Trump Threats

What Comes after Free Trade?

  • Why it matters

    Why it matters

    Germany’s imports and exports equal 86 percent of its annual GDP, making the country very dependent on international trade — and vulnerable to the end of trade deals.

  • Facts

    Facts

    • The United States is Germany’s largest export destination, receiving 10 percents of all goods and services.
    • Germany’s exports totaled €1,194 billion ($1,182 billion) in 2015.
    • Donald Trump scrapped the TPP free-trade deal on Monday, and will renegotiate NAFTA within a month.
  • Audio

    Audio

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Container Ship Bow
Container ships carrying goods across the globe. Source: Getty Images

“America First” was the slogan looming over the World Economic Forum in Davos.

Since U.S. President Donald Trump’s inauguration address last Friday, the specter of American protectionism has scared European business managers, and German executives most of all.

The German economy is extremely dependent on trade. The country exported goods and services worth €1,194 billion ($1,182 billion) in 2015 alone, with 10 percent going to the United States.

So when Anthony Scaramucci, the former Goldman Sachs banker turned Trump advisor, spoke in Davos, the world listened. “Donald Trump isn’t against free trade. He’s only against unfair trade. He wants to make trade fair again,” the financier said.

Mr. Scaramucci’s statements weren’t enough to calm the nerves of America’s rattled overseas allies.

Does Mr. Trump want free trade, fair trade for the United States, unfair trade for the rest of the world? Or simply less trade?

“Everyone who thinks they know something has no idea,” said Paul Achleitner, head of the non-executive supervisory board at Germany’s largest bank, Deutsche Bank. The sentence sums up the uncertainty that German managers are facing in 2017.

Mr. Trump’s inauguration speech was a preview of what’s to come: the breach of longstanding traditions in trans-Atlantic economic ties. On his first full weekday in office, the new president withdrew from the Trans-Pacific Partnership, a multi-lateral free-trade deal between 12 nations on the Pacific rim.

“Donald Trump isn’t against free trade. He’s only against unfair trade. He wants to make trade fair again.”

Anthony Scaramucci, Trump Advisor

He is also set to renegotiate the North American Free Trade Agreement with Mexico and Canada within 30 days in office, according to a statement from the White House.

The proposed E.U.-U.S. free-trade deal known as TTIP, which has been in negotiations for four years, is likely to be scrapped, too.

Instead, Mr. Trump wants to bank on bilateral trade agreements, as he said previously.

That’s a threat to the German economy that depends on the free exchange of goods and services like hardly any other. German imports and exports amount to 86 percent of gross domestic product per year, according to a study by the United Nations Conference on Trade and Development. Only South Korea is even more dependent on foreign trade.

The United States is by far the largest single trading partner for the German economy. Exports to America skyrocketed by 73 percent over the past six years: 1.6 million German jobs depend on this trans-Atlantic trade.

Remodeling international commerce might not lead to the collapse of the West, as Nobel prize-winning economist Joseph Stiglitz put it. But it amounts to a direct attack on Germany’s business model.

And the irony of Mr. Trump’s move is not lost: The United States was the driving force behind the World Trade Organization, which for decades pushed an agenda of lowering tariffs and trade barriers. Now, the U.S president wants to put punitive taxes on Chinese imports, and threatens to leave the WTO if the organization intervenes.

That left communist China’s President Xi Jinping in the unfamiliar, but not entirely unwelcome role, of playing the advocate of free trade at the World Economic Forum.

The first multinational corporations seem to accept the new order of the day and buckle under. U.S. automotive firm Ford last week cancelled its plans to invest millions in a new production site in Mexico and instead now plans to produce in Michigan.

And Japanese carmaker Toyota sweetened the prospect of building a new factory in Mexico by promising investments worth $10 billion in the United States over the next five years.

Their German counterparts are still hesitant, even though Mr. Trump explicitly threatened them with punitive tariffs. Luxury automaker BMW this week still stood by its new Mexican plant that is supposed to start work in 2019.

But the chief executive of Germany’s chemicals and pharmaceuticals giant Bayer this week was more cooperative. Werner Baumann made the pilgrimage to Mr. Trump to get his blessing for Bayer’s planned merger with U.S. agricultural firm Monsanto.

In response, Mr. Trump praised the companies on Twitter for pledging to create jobs in America.

And even though conservatives are traditionally advocates of free trade, Mr. Trump’s radical U-turn in trade policy does have some supporters in politics. British Prime Minister Theresa May, when advocating her country’s exit from the European Union, used the phrase “No deal for Britain is better than a bad deal for Britain” more than once.

“Deal,” that’s a word that dealmaker Mr. Trump has introduced into the jargon of politics. It’s not about mutual benefits anymore, but about brutal cost-benefit calculations.

Britain is set to follow through on that logic. Both Ms. May and her finance minister, Philip Hammond, have threatened to turn the country into a tax haven in order to stay attractive to investors. The prime minister, very Trump-like, also wants to decide on a case-by-case basis which conditions to offer to companies so that they guarantee jobs in the United Kingdom. Japanese carmaker Nissan agreed to manufacture two more models in its plant in Sunderland, but what the firm got in return is under wraps.

Mr. Trump might call that a good deal, most people would call it despotism.

But even outside of populist politics, free trade has more than enough critics. Many claim that it benefits strong Western economies, like the United States and Germany, more than others, and often exploits poorer developing countries.

A recent PwC poll among global top managers revealed that 44 percent see more negatives than positives in free trade.

“We as managers aren’t completely innocent,” said Tidjane Thiam, head of Credit Suisse. “Globalization of course has many advantages, but we also have to recognize the tensions it causes,” the top banker said, adding that executives had to play their part to make sure international commerce benefits everyone.

“The system is to short-term,” said Martin Sorrell, who leads the world’s largest advertising company, WPP. “Instead of creating long-term values, large corporations just distributed their profits from free trade to their shareholders,” he added.

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And Mr. Stiglitz in Davos said Germany has benefited from skewed international trade: “Of course countries like Germany have banked on exports to an extent that they have a trade deficit.” He said it’s no surprise that other country’s protest that strategy. Anglo-Saxon economists and Southern Europeans have been debating for quite a while whether Germany celebrates its export success story at the expense of other European states.

Yet, Mr. Stiglitz – and many other economists – don’t think that protectionism is the answer. The Nobel laureate even called on Germany to lead the front against any meddling in international trade. “It is very important that Germany show a clear resolve. The Germans have to say, ‘we stand by the existing international order,’” he said in an interview with Handelsblatt’s sister publication WirtschaftsWoche last week.

Frank Riemensperger, Germany head of consultancy Accenture and member of the board of the German-American Chamber of Commerce, is still optimistic about the future of trade under Mr. Trump.

“It’s not like Mr. Trump invented protectionism,” he said. In reality, trade between most countries worldwide was never very free, Mr. Riemensperger added, alluding to a spreadsheet making the rounds these days that claims that trade barriers, tariffs and weird technical standards have hemmed the international flow of goods for years.

Economists with the WTO counted almost 3,000 measures impeding trade globally by 2010, nearly six times as many as 2010.

And Germany navigated this not-so-free-trade world just fine, Mr. Riemensperger said. “The top 50 German firms recently created close to 30,000 new Jobs in the United states and together employ 790,000 people,” he said, adding: “That’s exactly the high-paying jobs that Mr. Trump promised his voters.”

Not everyone is this optimistic about the future of Germany’s commerce. “Some believe that economic nationalism is their salvation, but it’s their doom,” said Ingo Kramer, who heads the German employers’ association. “No country can maintain its prosperity while isolating itself.”

The world seems clearly heading toward renationalization of economic policy, and maybe toward accepting that the notions of “free trade” and “fair competition” might have been a bit deceptive.

And Germany? German Chancellor Angela Merkel so far only has platitudes to offer in response to Mr. Trump’s threats. “I think we Europeans are the makers of our own destinies,” she said last week.

 

A longer version of this article first appeared in the business magazine WirtschaftsWoche. To contact the authors: tim.rahmann@wiwo.de, lea.deuber@wiwo.de, miriam.meckel@wiwo.de, konrad.fischer@wiwo.de, max.haerder@wiwo.de, sven.prange@wiwo.de, yvonne.esterhazy@wiwo.de, christian.ramthun@wiwo.de, malte.fischer@wiwo.de

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