The Trade Numerologist: After Strong 2018, German Exports Threatened by Global Trade War

Perhaps no country risks losing more from the winds of protectionism and tariffs sweeping the world than Germany. The world's fourth-largest economy and the richest in the European Union is heavily dependent on exports, especially of industrial goods that are sensitive to swings in the economic cycle.

The German economy and fabled Mittelstand -- its small and medium-sized businesses -- depend on thousands of factories, millions of jobs, and a network of shipping lines, ports and logistics firms that need exports for their survival.

The country also faces failing fortunes in its titanic car sector, an aging population, a weaker eurozone economy, and a migrant crisis that still has not been resolved.

To be sure, Germany's efficient export machine is still pumping out cars, trucks, factory machines, tools, chemicals, and other industrial products. Unemployment is below 5%, and with a much smaller population, it rivals the US as the world's second-largest exporter.

World's top exporters, first 11 months, 2018

• China: $2.3 billion (+11%)
• US: $1.53 billion (+8.5%)
• Germany: $1.45 billion (+9.2%)
• Japan: $675.6 million (+6.7%)
• Netherlands: $666.6 million (+12%)

Germany's export economy performed well for most of 2018, even in the US, thanks to longstanding orders, and strong exports of electronics, chemicals and car parts.

Top destinations, German exports, first 11 months, 2018

• US: $125.7 billion (+8%)
• France: $115.4 billion (+5%)
• China: $102.5 billion (+15%)
• Netherlands: $93 billion (+13%)
• UK: $90.4 billion (+2%)
• Italy: $77.1 billion (+14%)
• Austria: $70 billion (+8.5%)
• Poland: $69.5 billion (+13%)
• Switzerland: $59.3 billion (+6.1%)
• Belgium: $48.7 billion (+6.5%)

So why did German economic growth fall to around zero in the last few months of 2018?

The answer is trade and fears about what's to come. The percentage of gross domestic product generated by exports is now almost 50%, up from around 20% in the early 1990s.

Increasingly, the economic cold that's infected the rest of the world is reaching Germany. US tariffs and the threat of more duties, threaten to shrink demand for German industrial goods, denting business confidence. Economic growth is leveling off in China. And Germany's third pillar of demand, Europe, has been sputtering.

Instead of looking at export figures, a better measure of Germany's fortunes is its trade deficit. After increasing steadily in the first 10 years of the century, Germany's trade surplus stopped growing this decade and could even be headed for retrenchment.

German trade surplus, first 11 months, 2010-2018

• 2018: $259 billion
• 2017: $263.2 billion
• 2016: $259.6 billion
• 2015: $254.9 billion
• 2014: $264.1 billion
• 2013: $244.7 billion
• 2012: $226.2 billion
• 2011: $202.8 billion
• 2010: $187.8 billion

A good case study for Germany's trade fortunes is its mighty car industry, which has been marred by the diesel emissions scandal at Volkswagen, the switch to electric cars and trade tensions with the US.

The Trump administration has threatened to impose further 25% tariffs on car imports. Chancellor Angela Merkel, who's been in power since 2005, decried that the US now considers German and European cars to be a "threat to the national security". The EU has threatened to retaliate with new duties on billions of dollars of US goods if Washington imposes auto tariffs.

Already, as Merkel pointed out, Germany's car companies do much of their manufacturing in the world's top two markets, China and the US. When it comes to exports, Germany may find itself turning more toward European neighbors.

German car, truck, parts exports, units, 2018

• Poland: 6.4 million (+1.5%)
• US: 5.9 million (-2.5%)
• China: 4.2 million (+3.7%)
• UK: 3.2 million (-15%)
• France: 2.9 million (-3%)
• Czech Republic: 1.8 million (-21%)
• Italy: 1.3 million (-24%)
• Spain: 1.3 million (-26%)
• Turkey: 1.2 million (-53%)
• Netherlands: 1.1 million (-15%)

In the end, German businesses will need China to keep ordering and importing industrial goods. The best growth markets last year were automotive, electronics and organic chemicals.

Top German exports to China, first 11 months, 2018

• Cars, trucks & parts: $27.7 billion (+20.5%)
• Electric machinery & parts: $22.6 billion (+15.5%)
• Electronics: $16.2 billion (+17.7%)
• Optical, medical, photo equipment: $8.5 billion (+16%)
• Aircraft & parts: $4.2 billion (-4.2%)
• Pharmaceuticals: $3 billion (+9%)
• Plastics: $2.9 billion (+5%)
• Articles of iron or steel: $1.8 billion (+4%)
• Organic chemicals: $1.5 billion (+33%)
• Chemical products: $1.2 billion (+12%)

Over 5,000 German firms do business in China, which is still hungry for German innovation and investment, and Beijing is expected to provide much-needed stimulus this year. Clearly, it's still a land of opportunity.

But if Chinese demand fails, Germany will now have to figure out if it can transition to an economy that's less dependent on exports. In the fourth quarter, an increase of 1.6% in German state spending helped to avoid a recession, according to government data.