The Trade War Puts Germany's Growth Model into Question

TRUMP IS ASKING EUROPE TO CUT THE TRADE SURPLUS BY BOOSTING INTERNAL CONSUMPTION AND INVESTMENT

by Carlo Altomonte, Dept. of Social and Political Sciences
Translated by Alex Foti


Keeping his promise made during the election campaign, in recent months Donald Trump has slapped tariffs on aluminum and steel imports (25 and 10 percent, respectively) into the US. Such a move, affecting about $10 billion of global trade, was followed by an escalation of negative rhetoric on the issue of international economic relations, an escalation that could jeopardize the system of rules on international trade sanctioned by the creation of the WTO in 1995. On the one hand, the United States and China have reciprocally threatened to impose import duties on hundreds of products worth about $60 billion of their bilateral trade (about a quarter of the current volume of goods traded); on the other hand, the likely European response to steel and aluminum tariffs could lead the United States to impose duties on imports of cars and other vehicles, an industry which is the backbone of EU exports, and in particular of German exports.

➜ US and China? They will find a compromise
In addition, the G7 summit held in Canada last month was supposed to lead to a general agreement about compliance with international trade rules by major economies, but ended in acrimony: Trump left the summit early after negotiating a joint communique with other western countries, but then at the last minute withdrew his support from the agreement painstakingly achieved (with a tweet, as is his style), leaving everybody dumbfounded. In fact, the US has taken a stance against its main allies, Japan, Canada, the European Union, and the United Kingdom, thus paving the way for a future in which the threat of a trade war between the United States and the rest of the West is increasingly real, perhaps even more so than tensions between the United States and China.

In fact, there is a strong interdependence between the two world’s largest economies: the United States needs manufacturing components produced by Chinese value chains, China needs American technology, so that some kind of agreement is likely to be found between the two countries. The macroeconomic objectives pursued by the two countries are compatible with this idea: on the one hand, the United States wants to reduce its trade deficit with China, and export more to the East Asian powerhouse, on the other, it is in Beijing's interest to reduce the trade surplus that China has with the rest of the world (which is relatively modest, +1.4 percent of GDP) in order to stimulate domestic consumption.

Conversely, the clash of interests between the US and the EU appears to be more problematic. Since the euro crisis, the EU has in fact adopted Germany’s model of export-led growth that uses the trade surplus (the EU has a +3.5 percent surplus with the rest of the world) as the main growth engine, to the detriment of internal consumption and investment. Wage compression induced by deflationary pressures associated with containment of public spending supports the competitiveness needed to fuel this growth model. But the key competitive elements of such model are not fully under the control of the European Union. On the one hand, for the EU growth model to be successful, there must be readiness from the rest of the world (and in particular the US) to buy European products, which means that trading partners must be willing to maintain (and finance) structural current account deficits, something Trump has promised to change. On the other hand, austerity in public spending is partly made possible by the fact that the military spending component is to a large extent outsourced to the United States through NATO, and this is also a situation that the Trump administration is no longer willing to tolerate.

➜ Most pro-European? The United States..
So, in fact, Trump is asking Europe (and Germany in particular, because it is the country that has most leeway to boost domestic demand) to revive consumption and internal investment, which would reduce private and public savings and therefore the trade surplus, and spend more on security. If this does not happen, the US will seek to hamper Germany’s (and Europe’s) growth model by placing tariffs on the automotive sector, while progressively disengaging from NATO. After years of sterile Continental debates on the reform of the eurozone, it is Trump who is laying bare the contradictions of the German model, and suggesting countervailing measures to overcome it. It might sound strange, but it's the most pro-European thing that has happened in recent months.