Canadian Manufacturing

Why is Trump angered by Germany’s trade surplus?

by David McHugh, The Associated Press   

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Germans say their products are just better and people want to buy them; experts say Germany is just really good at exporting

FRANKFURT—President Donald Trump keeps criticizing Germany’s trade surplus with the United States. Germans respond by saying their products are just better and people want to buy them.

One thing isn’t in dispute: German companies sold 107 billion euros ($120 billion) worth of goods to U.S. customers last year. Going the other way, U.S. companies sold 58 billion euros ($65 billion) worth of stuff to Germany. The result: a German trade surplus of 49 billion euros ($55 billion).

Trump tweeted Tuesday that “we have a MASSIVE trade deficit with Germany, plus they pay FAR LESS than they should on NATO & military. Very bad for U.S. This will change.” He also told EU officials that Germany was “very bad” on the trade question during his stop in Brussels last week.

What’s behind all this? Here’s a look at Germany’s trading relationship with the U.S. and the rest of the world.


Why does Germany sell so many goods in the United States?
Germans—including Chancellor Angela Merkel—are quick to say that German companies just make better products. There’s something to that, as anyone noting all the Mercedes-Benz and Porsche rides in Hollywood and Manhattan will have to concede. Germany’s export success also depends on less glamorous goods, often highly technical industrial equipment made by smaller firms that dominate global niche markets. They have a lot of practice at exporting and they’re good at it.

So trade is all one way? Advantage Germany?
Despite concerns about the surplus there are lots of benefits to both countries from their close and longstanding business ties. Germany is the sixth-largest export market for the U.S.

Also, German companies often invest, hire and sell in the United States rather than exporting there. The BMW plant in Spartanburg, South Carolina, was in fact the largest single auto exporter, sending $9.5 billion in SUVs through the Port of Charleston to the rest of the world.

Does Germany manipulate its currency to make its goods cheaper and gain advantage?
Germany doesn’t have a currency it can manipulate since it belongs to the 19-member euro currency union. It just so happens, however, that the euro has been relatively weak. That’s mainly due to extensive monetary stimulus by the European Central Bank. The ECB has printed more than 1.8 trillion euros and pumped them into the financial system to lift inflation and growth as the eurozone heals from the Great Recession and troubles over too much debt in countries such as Greece. Such monetary stimulus can weaken a currency, and the euro has slid from near $1.40 in May 2014 to $1.12 now.

If Germany had its own currency, it’s likely the opposite would have happened. Countries that run large trade surpluses often see their currencies gain in value, making their goods more expensive for foreigners and eventually reducing the surplus. The International Monetary Fund said in its 2016 report on German that the country’s real effective exchange rate is undervalued by 10-20 per cent.

Germans point out they can’t tell the ECB what to do, since it’s politically independent. Ironically, Germans—including the two that sit on the 25-member ECB governing council—have been among the leading critics of ECB stimulus, saying it bails out countries with weak finances and lots of debt through lower borrowing costs.

Yet German exports are beneficiaries too, through the weaker euro.

So it’s all out of Germany’s control?
Not entirely. Germany’s emphasis on exports is in part a result of government policies over the years. The government chooses to run budget surpluses rather than spend that money or cut taxes. That suppresses spending by Germans, including on imports. In 2003-4, the previous government of Chancellor Gerhard Schroeder shook up the country’s welfare state, cutting long-term unemployment benefits, loosening rules on firing workers and on part-time and temporary work. Since then German wages increases have lagged, making the country more competitive on exports but reducing consumer demand for goods.

Is Trump alone in criticizing Germany’s trade surplus?
No. Among others, then-Premier Matteo Renzi of Italy said last year that the German surplus isn’t good for the eurozone. Former Federal Reserve Chairman Ben Bernanke wrote in 2015 that Germany’s trade surplus “is a problem” since government policy leads to less spending by Germans, in region that needs all the growth it can get.

What could Germany do?
Bernanke said that “Germany has several policy tools at its disposal to reduce its surplus _ tools that, rather than involving sacrifice, would make most Germans better off.” Those steps could include more spending on roads, bridges and airports. That could help increase domestic income and spending. Government, employers and unions could co-operate to permit higher wages. Germany could also improve domestic demand by reducing red tape and regulation on professions like lawyers, accountants, architects, and engineers. That would lower the cost of those services to firms.

How likely is any of that?
Such changes aren’t ruled out over the longer term. But German leaders tend to look at their trade performance as a source of pride and jobs. Balanced budgets and government thrift have strong appeal. And it’s an election year.


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