Seeking Compromise with the U.S. Instead of Conflict

Andreas Falke

Friedrich-Alexander University Erlangen-Nuremberg

Prof. Dr. Andreas Falke was a Visiting Fellow at AICGS in June 2017, and a Situation Room Fellow in Fall 2017 and Spring 2018. He is the Chair for International Studies in the School of Business and Economics at the Friedrich-Alexander University Erlangen-Nuremberg, where he specializes in trade policy, transatlantic economic relations, the domestic base of American foreign and economic policies, interaction between foreign policy and international economic policies, American politics, and American foreign policy.

Knut Brünjes

Knut Brünjes was for a long time responsible for the German trade policy in the WTO and the United States.

While recently in Brussels, Donald Trump renewed his invectives against Germany’s trade surplus. This fits into an already quite familiar pattern: An unfriendly reception by demonstrators in Europe, major problems at home in Washington, bad press, and conflicts among his advisors lead to aggressive statements in talks with NATO and the EU leadership. Resetting trade relations is still paramount for Trump. NAFTA is to be renegotiated. Japan is not so urgent anymore. With China, Trump has to exercise restraint, as he needs the Chinese for controlling North Korean behavior. There is less restraint needed vis-à-vis Germany, as Germany is also not fulfilling its NATO commitments. Trump is threatening punitive tariffs and import fees and refuses to confirm NATO’s Article V collective defense commitment if Germany does not yield to his demands regarding military expenditures and reducing the trade deficit.

Germany and the U.S. experienced such conflict in the so-called “chicken-war” of the 1960s. Faced with Germany’s refusal to ease barriers for American agricultural products, the U.S. responded with steep retaliatory tariffs against light trucks like the VW pick-up truck—tariffs that are still in place today. A new agenda of trade conflicts is easy to construct: The Boeing-Airbus conflict over aircraft subsidies, hormone-treated beef, genetically modified food, mobile phone standards, digital trade, audio-visual services, and standards for automobiles and motorbikes. Nobody would benefit from such punitive measures in these areas, and both sides would suffer substantial damages. So they should be avoided at all costs.

Responding in kind would be misguided. Aggressively pushing German positions in Washington would lead to an exacerbation of the conflict and prevent a solution benefiting both sides. A successful strategy should go in a different direction. The U.S. complains about the high German trade surplus, which is said to cost jobs. Even though Germany is not totally devoid of responsibility—it has so far refused to take or advocate countermeasures in economic, fiscal, and monetary policy—America’s complaints are only partly justified.

The U.S. trade deficit has existed since the 1970s, regardless of exchange rate movements. It is part of a huge economy that is geared to the domestic side. Since the dollar is the leading global currency, the U.S. can comfortably live with a current account deficit over a long period. Americans profit from the import of high-quality products pushing payments far into the future. Germans, Japanese, and Chinese are trying to invest the revenues profitably in the U.S. via capital exports. Of course, they lose with every depreciation of the dollar. For these reasons it would make a lot of sense for the surplus countries to reduce the one-sided imbalances.

At the same time, the focus on the trade balances in isolation leads to wrong conclusions. Traditionally, American industry has entered big markets in Europe—as opposed to Asia—through foreign direct investment. Germans thus do not drive Chevrolets, but Opel, Ford, or Fiat/Chrysler cars. They use Apple, Amazon, and Microsoft, listen to American pop music, watch Hollywood movies, and go to McDonald’s and KFC, who all pay taxes outside of the U.S. So there is no lack of American products in European markets. American investment is concentrated in Ireland, the Netherlands, and Switzerland. But also in Germany, American investment had led to the creation of hundreds of thousands jobs, and German investment has done the same in the U.S.

What would a successful trade policy look like in the Trump era that would be beneficial for both sides? The Americans would have to understand that “America First” means at the same time “Germany First,” as more and better jobs will only be created through cooperation and not through conflict. Germany can contribute to the U.S. goal of reducing the trade deficit by improving investment conditions, particularly for venture capital, adequate wage increases, and sustainable tax cuts. Germany should also stop supporting the current interest rate subsidy strategy of the ECB and correct the indirect export subsidies caused by a low euro exchange rate. On the job side, one should be sympathetic to the U.S. interest in higher agricultural exports and better treatment for Internet service companies, unless Germany is willing to accept massive risks for the German automobile industry. Additional jobs are only possible through higher investment. On military procurement more transatlantic cooperation is possible.

An understanding between the U.S. and Germany, a win-win situation, could result from the current confrontation. In a mutual dialogue both sides could seek additional trade liberalization and take up the agenda of the Transatlantic Trade and Investment Partnership (TTIP). A deep trade conflict would be detrimental for both sides; Germany, however, would bear the brunt of the burden because of its greater dependence on exports. Reaching an understanding with the U.S. would be directly in Germany’s interest.