Sleepwalking toward a US-Germany trade war
Countries tend to go to war with one another when they have irreconcilable differences on a big issue on which they entertain very different points of view. The same would seem to be true of trade wars.
This must make one think that the present dialog of the deaf between the United States and German governments on the question of Germany’s outsized external current account surplus will eventually end in a full-scale trade war between those two nations.
That is unless somehow the International Monetary Fund (IMF) can find a way to mediate an acceptable solution to the two parties.
{mosads}At the heart of present U.S.-German trade frictions is Germany’s massive external current account surplus. At almost $300 billion, Germany has the world’s largest such surplus. Meanwhile, at almost 8 percent of GDP, Germany’s current account surplus is a large multiple of China’s sub-2 percent-of-GDP surplus.
While President Trump has been particularly vocal about the unfair advantage that Germany derives from its large surplus and is threatening increasing automobile tariffs to reduce it, he is not the first U.S. president to raise Germany’s surplus as an issue of contention.
Already, under the Obama administration, the U.S. Treasury placed Germany on the list of those countries like China, Japan and South Korea, whose policies needed to be monitored for possible currency manipulation. It did so precisely because of Germany’s large and persistent external surplus.
Among the more telling indications of the seemingly irreconcilable differences between the U.S. and Germany on the external surplus issue is the highly charged moral tone of the discussion.
For its part, the Trump administration sees Germany’s large surplus as an indication of Germany’s free riding the global economic system and stealing jobs from the United States and the rest of the world by pursuing policies that give it an unfair competitive advantage.
For its part, the German government sees the surplus as a sign of virtue and a reward for Germany maintaining highly disciplined macroeconomic policies.
It also does not help matters that the U.S. and German governments have very different views about Germany’s exchange rate policy.
For its part, the Trump administration regards Germany as having artificially suppressed the value of its currency since 1999 by abandoning the Deutschmark in favor of the euro.
By sharing a single currency with the weaker economies of Southern Europe that weigh down the euro, the U.S. government believes Germany has been enjoying the benefits of a more competitive exchange rate than would be the case under its own currency.
For its part, the German government claims that having joined the euro, there is no going back for Germany. As such, it claims that Germany no longer has its own exchange rate policy, but rather, it is the European Central Bank that determines the value of the euro, which now serves as Germany’s currency.
The German government is equally resistant to suggestions by either the U.S. government or the IMF to calls that Germany be less restrictive in its budget policy with a view to help reducing its large external surplus.
Rather, it notes that Germany has a balanced budget amendment with which it legally must comply and that, in any event, Germany’s disciplined budget policies have served it well and are a salutary example for other countries to emulate.
Further seeming to put an amicable solution of the German external surplus problem out of reach is the Trump administration’s pursuit of a highly expansionary budget policy at this late stage in the U.S. economic cycle.
By cutting taxes and increasing public spending at a time that the U.S. economy is already at full employment, the Trump administration heightens the chances that the U.S. will revisit the twin deficit problem of the 1980s.
It will do so by both reducing the level of the country’s saving as well as by causing the U.S. dollar to rise in response to higher U.S. interest rates.
If ever there was an occasion for the IMF to mediate between two major countries with diametrically opposite views on an economic issue of utmost importance to the global economy, this has to be it.
This is especially the case considering that a full-scale trade war between the United States and Germany has the real potential to be highly destructive to international economic prosperity.
However, given President Trump’s seeming antipathy to international organizations and given Germany’s moral conviction of the correctness of its pursuit of budget balance, I am not holding out much hope that this will happen. Instead I am bracing myself for the U.S. and Germany to sleepwalk their way to a trade war.
Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.