EconoMatters

Six Ways How Trump Gets Trade and Europe Wrong

What Europe earns by selling goods to the U.S., it spends on licensing fees for U.S. technology and on U.S. services. Nothing unfair here.

Credit: Gage Skidmore www.flickr.com

Takeaways


  • Trump complains about too many German cars on Fifth Avenue -- although half of those cars may actually be built in the US.
  • The US has actually run a small current account surplus with the EU since 2009. What Europe earns by selling goods to the US, it spends on licensing fees for US technology and services. Nothing unfair here.
  • In 2017, Trump rejected the TTIP deal that would have abolished almost all tariffs between the US and the EU. For that, he can only blame himself.
  • The EU is not a strong force in global politics. But its sheer market size makes it the top trading power of the world. It is therefore less inclined than any other region to give in to trade threats.

U.S. President Donald Trump is bringing the world close to a genuine trade war. Judging by his own rhetoric, Trump gets key trade issues wrong on at least six counts:

1. If China poses a problem, why not join forces with the EU?

In his dealings with China, Trump has half a point. China ought to change some of its practices, including its penchant for forced technology transfer and its habit of discriminating against foreign companies.

These legitimate concerns do not apply to the EU, however. Unfortunately, Trump seems to have rejected the original EU offer to jointly lean on China to mend its ways.

2. Can trade barriers reduce a U.S. deficit in a meaningful way?

Not really. The U.S. current account deficit of 2.3% of U.S. GDP in 2017 is not the result of supposedly unfair practices of trading partners.

Instead, the U.S. deficit reflects the country’s traditionally strong appetite for imports as well as the fact that the United States does not save enough to finance its investments at home. Short of actually halting imports, U.S. trade barriers will not change these factors very much.

3. Does the EU run a surplus with the U.S.?

Trump complains about too many German cars on Fifth Avenue — although half of those cars may actually be built in the United States.

Still, the United States indeed imports more goods from the EU than it sells in Europe. But that is only half the truth. The U.S. goods deficit is offset by a small surplus in services and a big surplus in income (largely from the Netherlands where some U.S. companies seem to pool their EU-wide profits).

As the chart below shows, the United States has actually run a small current account surplus with the EU since 2009. What Europe earns by selling goods to the United States, it spends on licensing fees for U.S. technology and on U.S. services. Nothing unfair here.

Trade chart

4. Is the EU refusing to cut tariffs on U.S. exports?

President Trump complains that EU tariffs are high. For cars, that is true. For trucks, however, it is the other way around. On average, EU tariffs are close to those of the United States.

In 2017, Trump rejected the TTIP deal that would have abolished almost all tariffs between the United States and the EU. For that, he can only blame himself.

5. Talk to Brussels, not Berlin and Wolfsburg

Trump’s ambassador to Berlin, Richard Grenell, has reportedly offered German car companies to abolish all car tariffs between the two countries on a bilateral basis.

But such a “divide and rule” attempt will not work. On trade, only the EU can and will strike deals, not Berlin. Moreover, as a result of the recent trade tensions, the EU seems more united on trade than on most other issues.

6. Can the U.S. bully the EU on trade?

The EU as such is not a strong force in global politics. But its sheer market size makes the EU the top trading power of the world.

As a result, the EU is less inclined than any other region to give in to trade threats.

Conclusion

A well-balanced deal to liberalize U.S.-EU trade is possible, but only if Trump’s advisors start to understand the EU — and then manage to convince their president.

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About Holger Schmieding

Holger Schmieding is chief economist at Berenberg Bank in London. [United Kingdom] Follow him @Berenberg_Econ

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