America is one of the main trading partners of Germany in the automobile industry. Since the bilateral trade of cars increases with a rise in the economic and market size, positive economic growth of individual nations strongly affects the automobile business relationship between them. For instance, German carmaker Mercedes-Benz was a pioneer in exporting cars to America and building plants in the neighboring nations of Canada and Mexico (Rader, 1980). German automobile manufacturers have expanded their export to the U.S. through the harmonization of strategic safety standards and the facilitation of trade between the two countries.
German Car Exports to the USA
German car producers export vehicles to the USA and generate surplus revenue from such strategies. One of the reasons for car trade between Germany and America is the currency advantage, namely the strength of the euro. Therefore, exporters of automobiles possess an artificial advantage because they share the currency with less competitive economies (Sawyer & Sprinkle, 2015). Additionally, their surplus revenue from car trade continues to be higher than the one of competitors because German automobile companies produce premium quality cars. Sawyer and Sprinkle (2015) further argue that the automotive engineering industry of Germany is considered to manufacture products of better quality as compared to that of other nations, including Japan and China, helping them retain a loyal customer base.
The Comparative Advantage of Cars in Germany
The main reason why Germany exports car to the USA is that its producers have a comparative advantage over other car markets, which motivates the countries to trade because of relative price differences. International competition plays a significant role in determining such a situation. According to Rader (1980), the concept of comparative advantage postulates that based on mutually beneficial trade, an automobile company should focus on producing products that are widely accepted for export. The two trading partners have a mutual benefit of product differentiation, where different types of automobiles are produced with various appeals to clients.
Furthermore, many customers loyal to automobile brands do so because of country’s efficiency in the manufacturing process. Batra (2016) suggests that the comparative advantage that German carmakers have achieved has been because of the efficient use of factors of production. Germany has also specialized and heavily invested in the manufacture of quality and luxurious cars through an adequate supply of labor power. Its comparative advantage further combines the characteristics of individual preferences and tastes for cars, technologies of production and sustainable vehicles (Batra, 2016). The competitiveness of German car manufacturers has become the best in the market over the years because they have produced luxurious cars at lower prices and strive to develop skills of their workers.
Additionally, another reason for car trade between Germany and the USA is the achievement of economies of scale. Comparative advantage and specialization in the first country make the opportunity cost of producing a car lower than in the second one. In 2010, Germany produced automobiles twice as much as the USA and at the same time, ordinary workers earned more salary benefits than their U.S. counterparts did (Sawyer & Sprinkle, 2015).
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Gravity Model for the Trade Pattern
According to the gravity model of analysis, the measure of the pattern of bilateral car trade between Germany and the USA depends on the economic strength of the two countries, namely, their high gross domestic product (GDP), potential flow of trade, latent demand, and supply. Empirical estimations of the business pattern for car traders give an overview of the reasons why the degree of export is significantly high (Batra, 2016). The gravity model equation enables to estimate the trade flow using variables of GDP, geographical distance and the difference per capita shown below:
XGU = a0GDPU +GDPG +DGDPTGU +DISTGU
XGU denotes total trade between Germany and the USA, while a 0 is the intensity of comparative advantage (<-0.1). GDPG stands for Gross Domestic Product of Germany being $3.40 trillion. GDPU stands for Gross Domestic Product of the USA amounting to $15.68 trillion. DGDPTGU is the difference in GDP per capita between partners and is a proxy for the economic distance or comparative advantage intensity (Germany has $34065.12, while the USA shows $45759.46, and the difference is 34%). DISTGU represents the geographical distance between the capitals of Germany and the USA respectively (7857 km) (Sawyer and Sprinkle, 2015).
Sawyer and Sprinkle (2015) illustrate that using the difference in GDP per capita (34%), the greater demand for a car in the USA because of high GDP ($15.68 T) necessitates people’s need for exports. The overall grade of excellent infrastructure in the form of highways and roads, car assembly plants, and communication organizations leads to more automobile imports from Germany (Sawyer & Sprinkle, 2015). The use of land for auto investments and plants is expected to generate high demand for vehicles, and GDP increases with the land surface, so export into America will rise. The coefficient of per capita income (0.34) from the gravity model shows that the distance (DISTGU is 7857km) significantly influences the total export of cars (Sawyer & Sprinkle, 2015). Although it can be an impediment to the trade of cars between the USA and Germany, car producers have formulated brilliant strategies to nullify the situation by constructing car production plants in America to reduce the cost of transportation and at the same time target Canadian and Mexican markets (Sawyer & Sprinkle, 2015). Lastly, the gravity model has the potential to allow the user to analyze bilateral trade dynamics of car trade between Germany and the USA.
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Germany’s car trade with the USA has improved because of the economic strength of the countries that is consistent with the gravity model of trade. Similarly, the purchasing power of America has increased the probability that Germany will continue to trade cars with the latter despite the geographical distance. The use of the gravity model has helped to extensively estimate the dynamics of international export and the liabilities associated with it. As such, an important determinant of the car trade between Germany and the U.S is the comparative advantage of the former. It facilitates the German automobile export, improves the unit of labor cost and the manufacture of surplus vehicles. The quality of importer-exporter relationship between the two nations has inspired confidence in the integrity and reliability of car trade.