Trump's Ignorant Attack on German Trade Policy

May 30, 2017

In a Tuesday morning tweet, President Trump thundered, "We have a MASSIVE trade deficit with Germany, plus they pay FAR LESS than they should on NATO & military. Very bad for U.S. This will change."

Last week, he told assembled European officials something to the effect of: "Germans are bad, really bad. Look at the millions of cars they sell in the US. It's terrible. We'll put a stop to that."

German economic policy has plenty of room for improvement, but will public scolding from Trump have a positive effect?

Not likely. Trump's contentious words have boosted Angela Merkel's re-election prospects, as she tells Europe it "really must take our fate into our own hands." Translation: "We can't rely on Uncle Sam."

Defiance makes Merkel a sure bet for another term as chancellor, and anoints her the popular leader of all Europe—even though Germany's economic policies do far more harm to neighbors than to the United States.

Trade policy for the European Union is written by the European Commission, which sits in Brussels, not the German government, which sits in Berlin.

Trump may imagine he is channeling Teddy Roosevelt when he bullies other political leaders. If so, he forgot the first few words of Teddy's famous maxim, written in 1900: "Speak softly and carry a big stick; you will go far."

Trump's boisterous proclamations have unified in opposition countries that should be America's allies. If Trump's approach goes far, it will only be to the land of diplomatic irrelevance.

To be sure, in 2016, Germany enjoyed a global trade surplus of $250 billion, mostly with her European neighbors, but $68 billion with the United States.

Trade policy for the European Union is written by the European Commission, which sits in Brussels, not the German government, which sits in Berlin. The value of the euro, which one of Trump's advisors claims is "grossly undervalued," is managed by the European Central Bank, not the German government.

In short, the two instruments of economic policy that have attracted Trump's vitriol are not at Merkel's disposal.

It would make as much sense for the European Union to complain to Texas about US immigration or foreign policy as it makes for Trump to complain about German trade or monetary policy. Ever since Texas joined the union in 1845, it surrendered to the federal government control over immigration and foreign relations.

Likewise, when Germany signed the Treaty of Rome in 1957, and the Treaty of Amsterdam in 1998, it surrendered to the European Union and then to the European Central Bank control over trade policy and monetary policy respectively.

The United States has many legitimate grievances with the European Union over trade policy.

To cite one example, EU tariffs on auto imports are nearly 10 percent, while US tariffs are under 3 percent.

Another: Europe imposes an array of barriers against US agricultural exports—high tariffs, and absolute prohibitions in the name of questionable health and safety concerns.

A third: Europe makes US chemical and pharmaceutical companies work their way through a maze of regulatory controls.

The way to address these grievances is through constructive negotiations, not bombastic rhetoric. Talks launched in the Obama administration—the Trans-Atlantic Trade and Investment Partnership—would have been a good place to start, but these have been shelved by the Trump administration.

As for the value of the euro, if the United States has a legitimate complaint—far from clear, but possible—Trump should ask Federal Reserve Chair Janet Yellen to take up the problem with European Central Bank President Mario Draghi. Accusations hurled at Berlin are worse than useless.

Trump could reasonably call for Merkel to embrace a combination of three economic policies. Boost wages across the board on the order of 10 percent; slash taxes, which claim about 40 percent of GDP in Germany versus 26 percent in the United States; or raise public spending, not only for defense but also for infrastructure, on the order of $100 billion annually.

These policies would sharply reduce Germany's global trade surplus, spur the world economy, and win applause for Trump both in Germany and across Europe. Instead, Trump has allowed his penchant for aggressive tweets to part company with sensible economics.