Germany’s principal reaction to the Trump-Interview by the “Bild”-Zeitung of 16 January 2017 was consternation. Is this alarm due to the fact that the new American president understands what is going wrong in international trade?
When Donald Trump was elected president, we at Macroscope already had a hunch that this would be the case. Right at the beginning of the new year, he threatened China with levying duties of 45% on Chinese imports. It was clear then where he was heading to. Shortly after Trump’s China-announcement, on 13 January, Heiner Flassbeck wrote in his essay “Trump and China – a foretaste of Trump and Germany”: “Germany should take a very close look at Trump’s attitude to China, for Germany, being the G-20 country with the highest surplus of exports over imports (nearly 9% of GDP), has a lot to lose. For Germany the US is the trading partner with the largest deficit – about 60 billion euro per year. Of this, President Trump will become aware at the latest when his Treasury Secretary draws up his annual Currency Report to the Congress, and this denounces the biggest sinners in international trade, from the point of view of the United States.”
But Trump noticed it much faster than we had imagined. Only two days later, he had not only noted the great trade balance deficit with Germany, but – in a remarkable interview with the “Bild” and the “Times” – also announced the first consequences he would draw. The president (-elect) is now threatening Germany as well – similar to the Chinese – with being no longer willing to accept the high deficits in mutual trade. His central argument is, that trade is not a one-way street. In addition, he is threatening German car manufacturers, especially BMW, with punitive duties, should they build vehicles for the US market in Mexico. “They can build cars for the US, but they’ll pay 35% taxes on any car that enters the US.” (Donald Trump)
What can we argue against the president of the world’s greatest economic power once again asserting that trade cannot be a one-way street? Can we blame Trump for being serious about the reduction of the foreign trade deficit of about $800 billion a year, which other presidents have also mentioned, however, without taking action against the surplus countries? The US President might even win his case if addressing a complaint to the World Trade Organization (WTO). Since his levying custom duties on German import products would be in line with the rules of the WTO: countries with high surpluses might be legally threatened so as to protect one’s own markets and in an extreme case, they might even be sanctioned. Article XII of the GATT Agreement of 1947 shows that Germany’s large foreign trade surpluses are illegal: “[…] any contracting party, in order to safeguard its external financial position and its balance of payments, may restrict the quantity or value of merchandise permitted to be imported […]. Contracting parties undertake, in carrying out their domestic policies, to pay due regard to the need for maintaining or restoring equilibrium in their balance of payments on a sound and lasting basis and to the desirability of avoiding an uneconomic employment of productive resources. They recognize that, in order to achieve these ends, it is desirable so far as possible to adopt measures which expand rather than contract international trade.” (Article XII*: Restrictions to Safeguard the Balance of Payments 3a)
According to the agreement, Germany itself would therefore have to take its own measures to ensure trade adjustment. In doing so, it should primarily promote the import of foreign goods, as this would strengthen trade in general instead of slowing it down. Let it be understood that this is an excerpt from a contract that Germany has signed and whose strict adherence by other countries, amongst them the US, it is always insisting on.
In any case there is no reason for the reactions by the German government, neither by the largest part of the German press. Frank-Walter Steinmeier, Minister of Foreign Affairs, who called for the observance of international agreements after Trump’s message to Germany, should see to being better informed before making big statements: “We assume that our American partner will continue to comply with international obligations and the WTO rules.”
The fact that Germany has had not much discernment and wisdom so far, is probably due to the fact that a policy of wage dumping pursued behind the protective wall of a monetary union has not yet been seized upon and sanctioned by the WTO. But perhaps, all that has been missing up to now, is a claimant, as happens so often in legal life.
There is, however, one additional fact to consider, namely that the provisions of the WTO anti-dumping agreement apply merely to the sale of goods or services below the cost of production, which is not the case in Germany. One should, however, not join in the Federal Ministry of Economy’s lamentation that “the export-oriented German industry is increasingly affected by distortions of competition on the part of third countries and by unjustified anti-dumping measures”. Those sitting in a glass house should not throw stones. For as the case may be, for an economy with an export share of almost 50% of its GDP, a currency crisis and a depreciation of the dollar would be a disaster.
Article XII of the GATT has not been utilised often, because almost always there were other, more elegant ways of putting countries with permanently high surpluses in their place. For instance in the 1980s, the Americans – by way of currency agreements – forced other countries to swallow and even actively support a depreciation of the US dollar. In the case of China’s high current account surpluses, there was also a pressure towards currency revaluation. But China then decided to surrender to the Americans’ political pressure by doing everything they could to make domestic wages rise sharply, so that they would lose their edge in the field of competitiveness.
Seen from another perspective, media criticism of Trumps protectionism is not devoid of a double standard. Not only was the Obama administration already pursuing a similar policy against China by imposing an import tax of 35% on car tires from the Middle Kingdom in September 2009. The EU is also currently planning to raise its import tax on Chinese steel products at more than 10 times as much as it is at present, namely up to 265% instead of 20%, similar to certain products in the USA. The reasoning sounds downright “Trumpian”: It is done for the rescue of the European steel industry and to combat “unfair competition”. However, a trade war or a currency war generated by a policy of competitive devaluation can not be blamed on the Americans. More obviously it is an inevitable consequence of a questionable German foreign trade strategy, as Flassbeck pointed out in the above-mentioned paper: “What is being forgotten in Germany and China only too willingly: Whoever makes a permanent surplus in foreign trade, actually damages the deficit countries, because with his products, he displaces those of the deficit countries, and so exports his unemployment to those countries. When there are large surpluses and deficits, the prosperity gains resulting from foreign trade are not evenly distributed. The surplus country wins and the deficit country loses at all events. This contradicts the idea of free trade and the hope that free trade will benefit all participants.”
This is exactly how we must understand Trump’s statement that he advocates free trade, but not at any price. The Republican obviously feels that it is unfair conditions which explain the German success. “I love free trade, but it must be a clever trade for me to call it fair.”
The German press and German policy are reacting with defiant self-praise and the usual unanimity to defend the untenable German position. Jan Schmidbauer of the “Süddeutsche Zeitung” argues almost typically for the German perspective: “The fact that German producers are much more widely represented in the US than US competition is here,” says Schmidbauer, “is not due to unfair trading conditions, but to the high quality of our cars.” Minister for Economic Affairs Sigmar Gabriel, who is responsible for international trade, immediately took the same line. His “genius” proposal for a lower deficit in the United States: “To that end the US need to build better cars.”
His colleague Wolfgang Schäuble is no less smart and knows that the surpluses are based on the strength of the German economy. And, in order to carry things to the extremes, he adds that this strong economy is an important contribution to Europe and, as well as a contribution of the European Union’s to the global economy.
However, in a fair international system of trade it is precisely not about the quality of the products, but about the quality of each product’s being appropriately reflected in its price. But who ever, like Germany over the years, has been applying political pressure on the wage-earners to depress wages and for this utilizes the protection of a “lower” euro (expression coined by Schäuble) – the Euro being “low” because Germany systematically weakens the other Euro group countries with its actual depreciation – violates the basic rules of fair trade. Fair trade can only exist, if in every country wages rise in proportion to the productivity plus the inflation target of that country, and if the differences in the inflation targets of the countries are compensated for by consequent devaluation or revaluation of the national currencies.
Finally, and this is really impressive, Trump also seems to understand (or guess) that the problem of German mercantilism does not just affect the United States. German wage dumping went on mainly at the expense of its European neighbours. These countries, for instance Italy, can only escape to positions of current account surplus by suffering high unemployment and many years of economic shrinkage and by importing less and less goods for this reason. When Trump speaks of “Europe as the vehicle of Germany,” he focusses astonishingly accurately on this point, which turns Schäuble’s position into an absolute joke. After the Obama administration had already prompted Germany several times, now there is an American president who removes the kid gloves and speaks in plain language:
“Look at Great Britain and look at the European Union; the EU is Germany. In essence, the European Union is a means to an end for Germany. That’s why I found that Great Britain was so wise to leave. [...] If you ask me, there will be more countries that leave.”
The Chancellor’s reaction followed yesterday: “I think we Europeans must hold our destiny in our own hands.” What she has obviously still not understood or does not want to understand is that “the Europeans” no longer exist. In the next few weeks after Trump’s open criticism, there might be the one or another who will dare to pronounce some simple truths about the ugly causes of the euro crisis and about German dominance. •
* Sebastian Müller studied history, political science and German studies in Darmstadt. As a freelance author, he especially deals with the interactions of economics and society as well as economic history. In this context he has been operating – together with other authors - the blog le Bohémien since 2009. In October, his book “Der Anbruch des Neoliberalismus” (Dawning of Neoliberalism) was published by Promedia edition.
Heiner Flassbeck is an honorary professor at the University of Hamburg, he was Chief Economist of UNCTAD and Secretary of State in the German Federal Ministry of Finance. His focus of research is globalisation, the theory of economic development and the theory of monetary and currency. Publications among others: “The Market Economy of the 21st Century”, 2010; “10 Mythen der Krise” (Ten Myths of the Crisis), 2012; together with Paul Davidson, James K. Galbraith, Richard Koo and Jayati Ghosh: “Economic Reform Now: The Global Manifesto to Rescue our Sinking Economies”, 2013.
Source: https://makroskop.eu/2017/01/deutschland-droht-ein-waehrungskrieg/ from 18.1.2017
(Translation Current Concerns)
If you want to prevent the setting of cookies (for example, Google Analytics), you can set this up by using this browser add-on.