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July 23, 2018


Towards a trade war

This is not a good summer for Germany. The football team crashed out of the world cup and Mesut Özil’s angry resignation from the national team over the weekend has opened political wounds that go far beyond football. And Donald Trump keeps on doubling down on tariffs - hitting Germany where it hurts the most. Football is not in our reservation, but we allow ourselves to point out that the various events together all add to the sense of a summer of discontent. 

In the political sphere, unlike other commentators we see no evidence that the German position on trade tariffs is prevailing at the EU level. The Germans are desperate to cut a deal with Trump. At the G20 meeting of finance ministers in Buenos Aires, Bruno Le Maire said France will not even negotiate with the US for so long as Trump maintains punitive tariffs on steel and aluminium. He says the EU would not negotiate with anyone who points a gun at them.

We don’t think that this comparison is just. The EU has been collecting more tariffs on cars than the US. If the EU refuses to talk, it would suffer a massive economic shock given its dependence on exports. We note a comment by Christine Lagarde in Buenos Aires who said global growth could be hit by 0.5pp. We don’t think this figure capture the true dynamics of a trade war. 

Over the weekend Trump has now widened his arguments in the trade conflict to include macroeconomic management, as he accused both China and the eurozone of manipulating their currencies. This is a serious charge in the context of the US's own laws. If a country is deemed to be a currency manipulator, the president has the right to impose punitive tariffs, without having to resort to a national security justification as is currently the case. 

FAZ is shocked to learn that Trump was now attacking the independence of the ECB. We note that a policy to devalue the euro and to eliminate fiscal deficits were central planks of the EU’s eurozone rescue strategy. There can be no question that these policies had an external impact on the rest of the world - which had to absorb the eurozone's now sizeable current account surplus. It is much harder to accuse the EU of unfair trade practices than to criticise its macro policies. For the former one would have to deep-dive into issues such as non-tariff barriers, but the macroeconomic imbalances are there for everybody to see. 

In his FT column Wolfgang Munchau writes that the EU is not in a position to fight and win a trade war. The best strategy for the EU would be to take a two-pronged approach. First, take Trump’s trade tariffs on the chin, a decision that would benefit Germany and the Netherlands more than the other member states. The quid-pro-quo for such a policy would be a binding obligation on countries to reduce their current account surpluses to under 3% of GDP or thereabouts. With such a dual approach, the EU as a whole would gain. There would be no trade war. And the EU would finally start to address the underlying issues that gave rise to this trade war. Munchau concludes that he ultimately does not think the EU would take such action, as so far it has shown no inclination to solve the underlying issues, preferring to paper over cracks as they arise. 

Our other stories

We also have stories on the escalating affair around Macron's bodyguard; on the right turn by the PP's new leader Pablo Casado; on the eurozone in budget balance; on Ireland insisting a hard border is politically impossible; and on the quick death of the Franco-German tax harmonisation project.

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