Tuesday

23rd Oct 2018

Opinion

Trump's trade position weaker against EU than China

  • The US deficit against Germany in trade in goods gives an incomplete picture of economic relations (Photo: Audi)

US president Donald Trump insists that his country is being treated unfairly by both the EU and China in terms of commercial trade.

By this he means that European and Chinese companies and their employees live on exports to the USA, while Americans benefit far less from market access to Europe and China.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 18 year's of archives. 30 days free trial.

... or join as a group

This is why Trump is threatening to start a trade war. He sees himself as in the stronger negotiating position – he thinks that isolation would damage China and Europe more than it would the USA. This reasoning is not only flawed because imports of foreign products are extremely useful to the demand-side, which includes both consumers and companies.

It is also misguided since the EU at least does not earn any more income in the USA than the USA does in Europe. This impression can only arise by focusing exclusively on trade with goods and services.

Revenues, however, are also generated by US companies via profits of their subsidiaries in Europe. The current account between the US and the EU, which includes not only trade in goods and services, but also the profits generated in a specific foreign market, is actually balanced.

Believe it or not, there is no US deficit.

In trade in goods with the USA the EU ran a surplus of $153bn in 2017. In services, by contrast, the USA posted a surplus of $51bn, and in so-called primary income, which mainly consists of corporate profits, the US surplus was as high as $106bn.

Fairy tale

So overall, the Americans generated slightly higher revenues in the EU than vice-versa. The main reason for this is that US companies with subsidiaries in Europe earn far more money than European companies in the USA.

The fact that corporate profits play a greater role for the USA than export-based revenues is due to the fact that the US economy is more focused on digital business models and immaterial assets.

A comparatively high number of US companies, for example, hold patent and brand rights in EU countries with attractive tax laws like, for example, The Netherlands, and generate high profits there by granting licences in other EU countries.

These profits are not shown in the balance of trade, but do feature in the current account, which covers the entire exchange of goods and services.

This is clearly illustrated by the current account balance between The Netherlands and the USA. Like Germany, The Netherlands is often criticised for its trade surplus. In fact it is running an astronomical current account deficit of $98bn against the USA.

This is primarily due to the fact that US companies in The Netherlands generate a surplus of $68bn in corporate profits, which accounts for two thirds of the surplus generated in Europe as a whole. This illustrates that it makes no sense for the USA to look at bilateral deficits or surpluses with individual European countries.

US companies tend to pool their profits generated across the entire EU in The Netherlands for tax reasons. That is why the US deficit against Germany in trade in goods gives an incomplete picture of economic relations.

Overall, the idea that the USA benefits less from market access to the EU than vice-versa is a fairy tale. That is why Trump is mistaken if he believes that he can blackmail the EU with the advantages of US market access.

Open China's market

The USA stands to lose at least as much as the EU by blocking this access. In case of a trade war, the EU would just need to make use of other instruments next to tariffs, like taxing the revenues of internet giants like Google and Facebook, for example. But it would of course be far better to avoid such a conflict.

The US position vis-a-vis China is different. Chinese companies exported goods worth $506 billion to the USA in 2017, while the USA sold a total of just $130bn-worth of goods in China.

In services the USA generated a surplus of $38bn, but in terms of corporate profits China was once again streets ahead. Chinese companies earned $34bn with their activities in the USA, while American companies in China earned only around half of this figure.

The USA's overall current account deficit against China totalled $358bn in 2017, which is effectively very imbalanced. This is primarily due to the fact that China has long since restricted investment by foreign companies in the Chinese market; and has failed to adequately protect the intellectual property of foreign investors.

If the USA were to use its negotiating power against China to encourage the country to open up its markets, all concerned would ultimately benefit.

Clemens Fuest is president of ifo Institute – Leibniz Institute for Economic Research at the University of Munich

EU pessimistic on permanent US trade exemption

EU trade chief said the US will impose tariffs or "other limiting measures" on 1 June, as the EU's offer to start limited trade talks is probably not enough for the protectionist Trump presidency.

EU rejects US trade 'gun to the head'

EU leaders demanded a permanent exemption from US tariffs on steel and aluminium - and ruled out any bilateral trade talks within the 1 May deadline set by Donald Trump.

Analysis

EU has no 'magic bullet' against US Iran sanctions

EU leaders in Sofia will discuss how they can protect the bloc's economic interests against US threats to sanction companies doing business in Iran. But their options are limited.

News in Brief

  1. EU commission sends back Italy's budget plan
  2. French CEO attends Saudi forum despite journalist murder
  3. Sacked Polish judges urged to return to work
  4. Italy's budget defence arrived in Brussels
  5. EU warns of nuclear race as US pulls out of treaty
  6. Spain and Sweden not stopping arms sales to Saudi Arabia
  7. Piedmont and Copenhagen named top tourist destinations
  8. Bayer to compensate for carcinogenic weed killer

Stakeholders' Highlights

  1. International Partnership for Human RightsOpen letter to Emmanuel Macron ahead of Uzbek president's visit
  2. International Partnership for Human RightsRaising key human rights concerns during visit of Turkmenistan's foreign minister
  3. NORDIC COUNCIL OF MINISTERSState of the Nordic Region presented in Brussels
  4. NORDIC COUNCIL OF MINISTERSThe vital bioeconomy. New issue of “Sustainable Growth the Nordic Way” out now
  5. NORDIC COUNCIL OF MINISTERSThe Nordic gender effect goes international
  6. NORDIC COUNCIL OF MINISTERSPaula Lehtomaki from Finland elected as the Council's first female Secretary General
  7. NORDIC COUNCIL OF MINISTERSNordic design sets the stage at COP24, running a competition for sustainable chairs.
  8. Counter BalanceIn Kenya, a motorway funded by the European Investment Bank runs over roadside dwellers
  9. ACCACompany Law Package: Making the Best of Digital and Cross Border Mobility,
  10. International Partnership for Human RightsCivil Society Worried About Shortcomings in EU-Kyrgyzstan Human Rights Dialogue
  11. UNESDAThe European Soft Drinks Industry Supports over 1.7 Million Jobs
  12. Mission of China to the EUJointly Building Belt and Road Initiative Leads to a Better Future for All

Latest News

  1. EU commission rejects Italy's budget plans
  2. Poland's liberal prodigy to take on EU populists
  3. Italy's M5S to unveil new EU group in January
  4. Cities are frontrunners in fight for social rights for all
  5. 'Integration' - the missing factor in new EU migration fund
  6. Unelected EU parliament official blocks release of #Metoo papers
  7. 'The kids aren't alt-right'
  8. Lone Merkel declares Saudi arms ban

Stakeholders' Highlights

  1. International Partnership for Human RightsCivil society asks PACE to appoint Rapporteur to probe issue of political prisoners in Azerbaijan
  2. ACCASocial Mobility – How Can We Increase Opportunities Through Training and Education?
  3. Nordic Council of MinistersEnergy Solutions for a Greener Tomorrow
  4. UNICEFWhat Kind of Europe Do Children Want? Unicef & Eurochild Launch Survey on the Europe Kids Want
  5. Nordic Council of MinistersNordic Countries Take a Stand for Climate-Smart Energy Solutions
  6. Mission of China to the EUChina: Work Together for a Better Globalisation
  7. Nordic Council of MinistersNordics Could Be First Carbon-Negative Region in World
  8. European Federation of Allergy and AirwaysLife Is Possible for Patients with Severe Asthma
  9. PKEE - Polish Energy AssociationCommon-Sense Approach Needed for EU Energy Reform
  10. Nordic Council of MinistersNordic Region to Lead in Developing and Rolling Out 5G Network
  11. Mission of China to the EUChina-EU Economic and Trade Relations Enjoy a Bright Future
  12. ACCAEmpowering Businesses to Engage with Sustainable Finance and the SDGs

Join EUobserver

Support quality EU news

Join us