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May 30, 2017

Why Is Trump Complaining About German Trade?

 

One puzzling incident during President Donald Trump’s first overseas trip was his criticism of Germany’s trade surplus with the U.S. 

Trump reportedly said the Germans were “bad, very bad” on trade. White House economic advisor Gary Cohn reiterated the president, saying, “I don’t have a problem with Germany. I have a problem with German trade.” 

But why? 

To begin with, Trump considers trade surpluses and deficits a lot like company profits and losses: trade surpluses (like profits) are good, and trade deficits (like losses) aren’t. Most economists disagree, but more on that later. 

But why criticize a country that has a strong trade surplus? Trump wouldn’t criticize companies for making a profit. 

Rather, others try to learn from profitable companies. So why isn’t Trump asking what Germany is doing right? 

Second, there are two major, government-related actions that could give German products and services a competitive advantage over U.S. products:  

  • Protectionist import tariffs that force Germans to pay artificially higher prices for goods and services imported from the U.S.—similar to the tariffs Trump has proposed on U.S. imports from other countries; and 

  • Currency manipulation that artificially weakens a currency (in this case the euro), thereby making the manipulating country’s products cheaper by comparison. 

But Germany is guilty of neither. U.S. consumers, as well as those in many other countries, voluntarily choose to buy German-made products over other options. And while the euro has been lower compared to the dollar, Germany cannot individually manipulate it.  

So with respect to the first two points, it’s not entirely clear what Germany would have to do for Trump to consider it “good” on trade. Artificially raise prices or lower quality to make its products less competitive?   

Third, the U.S. has its own trade surplus with a number of countries. According to the U.S. Census Bureau, the U.S. has run a trade surplus with the Netherlands ($24.2 billion in 2016), Hong Kong ($27.5 billion), Brazil ($4.1 billion), Australia ($12.6 billion) and Singapore ($9 billion), among others, for a decade or more. The U.S. even had a trade surplus with the UK in 2016. 

If a country is “bad” for having a long-running trade surplus with the U.S., is the U.S. bad for having a long-running trade surplus with other countries? 

Most economists’ response is that trade deficits and surpluses don’t mean much. The U.S. has a trade deficit because consumers have money to spend—and they spend it. Moreover, when U.S. consumers buy foreign goods and services (the current account), that money returns in the form of investment (the capital account). In other words, the accounts balance.  

If Trump wants the U.S. to export more to other countries, he should press harder for his corporate income tax reform and regulatory relief. Both steps, properly done, will make U.S. goods and services much more competitive against the Germans, as well as most other coutnries.


 

  • TaxBytes-New

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