How does prosperity arise in an economy

Prosperity through division of labor

Leonard E. Read, founder of the Foundation for Economic Education (FEE), wrote a beautiful story in 1958 that tells of the miracle of the pencil. His text is about the innumerable people around the world who are involved in the creation of a pencil: from the miner who extracts graphite in Sri Lanka, from the woodcutter in Oregon, from the worker at the oil refinery, from the truck driver, from the factory manager, by the chemist and by many, many others.

The story also tells of people who don't know each other and who have no idea how a pencil is made in all of its production steps. Sometimes they don't even know that their work is helping to create it.

As if guided by an invisible hand, a pencil ends up in the visible hand of a school child - who can use it to draw a beautiful picture.

It is obvious: no one alone could mine all raw materials and invent, produce and operate machines and tools in order to develop, manufacture, transport and market a pencil - certainly not for one euro a piece. No one alone has so many ideas, so much manpower and so much knowledge.

The pencil, like thousands of other everyday goods, is a result of the international division of labor. It brings together people's knowledge and the world's raw materials. If we chew on a pencil in our minds, then we chew on a piece of lived and successful foreign trade, division of labor and globalization.

Conversely, this means: If the division of labor at national borders is blocked, it can no longer develop its positive effect. Every inch and every trade barrier along the pencil's long value chain hinders its creation. The pencil becomes more expensive and / or inferior. If the number of trade barriers is too large, it is no longer worth creating one.

With every new intervention in free trade, not only do goods and services get stuck on the border fence, but also the ideas, the workforce and the knowledge of the people who stand behind these products.

The number of patents and our high gross national product prove it: The people in Germany bring a lot of ideas and a lot of manpower to goods and services. About half of the German added value goes into export. Almost every fourth job depends directly or indirectly on exports. Cars, machines as well as medical and electrical engineering are German export hits.

Of course, exporting is not an end in itself. Trade enables us to sell goods abroad and thus creates growth and jobs. But we also benefit from imports. This is not always reciprocal, because in some countries we export more than we import and vice versa. Nevertheless, all sides in all parts of the world benefit from free trade - provided they participate. And most of them are taking part: our most important trading partners are our neighbors in Europe, but economic ties are also increasing in North Africa and the Near and Middle East.

And with the dynamic economic areas in the Asia-Pacific region and with the African countries south of the Sahara, the German economy is also expanding trade and investment relationships. It should not be forgotten that German companies are making high investments all over the world. Germany is already the third largest investor in Latin America. This internationalization of German companies meant that the industrial base in Germany was retained. It also catapulted Germany into the middle of the interwoven world market.

This is also shown by the stocks of German direct investment abroad. They more than quintupled between 1990 and 2018. German companies participate locally, thereby opening up new sales markets and thus selling twice as many goods abroad as they are exporting.

But the principle of reciprocity also applies here: in 2017, around three million people in Germany had a job as a result of foreign investments.

And what does the future hold? A large number of preferential trade agreements between the EU and the World Trade Organization have cleared the way for more trade in German goods and services. The European Commission currently lists 38 trade agreements that are fully in force (including three customs unions), 48 agreements that are partially in force (e.g. the agreement with Canada), 25 treaties that have yet to be ratified, and five existing agreements that are currently being modernized (e.g. with Chile and Mexico). The EU is currently negotiating trade and investment agreements with 21 states (e.g. with the four Mercosur states and the USA). 129 German investment promotion and protection agreements as well as investment chapters in EU trade agreements protect German investments abroad against political risks.

We have to build on these successes, for example when we conclude a free trade agreement with our most important economic partner outside the EU. Such agreements are not about lowering our high quality and safety standards, but about exporting them. And: The international division of labor is not just about prosperity and jobs in Germany, but also about the well-founded hope of a better life for billions of people around the globe.