Trump’s Trade Policy: An Opportunity for Germany

History teaches that everyone suffers from trade wars, but the biggest pain is incurred by those who run the big surpluses once it starts.

March 23, 2018

History teaches that everyone suffers from trade wars, but the biggest pain is incurred by those who run the big surpluses once it starts.

U.S. President Donald Trump is getting serious with his threats to global trade relations. This would be particularly harmful for Germany, the world export champion. Instead of objecting to change, Germany should see Trump’s efforts as a wake-up call to change its economic policies.

It would actually be in Germany’s own interests to change course. If it doesn’t and stays on its current path, Germany is facing eroding competitiveness and significant losses on its foreign reserves.

Of course, Germans could continue to argue that they work especially hard and that German products are outstanding. None of that is untrue. But it is also a fact that the wage restraint exercised by German workers over the past 15 years and the weak euro have made German exports even more competitive.

In contrast, productivity gains – which are the true measure of fitness for any economy – have slowed down over the same time period. Behind the self-pleasing image of “world export champion,” Germany’s competitiveness is eroding.

German surplus is harmful for the world economy

It is high time that we Germans rethink our position. We should stop celebrating being the export “champion.”

Reducing our trade surplus is in our own interest – never mind that it will please key German partners, including the French.

Creditor is a stupid role in an over indebted world

Any trade surplus, by definition, translates into an export of savings. If Germany generates a surplus in trade of 7.8% of GDP (as it will do in 2018, based on projections by the Munich-based IfO institute), this also means that 7.8% of Germany’s GDP is flowing abroad in the form of loans and investments.

In theory, this leads to the build up of foreign assets, which Germany could well use to cover the costs of the ageing society once the demographic change becomes fully visible. In practice, Germany is not a good investor.

Consider the U.S. subprime crisis – it caused German losses of 400-600 Billion euros – that is nearly the German export surplus of two entire years!

We could give our cars away for free

Even today, we are not investing our money smartly. The most prominent example are the Target 2 receivables which the Bundesbank holds within the Euro system, currently above 900 billion euros.

On a per capita basis, this means that Germany is providing more than 11.000 euros as a perpetual, interest free loan to countries like Italy and Greece. In the best-case scenario, we just won’t receive any interest on those loans.

In the worst case, we lose at least part of that staggering amount of money due to –eventually unavoidable – defaults within the eurozone. This can happen either directly through debt restructurings or indirectly via higher inflation.

In a world which is getting ever closer to over-indebtedness, it is not a good idea for Germany to be a major creditor. An ever-bigger part of our foreign assets is at risk.

From an economic point of view, this is tantamount to giving away all those cars and machine tools we exported for free, instead of selling them. In a way, the German investment strategy is reminiscent of a squirrel – we are busy saving, but end up forgetting where we stashed away those savings.

Let’s do better

There is no valid economic rule – not even in Germany – that jobs can only be generated in export industries. Germany has significant needs in its domestic economy, especially in the country’s infrastructure.

The government needs to step up its level of investment and should encourage corporations to do so as well. The latter are saving 2.6% of GDP per year.

However, it is not the purpose of corporations to act as a savings fund. They ought to focus on investments in technology and improving production.

Instead of denying the problem and celebrating the inglorious title of “export champion,” we should rather embark on a program to protect our wealth.

The reform program should include the following steps:

• More public investments in Germany, notably in infrastructure, digitalization and education as well as homeland security and military.

• Changing corporate taxation to support investments in research and development, i.e., in robotics and automation.

• Reducing the fiscal burden for lower and middle incomes, as these income groups tend to spend a higher share of their income.

• Establishing a sovereign wealth fund like Norway or Singapore to better invest Germany’s foreign assets.

• Pursuing a new set-up for the eurozone, including a debt restructuring and – where necessary – the exit of countries which will never be in a position to compete successfully within the constraints of a single currency. As a result, the euro would be more correctly valued and Germany’s trade position would not be as exalted.

Such a change in the country’s expert-obsessed mindset would not be taken to please Emmanuel Macron or the French. It would first and foremost be in Germany’s own interest.

History teaches that everyone suffers from trade wars, but the biggest pain is incurred by those who run the big surpluses once it starts.

Takeaways

History teaches that everyone suffers from trade wars, but the biggest pain is incurred by those who run the big surpluses once it starts.

In a world which is getting ever closer to over-indebtedness, it is not a good idea for Germany to be a major creditor.

There is no valid economic rule – not even in Germany – that jobs can only be generated in export industries.

A change in the country’s expert-obsessed mindset would not be taken to please Emmanuel Macron or the French. It would first and foremost be in Germany’s own interest.