This Time, Trump Is Right About Trade
Posted by hkarner - 2. Juni 2017
Date: 01-06-2017
Source: The Wall Street Journal By Greg Ip
German and Chinese current account surpluses are symptoms of damaging imbalances.
German Chancellor Angela Merkel and U.S. President Donald Trump at the G-7 summit in Italy last week.
President Donald Trump took his bellicose economic agenda abroad last week, blasting Germany for its “very bad” trade surplus—or “evil” as one German newspaper translated it.
Though German Chancellor Angela Merkel did not seem to care for the messenger, she should nonetheless hear the message. While Mr. Trump gets a lot wrong about trade, on this particular point he’s right. Germany’s current account surplus, which combines trade and investment income, is now the world’s largest. Along with China’s, it is a dangerous imbalance that leaves others, including the U.S. and the rest of Europe, worse off.
It’s not just Mr. Trump who thinks so. “The criticism is right. Germany’s trade surplus is excessive,” says Marcel Fratzscher, president of DIW Berlin, a prominent German think tank. Mervyn King, former governor of the Bank of England, went further, arguing, “President Trump is right when he identifies a problem with current international trading and monetary relationships.”
Mr. Trump does misstate the problem. It’s not, as he frequently claims, that a trade deficit means one country is using protectionist policies to win at another’s expense. Protectionism can change the patterns of a country’s exports and imports, but not the overall balance.
Rather, deeper economic forces are at work. A trade surplus means a country consumes less than it produces and thus saves a lot. A deficit means the opposite. This can be benign: a country in the upswing of the business cycle, like the U.S., tends to have a deficit. A country in recession, or with an aging population, tends to have a surplus. However, the persistence and magnitude of Chinese and German surpluses and U.S. deficits suggest actual policy decisions are at work.
This comes by interfering with currency markets. As Mr. King notes, a country with a weak economy and a trade deficit would expect its currency to fall to boost exports and restrain imports. That can’t happen if exchange rates can’t move, as is the case with China and Germany, though for different reasons.
China was the largest of a group of countries that from 2003 to 2013 spent more than $5 trillion intervening in foreign exchange markets to hold down their currencies and bolster trade surpluses, according to a new book by Fred Bergsten and Joseph Gagnon of the Peterson Institute for International Economics. That drew production and jobs from deficit countries like the U.S., worsening the 2007-2009 recession and holding back the subsequent recovery. They estimate U.S. employment was depressed by more than one million jobs between 2009 and 2014 as a result.
China’s behavior has changed in recent years. It has allowed its exchange rate to appreciate and since 2014 has intervened to support it, and the trade surplus has shrunk.
Messrs. Bergsten and Gagnon suggest a new approach to prevent China from reverting to its old ways: When a country buys dollars to hold down its currency for competitive advantage, the U.S. should respond proportionately by purchasing that country’s currency. They also recommend the U.S. go beyond current law, which requires the U.S. to discourage currency manipulation in new trade pacts, by prohibiting it outright. Mr. Trump may seek just that in a renegotiated North American Free Trade Agreement. Since neither Mexico nor Canada manipulate their currencies, this would serve as a template for future pacts.
Germany is a tougher challenge. Since adopting the euro in 1999, it hasn’t controlled its own currency. However, it did win competitive advantage over its neighbors in the currency union. Labor-market reforms restrained domestic wages. In 2007, a payroll tax cut, which made German labor more competitive, was financed with an increase in the value-added tax, which exempted exports.
In previous eras, those reforms would have pushed the deutsche mark higher, squeezing Germany’s trade surplus. Inside the euro, though, the burden has fallen on Germany’s neighbors, including France, to compete by grinding down domestic wages and prices through high unemployment and fiscal austerity. That has kept the entire region’s economy weak, forcing the European Central Bank to hold down interest rates and thus the euro. That inflates the entire region’s trade surplus with the world.
Mr. Fratzscher says the problem is not, as Mr. Trump claims, that Germany exports too much: “You can’t blame BMW for selling cars to American consumers.” (Indeed, BMW AG, Daimler AG and Volkswagen AG all assemble cars in the U.S.) “The problem is Germany is importing too little.”
In time that can be fixed if tight labor markets drive up German wages, bolstering domestic spending and imports. To hurry rebalancing, outsiders urge the German government to borrow and invest more, reducing domestic saving.
French President Emmanuel Macron is pressing for a “fiscal union” under which Germany in effect finances some of its neighbors’ budgets, loosening the vise of austerity in the rest of Europe.
Neither is appealing to Ms. Merkel or austere Germans. Mr. King says the euro may have to break up into a strong currency area led by Germany and a weak currency area including France.
Until now, U.S. leaders have been too attached to the euro to point this out. By contrast Mr. Trump, unburdened by any commitment to the status quo, can engage in “ruthless truth-telling,” as Mr. King puts it. After this past week, though, it’s doubtful Mr. Macron or Ms. Merkel will be in any mood to listen.
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