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May 30, 2017

Trump's Tweet Tirade Against Germany Could Backfire On U.S.

IPI expert referenced: Merrill Matthews | In The News | Media Hit

By John Schoen

President Donald Trump's recent comments and angry tweets about Germany's "unfair" trade practices could leave the U.S. as the odd man out in the global economy.

Fresh from a meeting in Brussels with the leaders of the Group of Seven largest economies, Trump fired yet another tweet salvo at a longtime U.S. ally, sharply attacking Germany's trade and spending policies.

"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," the president said.

The tweet follows a series of summit meetings with European leaders that reportedly included similar complaints about Germany's trade policy and NATO contributions. The president's stance drew a sharp response from German Chancellor Angela Merkel, who voiced doubts about the reliability of the United States as an ally.

"Recent days have shown me that the times when we could rely completely on others are over to a certain extent," Merkel said Monday in a speech in Berlin. "Europe must take its fate into its own hands."

Merkel and other German officials have taken pains to explain that German trade is governed by agreements forged by the European Union in Brussels, not by German officials in Berlin.

The Trump administration has also taken Germany to task for what it sees as a "weak euro" policy; German officials have countered that the European currency is managed by the European Central Bank, not by individual member states.

But the main source of Trump's frustration is the imbalance between the total value of goods and services that U.S. consumers buy from Germany compared with the amount of goods and services the U.S. sells to Germans.

U.S. trade with Germany

Last year, the U.S. ran a trade deficit in goods and services with Germany of about $65 billion, down from $75 billion in 2015.

Much of that imbalance comes from U.S. imports of German machinery, pharmaceuticals and cars and trucks, the latter of which Trump singled out as a target for possible trade sanctions. Last year, German imports made up about 5 percent of U.S. vehicle sales.

Trump would like to see American consumers buy domestic cars and trucks, and has said he believes trade deficits represent a "bad deal" for the United States.

Some economists argue that the surplus cash generated by a given country through trade often comes back to the U.S in the form of capital investment.

"Growth prospects for Europe, longer term, will be greatly enhanced if Europe can access China's Silk Routes and thus acquire an additional four billion customers for its exports.  This is the basis for a sea change in global power. Watch out."-Carl Weinberg, chief economist, High Frequency Economics

"The U.S. has a trade deficit because consumers have money to spend — and they spend it," said Merrill Matthews, resident scholar with the Institute for Policy Innovation, in a recent post. "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."

But Trump's Twitter tantrum with Germany, and his protectionist stance last week with European leaders, carries larger risks than simply misunderstanding the economics of global trade, according to Carl Weinberg, chief economist at High Frequency Economics.

"President Trump effectively disavowed the United States' role as the leader of world trade and globalization," he said in a note to clients.

Weinberg cautioned that Trump's scolding of European leaders will only prompt those countries to forge closer ties with China, whose leaders have made clear they are happy to fill any economic void created by the United States' move toward more isolationist policies.

"Growth prospects for Europe, longer term, will be greatly enhanced if Europe can access China's Silk Routes and thus acquire an additional four billion customers for its exports," said Weinberg. "This is the basis for a sea change in global power. Watch out."


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