Thursday, June 1, 2017

What Trump Gets Right About the German Trade Imbalance (And What He Gets Wrong)

I have been concerned that this blog has become a "what Trump gets wrong" blog.  There is certainly a lot of material for such a blog, but I would like to take a broader view of national security.  So I was pleased when Trump said something that I could kinda sorta agree with: that the U.S. trade imbalance with Germany is a problem.

To be clear, I differ greatly from Trump on trade.  I supported TPP (but largely because of its immensely vital geopolitical benefits in Asia).  I generally agree with economists that a trade imbalance is not a per se bad thing, and largely reflects underlying economics, rather than unfair trade policies.  And I also think that our trade deals have largely been of greater benefit than harm (but we do a bad job of addressing those hurt by beneficial trade deals).

But there is some merit to Trump's concern about the German trade imbalance.  So what does Trump get right?  As Greg Ip explains today in the Wall Street Journal, Germany's trade imbalance as to the entire world is an artificial and harmful effect of the Euro:
[A] country with a weak economy and a trade deficit would expect its currency to fall to boost exports and restrain imports. That can’t happen if exchange rates can’t move, as is the case with China and Germany, though for different reasons.
.  .  .
Since adopting the euro in 1999, [Germany] hasn’t controlled its own currency. However, it did win competitive advantage over its neighbors in the currency union. Labor-market reforms restrained domestic wages. In 2007, a payroll tax cut, which made German labor more competitive, was financed with an increase in the value-added tax, which exempted exports.
In previous eras, those reforms would have pushed the deutsche mark higher, squeezing Germany’s trade surplus. Inside the euro, though, the burden has fallen on Germany’s neighbors, including France, to compete by grinding down domestic wages and prices through high unemployment and fiscal austerity. That has kept the entire region’s economy weak, forcing the European Central Bank to hold down interest rates and thus the euro. That inflates the entire region’s trade surplus with the world.
So what did Trump get wrong?  He seems to suggest that the problem arises from "bad trade deals" with Germany.  German car makers actually manufacture cars in the United States, and the U.S. trade deal is with the EU, which includes many countries with whom we enjoy a trade surplus.  As Greg Ip explains, the problem is not that Germany is exporting too much.  Rather, the problem is that Germany is importing too much.

So what is the solution to German Euro problem?  Most economists think that Germany needs to be less austere and encourage more domestic spending.  The new French President, Emmanuel Macron, wants to move to a "fiscal union" in which European budgets are financed at the European level.

Germany likely will not want to do either, but saving the Euro may require some movement on its part--which will help reduce the trade imbalance.

You can read the entire Greg Ip column here.  Greg Ip, by the way, is always worth reading.

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