Vanessa Rossi
(Former Chatham House Expert)

Germany's exporters are generally having a good year in spite of weak demand growth in Europe itself. They are a key beneficiary of a more competitive euro and the surge in demand in the developing world, especially China. Although July's dip in both exports and orders added to the chorus predicting a sharp slowdown, this view was subsequently called into question by data from China showing a surge in imports in August. If German exporters continue to benefit from rising Chinese demand then China could soon become Germany's leading trade partner.

Competitors, particularly the US but also Japan, will be well aware that much of this year's export gains for Germany and the rest of the Eurozone come at their expense. And, although it has recently stabilised in the $ 1.25-1.30 range, it is impossible to be certain just how low the euro will go before the Eurozone crisis comes to an end.

Trends before the euro crisis erupted pointed to Obama's target to double US exports probably being met by about 2014/15 (helped by a bounce back from an exceptionally low 2009 performance). However, revised estimates that take into account the additional impact of the low euro suggest that part of the US's predicted trade gains will be displaced by faster growing Eurozone exports. By 2014/15, US goods exports might be as much as $ 250-300 billion (around 10%) lower than the level predicted without the fall in the euro, raising the trade deficit. US exporters will lose out through lower sales to the Eurozone but the greatest impact will come from losses in market share in third markets, such as Asia and other fast developing countries.

On the other side, Eurozone exports could grow by an extra $ 300-350 billion, with Germany accounting for around $ 150 billion of this additional gain. Effectively, the outcome is predicted to be similar to that seen during the period of the undervalued euro in 2001/02, when European (chiefly German) exports rose strongly while US exports barely increased.

The China factor

A special feature of the surge in German exports this year is demand from China. According to German data, export sales to China could rise by as much as 60% in 2010, compared to an overall increase in exports of 20-25%.

This trend is rapidly propelling China towards becoming the leading export destination for Germany. This year it will probably become the second largest, overtaking the US and representing 6-7% of total German exports, up from 4.5% in 2009. By 2012, the share could be 9-10%, with China overtaking France as the leading export destination.

The potential for China to develop much stronger ties with German manufacturers is clear - bilateral investments look set to rise. Unlike the last decade when German capital helped fund heavy investments abroad (especially in Eastern Europe), in this case, China has its own funds to invest and is seeking opportunities abroad. Along with the UK, Germany is already a major beneficiary of Chinese FDI into Europe and both of these relationships look set to develop more rapidly over the next decade.

Such ties with China will also fit well with Germany's efforts to recharge its moribund domestic investment rate, which is now extraordinarily low after years of stagnation. Apart from links with big business, connections with China could provide a major opportunity for the many specialist small to medium sized enterprises in Germany, especially in the machinery and equipment sector.

This relationship could be a critical new factor for Germany and also for the development of world class industries in China. The emerging export/investment trends indicate the potential to open up a new era for the German economy, which, in turn, would mark a major opportunity and new driver for Europe in the global economy.