March 20, 2017
Does the language of communiques matter?
FAZ and the FT write in their coverage of the G20 finance ministers’ meeting in Baden-Baden that there was no agreement on the usual G20 pledge on the need to avoid protectionism - a formulation the new US treasury secretary Steven Mnuchin was not happy with. As Wolfgang Schäuble confirmed, the discussions had focused mostly on trade but there was no consensus on how to go forward, as the discussion had reached an impasse on protectionism. On the contrary, Mnuchin used the occasion to reiterate American criticism of Germany’s current account surpluses, along with the demand to eliminate them. Mnuchin is also quoted as saying that he could not care less what previous G20 communiques had said, since he was not finance minister then.
The FT noted in its coverage that China and the US clashed at the meeting, with China insisting on language condemning protectionism. Japan and the UK were more supportive of the US position. In the UK’s case the support is not in terms of substance but in terms of tactics. Philip Hammond said one should give the US a bit more time.
The German press also noted that Donald Trump had confirmed the US’ hard line on Germany’s surpluses during Angela Merkel’s awkward visit last week. Trump told her about the losers from free trade policies, to which she responded that there were similar worries in Germany when the EU negotiated a free-trade deal with South Korea. That deal ended up creating jobs on both sides. We have no reports on how Trump reacted, but we would be surprised if that left any impression, let alone change policy.
Guntram Wolff notes that the EU needs to formulate a clear response to Trump’s trade agenda, rather than becoming overwhelmed by it. The starting point should be to take his agenda serious. Trump, Mnuchin, Peter Navarro and Wilbur Ross really mean what they say. In particular Wolff argues that the EU needs to find answers to four questions.
- How to deal with Trump as a person? Is it sufficient to give him some symbolic victories he can brag about? (We think the answer is no. They may be wrong on trade, but they are not stupid, especially as they are now using bilateral trade balances as the yardstick for policy).
- How should the EU react if the US violates WTO rules? Wolff’s answer is that using WTO arbitration procedures should be part of the answer. But should the EU go further? He leaves the answer open.
- What if the US questions the legitimacy of the WTO? Wolff suggests that the EU should forge a closer relationship with China as a response.
- And finally: can the EU project its power in trade matters across the globe?
These are good questions to ask, but not easy to answer. The fundamental problem is that, if you have a current account surplus of over 3% for the EU as a whole, you are not in a credibly strong position to counter protectionism with protectionism. That’s probably what would be required to provide some disincentives to the Trump administration, but we doubt very much that the EU is willing to make such sacrifices. Such a strategy would be best in the long run, but not in the short run.