They say that truth is the first casualty of war. The same could be said of trade wars. And it is certainly true in the conflict between two erstwhile allies, the US and Europe, which have been locked in a war over trade surpluses since long before Donald Trump came on the scene.
But these days it’s getting serious. Where it was once an academic argument among economists, Mr. Trump has upped the stakes by demanding “fair” trade. Both sides are now threatening serious taxes against the other. Steel, aluminum, cars, motorcycles, farming, whisky and other industries on either side of the Atlantic could wind up collateral damage.
And lately a new statistical front has opened up between the Americans and the Europeans. At a party conference last month, German Chancellor Angela Merkel called talk of a trade surplus “outdated.” She explained that, “if services were included in the trade balance, then the US would have a major surplus over Europe!”
Ms. Merkel’s speechwriters were probably alluding to the work of Gabriel Felbermayr, an Austrian economist at the Ifo Institute who has made a name for himself by challenging orthodoxy. And before Trump supporters file him under “biased European,” he’s also the one who pointed out that Europeans have higher tariffs than the Americans.
What? So the US actually has a surplus with the Europeans? If so, somebody needs to tell Mr. Trump because he’s got it all wrong.
But is that right? The reality is tremendously complicated, not to mention convoluted, for a non-economist. But given that the US and Europe are embarking on a trade war over this issue, it pays to try to break it down. As ever with statistics, it turns out both sides are right in their own way.
The many numbers above are as simple as it gets. Mr. Trump is right that the US has a goods deficit with the European Union. Think of all those BMWs, Mercedes, the champagne, the Haribo sweets. But Ms. Merkel is right that, if you add services and corporate profits to the equation – that is, the Apples, Googles, Facebooks, Amazons – the US comes out on top. That’s what sets America’s trading relationship with the EU apart from its much more imbalanced ties to China, for example.
Another note to any Trump supporters reading this – the 2017 figures above came from the US Commerce Department. European statisticians use different measurements that make the sums come out even more favorably for the Europeans. “Europe needs to unite and explain US figures to the Americans,” Mr. Felbermayr quipped in a recent research note. However that’s not even half the story.
Thanks for all the goods
Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag. I fought hard for them and ultimately they will not pay tariffs selling into the E.U., which has hurt us badly on trade, down $151 Billion. Taxes just a Harley excuse – be patient! #MAGA
— Donald J. Trump (@realDonaldTrump) June 25, 2018
Mr. Trump’s brag above is based on the idea that he can “win” any trade war with Europe, eventually forcing Brussels (which imposed a tariff on motorcycles) to back off. That’s a tough gamble. But on the numbers, this is one tweet from Mr. Trump that is actually pretty accurate. In fact, he’s underselling it: The EU’s trade surplus with the US was $153 billion in 2017.
The trade surplus only looks at goods and Mr. Trump is certainly right that this is out of whack. There are many more Mercedes on the streets of New York than there are Fords on the streets of Berlin, as Mr. Trump has pointed out. Although as Germany’s foreign minister retorted, maybe the US should “make better cars.”
There’s a further argument in Mr. Trump’s favor – at least when it comes to his own constituents. Even in today’s automated world, building goods (a BMW, for example) requires more manpower than offering services like Facebook. So Mr. Trump has a point when he suggests the EU – and Germany, which is responsible for the lion’s share of the surplus – have cost manufacturing and agricultural jobs in middle America.
Services are harder to calculate
But that’s the “old economy.” One also needs to consider the “new economy” of digital companies. If you look at services and corporate profits alone in that area, the US has a “surplus” of some $167 billion. About $51 billion of that is simply from exporting services. More than $100 billion comes from cash inflows back into the US.
On the surface, that accounts for a surplus. The trouble is, not only does Facebook offer fewer jobs than BMW, but figuring out exactly which country benefits from the “digital economy” is a murkier business. That’s partly because digital companies find it much easier to stash profits in low-tax nations, even if they’re doing most of their business elsewhere.
Brad Setser, a former deputy Treasury secretary, points out that US capital gains typically come from three European countries – Ireland, Luxembourg and the Netherlands. All three are used as a base for tax purposes. Indeed this is part of the reason Germany has such a high current-account surplus with the United States: Many US companies use the Netherlands as a tax base to do business in Germany, Europe’s largest economy (see graphic below).
But that doesn’t mean capital gains should be thrown out of the calculations completely, as Mr. Setser would have it. There are other statistical tricks that work in America’s favor – such as the bizarre example that Google registers its patents in Ireland, again for tax reasons. When it “exports” these to the US, it benefits the EU’s trade balance. If Silicon Valley simply registered their patents in the US instead, America’s “deficit” would be magically reduced, Mr. Felbermayr said.
In other words, the numbers above aren’t worth the wax on a shiny new BMW. But both sides have a reason to make them more believable.
Show me the money
There’s another important half-truth being ignored by Mr. Trump: The US dollar’s strength allows America to profit from its neighbors. The US has racked up massive debts abroad, but much of the money spent on foreign goods winds up back on American shores, on Wall Street. “Foreigners overwhelmingly own low-yielding US debt, but the US holds high-yielding foreign stocks in massive amounts,” said Jens Südekom of the University of Düsseldorf.
This is a tremendous advantage. Americans are essentially financing their import habit at negative interest rates, raising about $100 billion per year in the process. The trouble is that these earnings are stuck in the financial system, and are not being passed on to the average American. The conclusion: Tackling inequality in the United States might be more useful than fighting a trade war with Europe.
Norbert Häring is an economist who works for Handelsblatt in Frankfurt. Donata Riedel covers finance and politics for Handelsblatt in Berlin. Christopher Cermak adapted this story in English for Handelsblatt Global in Berlin. To contact the authors: email@example.com, Riedel@handelsblatt.com