Opinion - World Economy

Trump's focus needs to be on exports

Key Points
  • The U.S. fails to get deals to reduce its huge trade deficits during the G-7 meeting in France.
  • Germany refuses to stimulate its economy — instead counting on exports into Trump’s election year, and monetary and fiscal stimulus.
  • Exports would provide steady and long-lasting support to the U.S. economy.
French President Emmanuel Macron (left) and U.S. President Donald Trump attend a working session on "International Economy and Trade, and International Security Agenda" in Biarritz, south-west France on August 25, 2019, on the second day of the annual G-7 Summit.
Andrew Harnik | AFP | Getty Images

From the viewpoint of huge American trade deficits, U.S. President Donald Trump is coming home empty handed after the Group of 7 meeting in France.

His main objectives there should have been to:

A. Get Germany and Japan to lay off exports — 47% and 18%, respectively, of their GDP — and rev up their moribund domestic demand.

B. Stop the German-run European Union and Japan from taking large and systematic surpluses — an estimated $240 billion this year — on their U.S. trades that Washington must finance by raising its net foreign debt.

Those $240 billion represent the U.S. goods trade deficit with the European Union and Japan in the first six months of this year (annualized), most of which will be added to Washington's $10 trillion of net foreign debt reported at the end of the first quarter 2019.

But stopping the increase of trade deficits is only part of what the U.S. should have obtained had Trump succeeded in changing the selfish mercantilism of those two large economic systems that account for about one-fifth of the world economy.

Trump gets blame and trade deficits

In fact, Trump could have done that. He is a much-feared American president, and the only person in the world who could have read the riot act to the Europeans and the Japanese. This year, the EU and Japan are expected to pocket an estimated $650 billion in a combined trade surplus, instead of helping to prop up the weakening world economy.

Failure to do that is just another instance of Trump losing a tailor-made argument to call out trade miscreants at a perfectly suited international talking forum. Indeed, France — the G-7 host closely coached by Germany and the EU Commission — did all it could to skirt the trade issue because the Europeans and the Japanese knew that they were making a huge amount of money on the back of the U.S. and the rest of the world.

What is that tailor-made argument that Trump botched?

Starting with Germany, Trump could have observed that the country has been running an increasing trade surplus with the U.S. for most of the post-World War II period. In the first six months of this year, the German trade surplus came in at $32 billion, roughly unchanged from the year earlier.

That must change, and the only way it could change is by weaning Germany off its exports gravy train in order to generate more economic growth from internal demand.

Is that happening now? Not by any means. The German economy is grappling with signs of recession, and official forecasts indicate that the cyclical downturn will continue, with, possibly, some improvement toward the end of this year.

What is Berlin doing about it? The answer from the office of the German chancellor is: Nothing.

So, there it is. Germany, which makes up about one-third of the EU economy, is pushing the rest of the continent into an intractable tailspin, rising unemployment and price deflation.

Hit the Germans with a car import tariff

But the Germans, and the rest of the EU, are blaming Trump for that because, they say, he is waging a global trade war.

That's the outrage that Trump heard at the G-7. I have not seen that he defended his attempts to reduce America's excessive trade imbalances, or that he showed concern about Germany's reckless shrinking of European markets — a destination for some $600 billion of U.S. exports, representing a quarter of America's total goods sales abroad.

Very worrying indeed. Trump could have at least asked the Germans why they were refusing to support their economy, and the rest of Europe, with tax cuts and public spending at a time when they are running a budget surplus of 2.3% of GDP.

Berlin has no valid reason to allow a recession under those circumstances. The only reason for such an attitude is a refusal to change their selfish, export-driven economic strategy.

And the irony that seems to have been lost on Trump is that Germans expect to grow by increasing their exports into Trump's election year economy boosted by fiscal and monetary stimuli.

Great game, isn't it?

Trump's response should be simple. The minute he gets back on Air Force One, he should tweet that he is increasing import duties on German cars to 25% — effective immediately. That would only even out the playing field, because that's what Germany and the EU charge on American car imports.

The long-suffering Europeans, led by the French, would be cheering. The French are Europe's largest victims of German economic policies. Germany is syphoning off more than 40 billion euro a year from France — a country struggling with social unrest, 2.6 million unemployed (8.7% of the labor force) and an EU record-high number of 600,000 of its youth without a job. In spite of that, Paris does not dare to raise its voice against Germany's growth-stifling economic policies.

What about Japan?

The Japanese media announced that a trade agreement with the U.S. could be signed by the end of next month. If and when that happens, one would have to watch the trade numbers because the American beef, pork and dairy products may not suit the Japanese palates, while the Chevy Silverados, Dodge Rams and Ford Rangers may just be too big for Japanese buyers. But never mind that the competitively targeted giant Toyota, Nissan and Isuzu pickup trucks are quite okay.

Investment thoughts

During the G-7 meeting in France, Trump failed to get a reduction of excessive and systematic German and EU trade surpluses on U.S. trades.

Germany's ongoing economic struggle is stifling the EU growth and killing markets for one-fourth of American exports.

In spite of a large budget surplus, Berlin is refusing to stimulate domestic demand, counting instead on exports into the Trump's election year economic stimulus, and on further credit easing by the European Central Bank.

A trade agreement with Japan is expected later next month, but it is not clear to what extent that would substantially change the Japanese surpluses on American trades.

Trump should not let up with his efforts to increase U.S. sales in the EU and Japan. That would give the economy substantial and lasting support. By contrast, an unwarranted fiscal and/or monetary boost to the U.S. economy operating above its physical limits to growth would leak out through rising imports to the rest of the world. Last year, for example, American imports were increasing 1.5% faster than the growth of demand and output.

The Europeans and the Japanese know that. And that's what they are waiting for.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.