Will Trump open a new front in trade war — against the EU?
You might think that recent events — market turmoil, weakening growth, declining manufacturing production — would produce soul-searching in the White House, particularly over Donald Trump’s view that “trade wars are good, and easy to win.”
Instead he’s attributing the economy’s troubles to a vast conspiracy of people out to get him. And his recent remarks suggest, if anything, that he’s preparing to open a new front in the trade war, this time against the European Union, which he says “treats us horribly: barriers, tariffs, taxes.”
Some aspects of European policy, especially German economic policy, do hurt the world economy and deserve condemnation. But Trump is going after the wrong thing. Europe does not, in fact, treat us badly; its markets are about as open to U.S. products as ours are to Europe’s. (We export about three times as much to the EU as we do to China.)
The problem is that the Europeans, especially the Germans, treat themselves badly, with a ruinous obsession over public debt. And the costs of that obsession are spilling over to the world as a whole.
Some background: Around 2010, politicians and pundits on both sides of the Atlantic ignored unemployment, though catastrophically high, and demanded spending cuts instead, which slowed the recovery and delayed the return to full employment.
While debt alarmism ruled both here and in Europe, our deficit hawks were hypocrites, who suddenly lost all interest in debt as soon as there was a Republican president. The Germans, however, really meant it.
Germany forced debt-troubled nations in southern Europe into punishing, society-destroying spending cuts; but it also imposed a lot of austerity on itself. Textbook economics says that governments should run deficits in times of high unemployment, but Germany basically eliminated its deficit in 2012, when euro area unemployment was more than 11%, and then began to run evergrowing surpluses.
Why is this a problem? Europe suffers from a chronic shortfall in private demand: Consumers and corporations don’t seem to want to spend enough to maintain full employment.
The European Central Bank, Europe’s Federal Reserve, fought this chronic weakness with extremely low interest rates. In Germany, even long-term bonds — up to 30 years! — pay negative interest rates.
Some believe this hurts the functioning of the financial sector. I’m agnostic on that point, but it’s clear that with monetary policy so stretched, Europe has no way to respond when things go wrong. Much of Europe may well already be in recession, and there’s little the central bank can do.
There is, however, a solution: European governments, especially Germany, should stimulate their economies by borrowing and increasing spending. And there’s much to spend on: Germany, like America, has crumbling infrastructure. But spend they won’t.
This impacts us. It contributes to a weak euro, which makes U.S. products less competitive, one reason American manufacturing is sliding. But saying Europe is taking advantage of America gets it all wrong, and is not helpful.
What would be helpful? America has no ability to pressure Germany into changing its domestic policies. We might be able to provide a little moral suasion if our own leadership had any intellectual or policy credibility, but, of course, it doesn’t. There’s a sense in which the whole world has a Germany problem, but it’s up to the Germans themselves to solve it.
One thing is for sure: Starting a trade war with Europe would truly be a lose-lose proposition, even more so than our trade war with China. It’s the last thing either America or Europe needs. Which means that Trump is probably going to do it.