Tuesday

19th Jun 2018

Opinion

Trump tariffs: Europe - we have a problem

  • Europe's account surplus is approaching €400bn - much more than China's surplus (Photo: European Commission)

It should be an animated discussion. US president Donald Trump has brought the world to the brink of a trade war.

In China, head of state Xi Jinping, who has just been appointed for life, is steering his country on an increasingly nationalist course, including in economic policy.

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  • If key trading partners erect tariff barriers, the stability of monetary union would be in danger. (Photo: ECB)

Highly-indebted countries and companies around the world are wary of interest-rate shocks, as major central banks gradually tighten their money supply.

The future of the euro is again uncertain after the majority of Italians have voted for eurosceptic parties. Many conflicts, many problems.

No doubt, the agenda will be overflowing when finance ministers and central bankers of the 20 largest economies (G20) convene in Buenos Aires next week.

The eurozone has a problem, and it's a big one.

Our combined current account surplus is approaching €400bn - much more than China's surplus. That leaves us vulnerable. A trade war would threaten the eurozone's business model. If key trading partners erect tariff barriers, the stability of monetary union would be in danger.

To be sure, it still remains unclear whether Trump is really willing to grant discounts on new steel and aluminium tariffs to traditional US allies, including America's neighbours Canada and Mexico and, possibly, EU.

After signing the new regulations with the usual fanfare, he sent out surprisingly reassuring signals shortly thereafter.

Once again, the world is puzzled by this president.

What are his ultimate goals? Does he have any? Or is he going to lose interest in international trade soon, when new areas of conflict rise on the agenda? And yet the destructive potential is enormous.

No steel, no country?

Trump is in the process of severely damaging the global trading order, a system of rules and institutions established by the United States even after World War II.

But the US president has justified the steel-and-aluminum tariffs with US security interests. "If you don't have steel, you don't have a country," he tweeted recently.

It's difficult to go through WTO procedures, if one party claims national security objectives.

Worse, the US is setting a bad precedent. From now on, all countries may protect domestic industries with reference to security considerations.

Following this argument, Europeans could argue for pampering their own microchip production – or take on platforms like Facebook and Twitter, that spread democracy-threatening fake news.

So where should Europeans stand in this conflict? What can we do? Here are a few suggestions.

First, the EU must stand together in this conflict by any means. Europe would certainly find itself at the losing end, if, for example, Brexit-wary Britain tried to negotiate a special deal, or if northern and southern, western and eastern Europeans could be played off against each other.

The authority for foreign trade is exclusively set at the EU level. National unilateralism would massively weaken the common position, not only vis-a-vis the US.

Second, the EU should refrain from getting involved in Trump's game.

The sandbox logic of threat and counter-threat, tariffs and counter-tariffs led to the trade war of the 1930s, a spiral, which the economic historian Charles Kindleberger impressively described in his classic The World in Depression.

The erosion of international exchange through import taxes will at best help certain industries in the short term, but it will harm entire economies permanently, especially the most vulnerable citizens.

Third, Europe should openly address its own problems.

The gigantic current account surplus is dangerous in the long term: for the world economy as a whole, because it favours dangerous global imbalances that contributed to the last financial crisis (at that time it was China's surplus that was causing problems) - but also for the eurozone.

A strategy to reduce European surpluses is not only in America's, but also in Europe's interest. Customs duties are no suitable tool to correct these imbalances.

The consequences of squeeze

To understand how the eurozone's current surplus has come about, it is worth taking a quick look back.

Before the financial crisis, the current account of the eurozone as a whole was close to balance. Germany has seen rising surpluses since 2002.

Other countries, though, especially the booming economies in the south, were running sizeable deficits.

When the financial crisis and the euro crisis hit after 2008, the situation changed completely, turning the eurozone as a whole into a surplus region. Here's why.

The crisis countries may have received bridge loans from the euro rescue fund and some relief from the European Central Bank. But above all, they were forced to cut costs. Layoffs, wage cuts, government austerity programs - all of which has led to lower imports.

At the same time, the cost reductions improved price competitiveness, helping exports to rise. Even battered Italy now records current account surpluses.

As Germany's – and the Netherlands' – surpluses continued to rise, the balance of the Eurozone shifted farther into positive territory.

One might consider this a normal market reaction. But the eurozone is not all that normal.

To put it plainly, the gradual economic recovery, the eurozone enjoyed in recent years, would not have been possible without running massive trade surpluses.

This is because monetary union lacks internal stabilisation mechanisms that nation states normally have – some form of central budget, some redistribution of income among regions.

There's no equivalent in the eurozone. A member state in crisis must pull itself up by its own bootstraps, even if the consequences are large external imbalances of currency area as whole.

Europe is not a surplus region for some protectionist calculus – as Donald Trump seems to suggest – but accidentally, due to its own institutional imperfections.

This is problematic for two reasons.

On the one hand, this strategy has to rely on other countries' willingness to accept large deficits. America has acted as a consumer of last resort in the past, allowing high degrees of spendthrift, which the US could afford because the rest of the world was happy to finance these deficits quite cheaply. But under Trump that's changing.

On the other hand, the current institutional imperfections are also difficult for the eurozone itself.

Running high current surpluses does not just mean more exports than imports. It also implies massive capital outflows. Money is lent to the rest of the world, through which imports from Europe can be paid for.

The eurozone - and Germany in particular - is now by far the world's largest capital exporter.

These funds are badly needed for investments at home to sustainably increase prosperity – to help fighting no-future sentiment in frustrated and increasingly radicalised societies such as Italy (see the outcome of the last elections) and to foster the anticipation of a good future, within the eurozone.

Henrik Mueller is a professor at TU Dortmund University and the spokesperson of Dortmund Centre for data-based Media Analysis (DoCMA). A German version of this article was published by Manager Magazin.

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