Trump’s foreign economic policy will almost certainly view trade relations as a zero-sum game that is won through the use of coercive economic diplomacy. Germany lies directly in the crosshairs and it is uniquely vulnerable. Germany cannot easily reduce its dependence on the transatlantic economic space, whose importance for Europe still overshadows that of China. Criticism of Germany is also ramping up in Europe.
Notwithstanding his inflammatory and sometimes impulsive campaign rhetoric, Donald Trump has assembled a foreign policy team that is unlikely to overturn the basic structure of U.S. alliances in Europe and Asia. Trump’s foreign economic policy will be more consequential. It will almost certainly view trade relations as a zero-sum game that is won through the use of coercive economic diplomacy. Germany lies directly in the crosshairs and it is uniquely vulnerable.
Trump has said of the EU that “it does not matter whether it lives or dies … Look at the EU and it’s Germany, basically a vehicle for Germany.” His chief advisor for trade and industrial policy, Peter Navarro, has dismissed European Commission pleas to revive the frozen TTIP talks, asserting that “A big obstacle to viewing TTIP as a bilateral deal is Germany, which continues to exploit other countries in the EU as well as the United States with an implicit DM that is grossly undervalued…”
Criticism of Germany is also ramping up in Europe, with elections in the Netherlands, France, and Germany in 2017. Marine Le Pen calls the euro a “knife” and a “political weapon.” There is a fundamental contradiction between Germany’s export mercantilism and the developmental needs of the Eurozone as a whole. For two decades German big business has relentlessly cut labor costs and expanded its production chains in Central and Eastern Europe. The result has been a massive growth of Germany’s current account surplus, which soared to a record 253 billion euros or 8.5% of GDP in 2016. The IMF anticipates that Germany will achieve a current account surplus of 8.1% for 2017 and projects that it will remain above 7% far into the future. By contrast China’s current account surplus for 2017 is projected to be 1.6%. Germany’s current account surplus with the United States exceeded $60 billion in 2016, roughly the same as that of Mexico and slightly behind Japan.
Claims of currency manipulation have been met with indignation in Frankfurt and Berlin. Finance Minister Wolfgang Schaeuble responds that the ECB, and not the Bundesbank, makes monetary policy. However, the IMF estimates that Germany’s real exchange rate is undervalued by 15-20%; a break-up of the Eurozone would certainly result in its revaluation. In 2016 the U.S. Treasury added Germany to a monitoring list of countries engaging in “unfair currency practices” even though Germany does not have its own currency. In any case, the key problem for the Eurozone as a whole is uneven development. No longer able to devalue, and subject to a Commission-enforced fiscal straitjacket under Berlin’s watchful eye, the southern member states of the Eurozone are condemned to “internal devaluation” and prolonged stagnation with no end in sight.
“America First” trade policies did not originate with Donald Trump. Richard Nixon’s unilateral decision in August, 1971 to decouple the dollar from gold restored American competitiveness and greatly reduced external constraints on U.S. monetary and fiscal policies while contributing to stagflation in Europe. U.S. Treasury Secretary John Connally famously informed the Europeans, “The dollar is our currency but it’s your problem.” Throughout the 1980s the United States imposed “voluntary export restraints” on Japanese automobile firms. The Plaza Accord of 1985—commonly viewed as the high point of multilateral cooperation but also an exercise in what today would be considered “currency manipulation”—enabled the United States to achieve a 50% depreciation of the dollar against the Yen and Deutschmark. Japan’s response to the loss of competitiveness, which included looser monetary and fiscal policies, ultimately set in motion an asset price bubble and subsequent “lost decade.”
The Trump Administration will seek to expand the global market share of American corporations through combination of bilateral and multilateral agreements. Trump has threatened BMW and other non-U.S. car manufacturers with a 35% tax on automobile imports. An alternative proposal for a “border adjustment tax,” has been endorsed by major exporters, including pharmaceuticals, technology, and defense and aerospace, the latter also set to benefit from increased NATO budgets in Europe. The neoliberal aspects of the NAFTA, TPP, and TTIP that have provoked popular opposition are likely to be preserved—and perhaps even enhanced—in new trade agreements, in line with coming U.S. domestic deregulation and corporate tax cuts. The outcome of this still-incoherent strategy is uncertain and requires complex negotiations among different sectors of capital; there is no guarantee that it will succeed. The Trump administration is profoundly dysfunctional and already deeply unpopular. Many administration proposals, including the border adjustment tax, could violate WTO rules and provoke retaliation, including from the EU.
With 80% of its exports entering the United States, Mexico will be compelled to make concessions, although these will be tempered by the deep integration of the North American economy and resistance from American corporations with factories in Mexico. UK Prime Minister Theresa May and Japanese Prime Minister Shinzo Abe seem poised to embrace bilateralism. Abe has already visited Trump at his New York Tower and Florida resort. China will be a much tougher negotiator.
Germany’s position, by contrast, is more precarious. 47% of German GDP derives from exports. A breakup of the Eurozone, much less the single market, would be catastrophic. Officials in Brussels and Berlin declare that that the retreat of the American hegemon can provide the impetus for further European integration and autonomy. They envision a “changing of the guard” from the United States to China, whose commercial relations with Europe are expanding, and ritually call for closer European defense cooperation. Yet, Germany cannot easily reduce its dependence on the transatlantic economic space, whose importance for Europe still overshadows that of China. In 2015 the United States replaced France as the largest export market for Germany, accounting for 9.5% of German exports (France had held the position since 1961). The EU had a $136 billion surplus with the United States in 2016. Genuine EU defense cooperation outside of the NATO framework will remain forever at the planning stage.
Many observers have called on Germany to take the lead in constructing- and underwriting - a genuine European fiscal union including a system of common taxation, a full-fledged banking union under ECB supervision, a deposit insurance scheme for banks, and the transformation of the ECB into a lender of last resort. Such a union could certainly counter the growing appeal of euroskepticism. However, despite its prowess as an exporter Germany must now also confront a host of pressing domestic problems, including low investment, anemic growth, migration, a fragile banking system, growing poverty and inequality, and greater compulsion from Washington to increase military spending. In this context, talk of a “transfer union” is anathema across much of the political spectrum. The costs of such an ambitious grand project would be immense, yet Angela Merkel’s coalition is committed to a balanced budget for years to come. Nevertheless, if the Eurozone—much less the EU—is to be saved it may be necessary for the Federal Republic to summon the political will to carry it out.
