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Made in Germany

Russia has spent decades cultivating its status as a country capable of doing business with the rest of the world. In one fell swoop, they destroyed that reputation, and it may be impossible to rehabilitate it for decades, if not generations. Germany, in contrast, spent the decades following World War II rehabilitating its status as a reliable neighbour, political ally, and business partner. It has done so quite successfully, such that “made in Germany” has become a synonym for quality in most industries. But for the first time in over thirty years, Germany’s experienced a monthly trade deficit for the first time. As Europe’s largest economy, it is a bellwether of how much stress the continent is experiencing due to COVID- and Ukraine-related supply chain issues.

For the last thirty years, exports have been the lifeblood of Germany’s economy. But sharp energy price shocks have increased the prices of products made in the country. Production and manufacturing rely on Russian natural gas, the flow of which has been severely restricted since the onset of the invasion of Ukraine. Because of this, exports fell .5%, while imports rose 2.7%, resulting in a one-billion-euro trade deficit, according to Germany’s Federal Statistics Office. This deficit is especially historic because it is the first time that imports surpassed exports since West and East Germany were reunified in 1991.

Winds of Change

This change in fortunes demonstrates Germany’s over-reliance on Russian energy. Before the war, Russian natural gas represented half of the nation’s natural gas resources. The thing is, Russia’s natural gas was meant to be a stopgap measure. Germany has long been planning to rely much more heavily on renewable energy. Energy independence and sustainability were goals that were supposed to be reached simultaneously via renewables. Their plans to invest heavily in renewable infrastructure rely on temporary supplies of Russian gas during the costly and extended transition. Since a quarter of German jobs rely on exports, we are now seeing the vulnerability of said transition. Additionally, because of rising costs worldwide, it is becoming harder for exporters to pass off the costs of international supply chain disruptions to the customers.

As far as imports go, China is the country sending the most goods to Germany. The US, in contrast, is the main importer of German goods. The good news from a trade deficit perspective is that there has been a 5% increase in the US purchase of German goods, whereas there has been a 1.6% decrease in goods imported from China. But despite these improvements, losing Russia as an export destination for German goods has hurt. Russia has long been a strong market for German goods, but since February, those sales have dropped by more than 50%. What experts now fear is if Russia decides to cut off its natural gas supplies to Germany, which could very well happen in the coming weeks or months. Although Germany has emergency plans in place, the country is extremely vulnerable to Russia’s decisions. Energy independence cannot come soon enough.