacturing 1,260,831 1,556,640 1,699,422 1,727,222 1,617,708 Pharmaceutical and Medicine Manufacturing 630, , , , ,111 Navigational, Measuring, Medical and Control Instruments Manufacturing 333, , , , ,214 Other Industrial Machinery Manufacturing 517, , , , ,434 Other Basic Organic Chemical Manufacturing 230, , , , ,580 All Other General-Purpose Machinery Manufacturing 234, , , , ,336 Iron and Steel Mills and Ferro-Alloy Manufacturing 131, , , , ,307 Metalworking Machinery Manufacturing 304, , , , ,767 Engine, Turbine and Power Transmission Equipment Manufacturing 222, , , , ,052 Material Handling Equipment Manufacturing 166, , , , ,582 Electrical Equipment Manufacturing 121, , , , ,734 Agricultural Implement Manufacturing 182, , , , ,902 All Other Chemical Product Manufacturing 84,663 85, , , ,397 Construction Machinery Manufacturing 101,532 95, , , ,323 Resin and Synthetic Rubber Manufacturing 112, , , , ,522 Commercial and Service Industry Machinery Manufacturing 97, , , , ,717 Medical Equipment and Supplies Manufacturing 99, , , , ,988 Pump and Compressor Manufacturing 103, , , , ,673 Aerospace Product and Parts Manufacturing 341, , , , ,143 Ventilation, Heating, Air-Conditioning and Commercial Refrigeration Equipment Manufacturing 75,354 67,595 85,062 92, ,913 Metal Valve Manufacturing 63,122 78,701 79, , ,462 Computer and Peripheral Equipment Manufacturing 81,477 73,826 70, , ,921 Motor Vehicle Transmission and Power Train Parts Manufacturing 21,171 23,250 33,098 72, ,444 Other Motor Vehicle Parts Manufacturing 75,816 82,293 83, , ,186 Motor Vehicle Gasoline Engine and Engine Parts Manufacturing 88, ,781 79, , ,260 SUB-TOTAL 5,680,202 5,775,763 6,046,927 6,608,730 7,139,677 OTHERS 2,319,390 2,517,961 2,592,300 2,807,995 3,110,115 TOTAL (ALL INDUSTRIES) 7,999,593 8,293,724 8,639,227 9,416,725 10,249, Trade Data Online- Industry Canada- Source : Statistics Canada (27 February 2006) 26

28 APPENDIX F 27

29 ANNEXE G HIGHLIGHTS TO THE MOST IMPORTANT IMPLEMENTATION CONCERNS AND THEIR STATUS/RESOLUTION 1 APPENDIX G STATUS OF DOHA TALKS 28

30 Web Sites World Trade Organization Organization for Economic Co-Operation and Development CIA The World Factbook - Germany Foreign Statistical Office Germany German Culture Federal Ministry of Economics and Labour International Monetary Fund The World Bank Group Europa International Centre for Trade and Sustainable Development Regierungonline IX Germany as a responsible partner in Europe and the world n=1 Federal Ministry of Economics and Technology Germany on the Path to Recovery. 29