Kari Liuhto
Professor, Director
Pan-European Institute, Turku School of Economics,
University of Turku
Finland
Director
Centrum Balticum Foundation
Finland
Importance
Although Germany is not the most important trading partner for each Baltic Sea Region (BSR) country, Germany is by far the most important foreign trader in the BSR as a whole. On average, Germany accounts for more than ten per cent of the foreign trade of other BSR countries. Germany's significant share of the Baltic Sea countries' foreign trade does not come as a surprise, as Germany is the third-largest trading nation in the world, after the United States and China.
Transformation
Despite the fact that Germany's trade with other BSR countries has grown in euro terms during this millennium, Germany's share of the foreign trade of other Baltic Sea countries has decreased slightly. The main reason for this decline is that Germany accounted for an exceptionally large share of the foreign trade of Poland, Latvia, and Lithuania at the beginning of the millennium (see Table).
Germany–Poland trade
Among the trade flows in the BSR, trade between Germany and Poland is by far the largest. In 2023, the value of trade between Germany and Poland was nearly 175 billion Euros. German–Polish trade is larger than Finland's entire foreign trade. Last year, Poland was Germany's fifth most important trading partner, after China, the United States, the Netherlands, and France. Trade with Germany has improved the competitiveness of the Polish economy and helped internationalize Polish industry. As evidence of this, Poland's foreign trade has increased ninefold during this millennium. Trade with Germany has also strengthened Poland's employment. At the beginning of the millennium (2002), unemployment in Poland was close to 20 per cent, whereas the unemployment rate is currently only around five per cent. The close integration of the German and Polish economies is well illustrated by the fact that the second-largest trade flow in the BSR (Germany–Sweden trade) is just 50 billion Euros. The third-largest trade flow in the region is between Germany and Norway (€40 billion), the fourth largest between Sweden and Norway (€35 billion), and the fifth largest between Sweden and Denmark (€25 billion).
Germany–Russia trade
The total trade turnover between Germany and Russia was only 12.5 billion Euros last year, of which nearly three-quarters consisted of German exports to Russia, meaning that German imports from Russia covered the remaining quarter. German trade with Russia has declined significantly since Russia began its invasion of Ukraine in February 2022. The steepness of the decline is aptly illustrated by the fact that the trade turnover between Germany and Russia was almost 60 billion Euros in 2021. In other words, the value of German–Russian trade has fallen by approximately 80 per cent when comparing the year 2021 and the year 2023. For comparison, Finland–Russia trade contracted by about 85 per cent during the same period. It should, however, be noted that Latvian exports to Russia in 2023 were only about five per cent lower than two years earlier. This small decline suggests that some Western countries are exporting goods to Russia through Latvia, with goods first being declared as exports to Latvia. For example, exports of optical devices from Latvia to Russia have grown by over 15 per cent when comparing the year 2021 and the year 2023. Significant amounts of Western products also flow to Russia through Lithuania.
Germany–Finland trade
The value of trade between Finland and Germany in 2023 was a little over 20 billion Euros. German exports to Finland consist mainly of machinery and transport equipment, which accounted for half of German exports to Finland. Correspondingly, the most significant import product from Finland to Germany was machinery and transport equipment, accounting for nearly 40 per cent of Germany's total imports from Finland (SITC 1 level). These figures demonstrate close intra-industry integration between Finland and Germany.
Germany–Norway trade
Norway's trade with Germany has grown rapidly since Russia invaded Ukraine. While in the year 2021, the trade turnover between Germany and Norway was 30 billion Euros, last year the trade value was close to 40 billion Euros. This growth in trade is driven by increased fuel deliveries from Norway to Germany. The reason for the significant increase in fuel deliveries from Norway to Germany is the EU sanctions imposed on Russia, which have practically stopped the fuel deliveries from Russia to Germany, except for LNG, as well as the sabotage of the Nord Stream gas pipeline in September 2022. Before Russia's invasion of Ukraine, two-thirds of Germany's natural gas imports and one-third of its crude oil imports came from Russia. Now, German–Russian energy cooperation has practically ended.
Table. Germany’s share in the foreign trade of the littoral states of the Baltic Sea (%)
Sources: WITS (2000-2020); national statistical
authorities (2023); EIU (for Russia 2023).
Conclusion
The German economy is extremely dependent on its foreign trade and thus on the development of global markets. Germany's dependence on foreign trade is illustrated by the fact that the ratio of foreign trade to GDP in Germany is about 80 per cent. The corresponding figure in the United States is only 20 per cent. In other words, the US economy largely runs on domestic demand, whereas the German economy is dependent on global demand. Motor vehicles and their parts form more than 15 percent of the German exports, and therefore the success of the adaptation of German automobile industry to the needs of the global transformation of the automobile industry, i.e. the electrification of next car generation, is utmost important.
The re-election of Donald Trump as president of the United States may lead to a new trade war with China, which may also side-effects in the US–EU trade. Since Germany is the largest player in EU–US trade, sudden changes would not only shake Germany's economy but also the entire EU economy, as Germany accounts for a quarter of the EU's GDP. Therefore, Germany's success in reforming its economy and maintaining its competitiveness is in the interest of the entire European Union.