Germany Collides With Trump
When an irresistible force meets an immovable object, the results are generally not pretty. For this reason, one has to worry about Germany’s outsized trade surplus, which appears to be putting that country on a collision course with the Trump administration.
Being elected on the platform that other countries have been taking advantage of the U.S. in the area of international trade, President Donald Trump seems to be moving irresistibly towards doing something about other countries’ large trade surpluses. Being sure that its country’s large trade surplus is a sign of virtue rather than constituting any problem, the German government is immovable about any notion of taking policy measures to help reduce the size of that surplus.
At the heart of the trade tensions between the U.S. and Germany is the fact that, at around $300 billion, Germany now has the world’s largest external current account surplus. At over 8 percent of GDP, Germany’s external current account surplus is approximately three times the size of that of China, which has for long been the main recipient of U.S. criticism about unfair trade practices.
U.S. concern about Germany’s large external current account surplus predates Trump becoming president. Already in April 2016, in its semi-annual currency report to Congress, the U.S. Treasury flagged that the German external surplus was problematic. It did so by placing Germany, along with China, Japan, South Korea and Taiwan, on a special monitoring list. It warned that these countries faced extra scrutiny and potential retaliation by Washington as a result of concerns over their growing trade imbalances with the U.S
Since assuming office, Trump has made abundantly clear his displeasure with Germany’s large trade surplus, which he considers to be totally unacceptable in that it unfairly disadvantages U.S. workers. In that context, his administration has charged that Germany has taken advantage of its Euro membership to gain an unfair competitive advantage. By adopting the Euro as its currency, which weak economic performers like Greece, Italy and Portugal also use, Germany has enjoyed the benefits of a very much weaker currency than it would have had if it had maintained the Deutsche Mark.
The German government’s reaction to the Trump administration’s charges of unfair trade practices is generally one of indignation and incomprehension. It insists that a large trade surplus is not a policy objective, but rather the result of Germany’s orderly budget policies and its aging population’s high propensity to save. Why, they ask, should Germany be penalized for following sensible economic policies?
The German government is also quick to point out that even if it wanted to do something to address its large trade surplus, it is politically constrained from doing so. Since joining the Euro in 1999, it has not been a German central bank that influences the German exchange rate, but rather the independent European Central Bank that does so. Germany might have two seats on the ECB’s board, but it is only one of 19 countries that are represented on that board, which puts it in a distinct minority.
Similarly, to the repeated entreaties by the International Monetary Fund that Germany should use the fiscal space that it has to help reduce trade imbalances both in Europe and the rest of the world, the German government responds that this is no longer constitutionally possible. In 2009, the German parliament overwhelmingly approved a balanced budget amendment or “debt brake.” According to that debt brake, from 2016 onwards, the German government has been constitutionally precluded from running a structural budget deficit that exceeds 0.35 percent of GDP.
One has to fear that the German government is grossly underestimating how politically important it is to the Trump administration to deliver on the president’s election promises to bring jobs back to America. One also has to worry that should the German government remain intransigent about doing anything to address its country’s large trade surplus, Trump will use his executive authority to follow through on his threats to introduce far-reaching trade restriction to meet his trade balance objectives.
An intensification of trade restrictions is the last thing that the world economy needs; it could very well invite retaliation that could lead to a global trade war. For this reason, one must hope that cooler heads prevail in both Berlin and Washington to find a cooperative way to deal with today’s global trade imbalances. The basis for such an approach might be to have Washington commit to more disciplined budget policies in return for Berlin committing to finding a way to use the fiscal space that it now enjoys to pursue a more expansionary fiscal policy.