Internet Giants

Fake news: the US trade deficit

Source: Fotolia, companies [M]

Before the fall meeting of the International Monetary Fund, the German federal statistics office reported a 7.2 percent increase in German exports over the previous month. These numbers provide new ammunition to Donald Trump, who has repeatedly threatened his key partners in Europe with punitive tariffs over a supposed “massive trade deficit.” The US president, however, overlooks the fact that there is also a widespread “digital trade deficit” – which is detrimental to the European economy. If the Trump administration is serious about taking protective measures against the European steel and automotive industry, it will inevitably trigger a debate in Europe over steps to take against America’s digital giants. A trade war would be foolish.

The European single market, with more than 400 million internet users with money to spend, is almost entirely open to digital products and services from abroad. The level of regulation is low in comparison with other industries. European user data is still being transferred free of charge to the United States, where it is refined by a small number of companies into sources of innovation and user profiles. We are being offered completely new and highly individualized services, which have shaped everyday life for some time. However, domestic competitors and consumers have no access to the emerging data pools and no opportunities to derive similar added value from them.

Germany's next government and the Europe Union must press ahead with digital transformation and move to catch up to the United States.

American Internet platforms such as Google/Alphabet, Amazon, Facebook and Apple have been able to grow to unprecedented dimensions in this environment. They have improved their products and services with each additional customer and his or her data. By creating additional digital ecosystems around core services, the leading platforms have acquired a controlling position in the digital world. With products such as Amazon Echo, the intelligent language assistant on the kitchen table, they penetrate deeply into our everyday lives and even shape all the downstream services and content that we use.

The digital platforms coordinate and control all central nodes on the web when we search, buy or communicate. After a brief triumphal march, they now represent 6 of the 10 largest companies in the world. Companies from Silicon Valley account for more than 50 percent of the world’s market capitalization of digital platforms. Germany and Europe only play a role here as a sales market, representing less than 5 percent of global market value.

This has resulted in a digital US trade surplus. Marcel Fratzscher, president of the German Institute for Economic Research, and  Klaus Hommels, the venture capitalist co-founder and CEO of Lakestar, estimate this European digital trade deficit at $68 billion (€58 billion) for the year 2014. The US is probably even more dominant in the digital sector, because not all digital “exports” appear in trade statistics. Is the situation escalating into a trade war? Will Europe respond to US tariffs for the European automotive and steel industries with a Facebook or Google tax? At the last G20 summit, European Commission President Jean-Claude Juncker announced that he would respond to possible American punitive tariffs within a few days.

But we must avoid the path to a trade war. Germany’s next government and the Europe Union must press ahead with digital transformation and move to catch up to the United States. If we want to play our part at the top, we must address the rapidly increasing demands on digital infrastructure and create competitive financing options for young and rapidly growing companies. We also need to rein in American dominance in the platform economy by means of market-compliant and competitive regulation.

If Mr. Trump truly chooses the path of protectionism, Mr. Junker’s warning will inevitably meet with widespread approval in Europe. To avoid an escalation, European leaders should draw attention to our digital trade deficit in discussions with the Trump administration. Mr. Trump must understand that while “America first” protectionism would affect German and European industry, it could also have serious implications for the digital growth engine of the US economy.

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