In the pre-industrial age, protecting local firms from foreign competition was common. What Berlin doesn't care to admit: Today's trade surplus is a 21st century version.

German tradesmanship goes back ages. Apparently, so does the promotion of domestic industry.

Last year, Germany had an impressive current account surplus of €267 billion ($300 billion), more than any other country. Mathematically, for each of the country's 82 million inhabitants, it means about €3,000 more was spent on goods and services sold by companies abroad that was imported to Germany. The country's steadily growing surpluses since the turn of the century have provoked a barrage of international criticism, especially from the United States. President Donald Trump describes Germany's trade policy as "bad, very bad" and is threatening counter-measures. He is not alone: The International Monetary Fund, the World Bank and the European Commission are also critical.

In economic speak, the Germans are accused of being "neo-mercantilists" who are promoting the development of their own economy at the expense of other countries. Chancellor Angela Merkel, Finance Minister Wolfgang Schäuble and Economics Minister Brigitte Zypries vehemently reject the accusation. Unlike Donald Trump cry of "America First," they argue Germany has consistently supported free trade and strictly opposes mercantilist, or protectionist, trade barriers.

The theory of mercantilism, the idea that an economy can become richer through exports and poorer through imports, was refuted in the late 18th and early 19th century – by major liberal economists like Adam Smith, David Ricardo and Jean-Baptiste Say – and has been much maligned ever since. And yet, on closer inspection, there are surprising parallels between the mercantilism pursued by many countries in the 17th and 18th centuries and today's economic policy in Germany.

The mercantilists believed that in a country without its own precious metal deposits, monetary defects could only be mitigated by trade surpluses.

At its core, Germany's economic policy hasn't really changed. It still involves an export or foreign trade-driven growth model, which implicitly treats economic relations as a zero-sum game, that is, as a system in which the profits of one player are always associated with the losses of the other economic partner. The concept was an understandable fallacy in the preindustrial world, which was characterized by very low growth rates until the end of the 18th century.

In contrast to the classic economic models of today – whether neoclassical synthesis or Keynesianism – the construct of mercantilism wasn't based on a consistent theoretical model, nor did it set out a specific action plan when it comes to trade. Instead, mercantilism was a series of economic policy recipes that had been tried and tested in practice and applied in various forms in individual European countries. The focus was always on the idea of maintaining a positive trade balance, as well as the role of wages and employment in keeping companies competitive.

The need for a trade surplus was a consequence of the widespread lack of money at the time. All national currencies were linked to the available stocks of gold or silver, which meant that the money circulating in a country was determined by its existing precious metal reserves. Banknotes and other money surrogates, with the exception of commercial bills, did not play a significant role yet and were also discredited after the disastrous outcome of the experiments of John Law in France.

The mercantilists believed that in a country without its own precious metal deposits, these defects could only be mitigated by running a trade surplus. Moreover, economic policymakers of the 18th century had very clear notions of the positive effects a growing money supply would have on growth and employment, as underutilized production facilities were the rule at the time. That was why the country's economic development was to be advanced by an export-oriented business model.

21 Germany's Surging Current-Account Balance-01 trade surplus

In present-day Germany, current-account surpluses are justified by demographic developments, rather than a lack of money. With an aging population, as in Germany, trade surpluses and current account surpluses, and the associated buildup of foreign assets, are economically rational and necessary. Stocking up reserves will allow Germany to "consume" these foreign assets at a later date, when the labor force shrinks.

Three hundred years ago, economic policymakers used the entire repertoire of export promotion and import restrictions to achieve the trade surpluses needed to alleviate the lack of money: tariffs, import quotas, import bans and export subsidies. The goal was to import raw materials and semi-finished products duty-free, while at the same time preventing imports of finished products, if possible, and supporting the export of these products.

The methods are subtler in the 21st century than 300 years ago, but the federal government's objectives are the same.

Nowadays, such archaic tools of protectionism and export promotion are no longer possible, as they are prohibited under the European Union treaties and the General Agreement on Tariffs and Trade (GATT). But there are other means: If the federal government in Berlin, with its considerable political weight in Brussels, tries to block stricter emissions limits for passenger cars in the European Union, this is nothing more than a sales promotion for the German automotive industry. This is because domestic premium manufacturers, with their powerful cars, would face major problems to meet the more ambitious limits. In short, the methods are subtler in the 21st century than 300 years ago, but the federal government's objectives are the same.

Fratzscher and Fuest talk economics.

The goal of maintaining a trade surplus has long been filed under the policy field of domestic wages and employment: Mr. Schäuble has repeatedly argued these days that his country shouldn't force companies to make themselves less competitive by hiking employee salaries. But this is actually where the most striking similarities emerge between the economic policy of the 18th century and that of the outgoing 20th and early 21st century.

Economic historian Fritz Blaich, one of the foremost experts in the field, wrote almost 40 years ago that "relatively low wages" in the mercantilist economic concept should "ensure the competitiveness of export goods on international markets." At the time, the tool used to improve international competitiveness was characterized as "real devaluation," that is, a lower wage and labor cost level, rather than currency devaluation.

10 p45 Will There be a Trade War 4-01

Since the advent of the common European currency, and above since Germnay passed a series of labor reforms known as the Hartz reforms in the 2000s, wages and salaries here have grown at a much slower pace than productivity – with the approval of the trade unions. For a long time, the growth rate of unit labor costs was lower than the increases in a number of neighboring European countries and the United States. "Agenda 2010" and the politically desired low-wage sector of the economy had and continue to have a damping effect on labor costs in Germany. Even though Germany has almost reached full employment, collective wage bargaining still hasn't exhausting the scope for distributing the spoils to employees, if we define it as the sum of expected overall productivity growth and the target inflation rate of the European Central Bank.

A surprisingly elastic workforce has also contributed to low labor costs in Germany. Mercantilists would not hesitate to accept the demand for permanent immigration of qualified workers. In the 17th and 18th century, this policy was called "populating," with the high labor supply already providing for a low wage level at the time.

The mercantile system ultimately failed, because all European countries committed themselves to the same economic policy.

The mercantile system ultimately failed, because all European countries committed themselves to the same economic policy. Yet Berlin's solution to today's problems is exacyly that: Other economies should follow the German example of an export-oriented growth model based on "real devaluation." This is both illogical (not every country in the world can export surpluses) and dangerous.

If the large euro-crisis countries, France and Italy, followed the German example, the resulting flat wage growth across the euro zone would lead to deflation risks, which in turn could develop into an explosive charge for the monetary union, or would at least counteract the monetary policy of the European Central Bank. That is why it's worth asking whether Europe, if not the world, should really follow Germany's lead.

Jörg Lichter is head of research at the Handelsblatt Research Institute. The economist holds a PhD. in economic and social history. To contact the author: [email protected]