Whilst the Covid-19 crisis overshadows other issues all over the world, some topics will most probably return once the pandemic will recede. Transatlantic trade is one of those. For years, policy makers on both side of the Atlantic have discussed trade policy, but have failed to reduce concerns. The bilateral surplus in favor of the European Union economies is the biggest stumbling block. Europeans in general and Germans in particular fail to see that there is bipartisan support in Washington for a managed trade policy. Against the backdrop of increasing concern about China, a lean Transatlantic Free Trade Area could help to solve the simmering conflict between Europe and the USA.
Donald Trump has recently gone silent on transatlantic trade. The American President has been too busy with the Covid-19 crisis, the upcoming election and his fight against China. But transatlantic trade still is an issue that may return to center stage any time after the US elections in November. The reason is that the United States have embraced a policy of reciprocity in international trade and are no longer willing to tolerate large imbalances. The Europeans, on the other hand, fail to understand that many US citizens have not benefitted from globalization as much as mainstream economist have long assumed. In addition, the European Union talks a lot about the virtues of free trade, but continues to apply protectionist policies in quite a few and significant areas.
Since the 1970s, the relative openness of the US economy had a number of effects. One was that American consumers benefitted enormously. They enjoyed the consumption of affordable imported products from Asia and Europe. American blue-collar workers were negatively affected. Factories were closed and re-opened in China. Many communities were destroyed, as Anne Case and Angus Deaton have pointed out in numerous publications. White men without a college degree have been the biggest losers and have seen a decline of the real purchasing power by 13 percent between 1979 and 2017.
Does that mater for the trading relations of the USA? Of course, President Trump is not responsible for the malaise of US manufacturing, but he is exploiting the misery of laid-off workers. Whilst it will be difficult to reduce the US trade deficit in the short term, the attempt to bring manufacturing back to the US is nevertheless popular amongst US voters. Covid-19 has further contributed to this trend: 71 percent of US citizens want to repatriate the manufacturing of medical supplies from China.
Even hard-nosed free traders are becoming a little more cautious. In 2019, Alan Blinder, professor at Princeton, criticized his colleagues for their Narrow-mindedness. According to Blinder, mainstream economists often saw the most important goals of an economic system in producing goods and services at the lowest possible cost and then distributing them to the people who want them. According to Blinder, the most important objective for economists is the well-being of consumers. Blinder criticized that American economists in particular often ignored the perspective of producers and those employed in production.
Whilst economists can focus on just one goal, policy makers cannot. Today, both the Democrats and the Republicans have embraced the strategy of managed trade, i.e. they are putting a greater emphasis on trade outcomes than their predecessors. Whilst China is the first target of US trade policy, the European Union and Germany in particular are a close runner up.
Indeed, that is not surprising. For years, Germany has produced enormous current account surpluses and has not done much to reduce them. Germany has contributed to the decline of manufacturing in Southern Europe and the USA. Of course, Germany has also provided the capital for the consumption of goods “Made in Germany”. Whilst this pattern is good for German workers and shareholders of manufacturing companies, it has drawbacks. The economist Hans-Werner Sinn once quipped that Germany exports Mercedes and Porsches and gets Lehman derivatives and Greek government bonds in return.
US policy makers still lament the stubborn trade deficit in transatlantic trade. In 2015, the deficit of the USA in transatlantic trade with the EU-27 was 113 billion euro. The US exported goods worth 197 billion euro, European exports stood at 311 billion euro. Four years later, EU exports had risen to 384 billion euro, US exports to 233 billion euro and the US deficit to 152 billion euro. A significant element have been automotive exports. In 2019, the EU exported cars and car parts worth 39.3 billion euros, whilst US exports were two thirds lower, at 13.0 billion euros.
Europeans often boast that this sectoral trade imbalance is due to the superior quality of their cars. The then German Minister for Economics, Sigmar Gabriel, suggested in January 2017 that “Americans should produce better cars” if they want to increase their exports to Europe. However, the European Union continues to protect its car industry with a ten percent tariff, which is a lot for a mature (and competitive) industry. The USA charges a much lower tariff of 2.5 percent for passenger cars.
Agriculture is of course the other often criticized area of European protectionism. All in all, the European Union could do more to reduce its trade surplus of 194 billion euro (2019) and could open up its large market for imports from other parts of the world. Of course, a unilateral reduction of tariffs and other liberalization measures would not only benefit the US and, say, African corporations, but also exporters from China. Given the increasing level of concern about China’s economic power, it is unlikely that Brussels will opt for such a policy.
The American anger about European protectionism is at least partly justified. The large and persistent deficits in transatlantic trade cost employment in the USA. European policy makers have failed to listen to criticism from Washington, primarily because Donald Trump has been considered a very irritating President. In the first two years of his presidency, many Europeans considered the 45th President of the United States unpredictable and not up to the tasks of the office. They could not imagine that behind the bizarre façade of the Trump presidency there would be a willingness and ability to address relevant issues. The Germans in particular showed a very positive perception of his predecessor Barack Obama and despised Donald Trump. Chancellor Merkel is no exception. In a speech at Harvard University in May 2019, she openly criticized Trump's policies.