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German advantage

I am afraid I have to disagree with Prof Pettis. Higher German wages could actually increase the German trade surplus (and increase German savings), rather than decrease them as he argues.

Why? Germany exports superbly engineered goods that are not easily substitutable. His widget example assumes that Germany and Spain make substitutable kind of widgets. They don’t. German capital goods as well as German cars are coveted around the world and the price premium paid for those goods mean high German wages.

Germany’s trade surplus is structurally the consequences of asymmetrical know-how advantage Germany has rather than too little consumption in Germany, as Prof Pettis argues. Substitutable widgets model of trade is inadequate to capture this structural issue.