Trump is right to check Germany on trade

President Trump hailed an agreement with European Commission President Jean-Claude Juncker in which the EU would buy more American products, work to lower tariffs on industrial goods and halt implementation of additional tariffs in the interim.

While that provides some hope, remember that the president previously hailed an agreement with China in which it would buy more American goods only to see a ratcheting up of trade rhetoric and tariffs.  

{mosads}Leading up to the White House visit by the top European Union official, Trump had been lashing out at the EU. Americans may be wondering why President Trump had been admonishing the European Union and, specifically, Germany over trade. After all, they are our allies.

While China gets all the press for having the largest goods trade surplus with the U.S., when looking at each country’s total global trade in goods and services, Germany edged out China in 2016 as having the largest absolute global trade surplus at a whopping $274 billion, compared to China’s $256-billion surplus.

With a GDP that is less than one-third of the size of China’s, it is clear that Germany not only has a larger trade surplus in goods and services but is benefitting far more from global trade in proportion to the size of its economy than China: Germany’s surplus represents 2.1 percent of its GDP, whereas China’s surplus represents 0.7 percent of its GDP.

How is this? While China has a much larger trade surplus in goods than Germany, China also has a significant trade deficit in services. Germany has a relatively minimal service deficit.

Why is Germany benefitting so greatly from global trade on both an absolute and percentage of GDP basis? In addition to high quality, advanced, precision products, Germany benefits from a relative currency advantage.

The euro makes German products more price competitive globally than they otherwise would be if Germany went back to using a currency solely reflecting its financial condition.

In addition, Germany benefits from favorable trade terms, including higher tariffs on auto imports from the U.S. than it faces when exporting to the U.S. Not surprisingly, with this advantage, Germany is highly dependent on global trade.

Germany’s 2016 global trade in goods and services equaling more than 84 percent of its GDP; compare this to China’s 37.1 percent. Among the largest economies examined, only Ireland and the Netherlands were more reliant on trade.

Source: OECD

How do other European members fare in the game of global trade? As impressive as Germany’s trading record and ability to benefit from global trade is, Ireland benefits even more in relation to the size of its economy.

Ireland’s $67 billion trade surplus in goods and services was equal to more than 22 percent of Ireland’s total GDP, a staggering percentage. Ireland’s status as a pharmaceutical-friendly tax haven, along with its significant exports of organic chemicals, drove its impressive trade performance.

What is going on with all the of the president’s tweets and talk about Germany auto imports? First, the U.S. is a key destination for German automobiles. Germany exported nearly 500,000 cars to the U.S. in 2017.

Second, while the U.S. places 2.5-percent tariffs on automobile imports, Germany hits the U.S. with a tariff that is quadruple that of the U.S. at 10 percent.

Germany had a $22-billion surplus with the U.S. in automotive vehicles and parts in 2017. This imbalance continued in 2018. Through the first three months of 2018, while the U.S. exported $1.48 billion in motor vehicles to Germany, Germany exported $4.55 billion to the U.S.

The automotive industry is critical to Germany employing more than 800,000 workers. It should also be noted that more of the German automobiles sold in the U.S. are made in the U.S. than imported. As a result, German automaker Daimler, owner of Mercedes Benz, employs more than 22,000 in the U.S.

While those are positives, the question remains: Why should the U.S. face 10-percent tariffs on U.S. auto imports into Germany while the U.S. only has 2.5-percent tariffs on car imports from Germany?

President Trump had good reason and was justified in seeking a better deal with at least reciprocal trade terms on behalf of the country he was elected to represent.

However, while President Trump has made it clear he is not happy with the current German trade dynamics, given the dominance of Germany in the EU and its elevated dependence on global trade, Germany isn’t going to easily give up its advantage.

In the end, while the president is right that trade terms with other countries need to be altered to create balanced trading relationships, slapping massive tariffs on imports with no transition period creating a sudden and significant change in trade policy is not the answer.

Instead, changes in trade policy need to be incremental, allowing global firms to reconfigure their supply chains, allowing for the benefits of finally achieving equal trade terms without unnecessarily and significantly disrupting company operations and economic growth in the near term.

The U.S. can both benefit from negotiating equal trade terms and avoid a significant near-term economic disruption if a measured, incremental path is taken.

Chris Macke is the founder of Solutionomics, an economic think tank focused on developing solutions for a more efficient, merit-based corporate tax code, a more successful U.S. trade policy, and a stable financial system. He has advised the U.S. Federal Reserve by providing market updates and implications of monetary policy changes on asset valuations and market distortions, and he’s a contributor to the Fed Beige Book. Find Chris Macke on Twitter: @solutionomics.