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Prepare for the Trade Wars

  • Why it matters

    Why it matters

    The global system of free trade is under attack like it last was in the 1930s.

  • Facts


    • Populists in the U.S. and Europe have made it their goal to unwind globalization and trade.
    • With exports totaling 47 percent of GDP, no other major economy has as much as to lose asGermany.
    • European companies wanting to retain access to the U.S. market have powerful allies in American companies with high sales in Europe.
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Large container terminal at the port of Hamburg.
So good it's bad? Source: Getty images

The loaded container ships leaving Hamburg harbor are the modern flagbearers of Germany’s national pride. On board are cars and pharmaceuticals, factory robots and MRI machines, Escada dresses and kegs of beer. To many Germans, their exporting prowess has become a symbol of economic virility, perfectly captured in a sinuous German noun: Exportweltmeister, or world-champion exporter.

It’s as if the nation’s collective chest swells each time the statistics office announces another uptick in trade.

This time, however, the cheerleading section stayed silent. When the highest annual export total in history, €1.21 trillion, was announced in January, the nervousness in company boardrooms and the political corridors of power was palpable. That’s because the world’s most powerful man and his team have honed in on Germany, and given the country notice that unfettered access to its No. 1 export market may soon be a thing of the past. The White House’s new trade advisor, Peter Navarro, has accused Germany of “exploiting” its trading partners by shipping much more abroad than it takes in. In an interview, Donald Trump has suggested the U.S. may slap a 35 percent tariff on imported German cars. After China and Mexico, Germany has become the third country targeted by Trump’s fury.

Of course, it’s still early days for the chaotic new team in the White House. Americans and Europeans alike have been left speechless by the conflicting statements, the alternative facts, and the glaring ineptitude of un-vetted executive orders. No one yet knows how much of Trump’s tough talk will turn into policy and how much will remain the celebrity mogul’s bluster.

What’s become glaringly clear, however, is that Trump’s tirades against trade are part of a bigger global pattern. Last June, Britain’s vote to secede from the European Union was driven by a similar fear of globalization and open borders – and by the discontent of the underprivileged against the prevailing economic order. These two events amplify a global anti-globalization trend, and portend further upheavals to come.

Nationalists of all stripes and colors now take Trump’s attacks on free trade as their model.

Long before 2016’s dual shock, the tide had turned against trade. Since the global financial crisis, the G20 countries alone have introduced 1,200 new protectionist measures to wall off more and more of their markets from foreign goods, according to the World Trade Organization. China, which has always understood free trade to be a one-way street for its exports, has in recent years made life even more difficult for foreign companies in the world’s most populous market, from placing restrictions on foreign ownership to freezing out foreign companies from “sensitive” sectors.

Since then, the backlash has gotten stronger. Nationalists of all stripes and colors now take Trump’s attacks as their model. In France, National Front leader, Marine Le Pen, has a significant lead in the opinion polls and is all but certain to make it to the final round of the presidential election in May. Her platform is Brexit plus Trump. She has promised to take France out of the euro and tax foreign workers, singling out German and other goods as the evil from which France must be protected.

A whiff of trade war is in the air. “We are in very dangerous waters,” warns former World Bank president Robert Zoellick. And no major economy is more vulnerable to any interruption in the free flow of goods than Germany’s. A quarter of all jobs directly depend on exports, including 1.6 million only on trade with the U.S. “A trade war would be fundamentally bad for the German economy,” says Galina Kolev, chief economist at the Institute of the German Economy in Cologne. The 47 percent of GDP Germany exports make the country far more dependent on free trade than any other large economy, including other export powerhouses like China (22 percent), Japan (18 percent) and the U.S. (13 percent, see chart).

Those exports would be far less likely to attract attention if they weren’t so far out of balance with what Germans buy from abroad. At €253 billion, or about 8 percent of GDP, all agree that the country’s trade surplus is unsustainably high. Particularly when the global economy is weak, as it’s been since the financial crisis, sky-high surpluses leave Germany vulnerable to accusations that it sucks jobs and demand from its neighbors. Until now, Germans have usually brushed off any criticism as unfair and bizarre. After all, they rightly say, no one forces Americans and Greeks to buy Porsches.

Yet ironically, it’s the Germans themselves who should have the greatest motivation for change. The money Germans earn from their surplus is in turn invested abroad, exposing the country to dangerous risks. The flood of German money has fed into American subprime mortgages, Spanish and Irish real estate bubbles and countless wasteful investments around the world. Gunther Schnabl, an economist at the University of Leipzig, calculates that Germany has already lost more than a trillion euros in export earnings through systematic misguided investments. “It is unlikely that the Germans will ever be able to use this fortune,” says Hans-Werner Sinn, another German economist. “Many of the automobiles and machine tools that we export have been simply given away.”

Because most of those losses accumulate in banks, Germans pay twice by having to bail out their banks later on. It’s a gigantic redistribution scheme, these economists say, benefiting German export companies and the countries buying Porsches, but leaving German taxpayers to foot the bill.

Companies like Volkswagen are taking their appeal directly to the American people.

What will happen next? According to various reports, Trump has already sent trade emissaries to Europe’s capitals to cut individual “deals.” Berlin, for example, has been asked to order more defense goods from the U.S. in order to reduce its €49 billion surplus with America. But fragmenting Europe’s market into bilateral, country-to-country deals will most likely accelerate the fragmentation of global trade.

German companies, in turn, are taking their appeal directly to the American people. After all, they already employ 670,000 U.S. workers. Carmaker Volkswagen has commissioned a study by consultancy EY to prove its benefits to American workers. The problem: While Volkswagen assembles 70,000 cars in the U.S., it imports another 400,000 or so, many of them made in Mexico. Under Trump’s proposed tariff, its American sales would wither. Essentially, these companies are sitting ducks. They cannot shift factories, reorder supply chains and find new markets without many years of advance planning.

What else can Europe do now? A full-fledged trade war would hurt everyone, as every student of the 1930s knows. But countries with high export surpluses like Germany would suffer the most. That makes it crucial to limit the damage. The first order of the day is for the European Union and Britain to negotiate a smooth Brexit that keeps trade flowing, as both Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble have promised.

It would also help for Europe to get its house in order and make sure all countries benefit from growth. The eurozone’s financial sector, still ailing a decade after the financial crisis, must finally be put in order, its overhang of bad debts wound down. Now, more than ever, regulation coming out of Brussels must have a lighter touch.

That said, with trade battles on the horizon, Europe does have a few arrows in its quiver. Already, Brussels and Washington have been engaged in a low-level skirmish, with Europe cracking down on tax avoiders like Apple and targeting online services like Facebook with concerns over privacy and hate speech. These companies are potent allies, for they are as dependent as anyone on Europe’s market of 500 million consumers. Berlin and Brussels can let Washington know just how much American companies have to lose. And Europe must join, not fight, America in pressing China to finally open up its markets.

HBM p24 Exploding Surplus-01


All of this, however, will only delay the reckoning for an economy like Germany’s. The anti-globalization tempest will not stop blowing, as this year’s European elections will show. Europe’s biggest economy must rebalance itself. A bigger share of the national wealth should once again go to consumers. Germany has an unusually large low-wage sector, says Institute of the German Economy chief Marcel Fratzscher. If more workers in good jobs with higher wages could afford French cars, Greek vacations and American iPhones, they could help rebalance the economy.

Germany’s domestic economy is also still held back, even if it has picked up some in recent years. Too many domestic service sectors are still weighed down by bureaucracy and overregulation, Fratzscher says. Well-paying new jobs – as opposed to burgeoning menial labor – have largely been concentrated in the export sector, he says. The tax system also favors investments and the corporate sector, while the middle class labors under some of the highest taxes in the world. Were citizens to spend and the domestic economy to grow, Germans could consume more of the products they now send abroad. Once these obstacles are removed, more companies would invest at home again, instead of sending their cash abroad.

Another part of any rebalancing could involve the public sector. Alone among the larger Western economies, Germany’s federal budget has been in the black since 2014. That gives Germany more spending leeway than most. In becoming a champion of fiscal discipline – no bad thing under normal circumstances – the country has underinvested in its infrastructure, including transportation, public buildings such as schools and broadband internet connections. Defense capabilities have atrophied after several post-Cold War decades of collecting a “peace dividend” – even as Europe’s security environment has lately worsened. Many of these public investments would jump-start the domestic economy, put money into consumers’ wallets and get companies investing again.

All these prescriptions have been written many times, but never filled. But between June’s Brexit vote and Trump’s inauguration in January, the debate has been reignited. More minds will surely have to change before the lessons of these shocks are absorbed. Ever-higher exports and surpluses can never be an end in themselves, in particular when they leave a nation so vulnerable, and when so much of what they earn does not come back. Then, come next January, Germans might cheer when the statistics office reports that numbers have gone down, not up.

HBM p24 Dependent on Exports-01

This article first appeared in the Spring 2017 issue of Handelsblatt Global Magazine. Stefan Theil is the magazine’s executive editor. To contact the author:

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