Τετάρτη 21 Μαρτίου 2018

In a trade war Germany is the weakest link


18/3/2018

By Wolfgang Münchau

Steel tariffs are a side show — extra duty on car exports could devastate the EU

Whether trade wars are easy to win, as US President Donald Trump asserts, depends a great deal on your opponent. If your target is Germany — a country with a current account surplus of some 8 per cent of gross domestic product — then yes, a trade war is easy to win.

For the US to target Germany is in some respects a category error. As a member of the EU, Germany does not have an independent trade policy. As a member of the eurozone, it does not have a national currency. The right geographical counterpart to the US would be either the EU or the eurozone: the first if your grievance is trade policy, the second if it is the currency. But in the end, this distinction does not matter. The eurozone ran a current account surplus of 3.5 per cent of GDP in 2017 — which is huge given the size of the economy.

The eurozone’s anti-crisis strategy since 2012 has been short-sighted, pushing the current account into a strong surplus and expecting the world to absorb it. It was a beggar-thy-neighbour strategy, more appropriate for small countries than the world’s second-largest economy. The reason why such a strategy is unsustainable is now becoming clear. It makes you vulnerable to protectionist action, such as the 25 per cent tariffs on steel and the 10 per cent tariffs on aluminium imposed by the US. These are due to take effect on Friday, barring a last-minute reprieve.

Germany is a large exporter of steel to the US, but steel is only a side show. The real issue is whether Mr Trump is going to follow up on his repeated threats by slapping tariffs on imported cars. The Brussels-based think-tank Bruegel calculated the effects of a hypothetical 35 per cent tariff hitting the European car industry — it comes up with a revenue loss estimate of €17bn a year. The overall economic impact would be higher because of network effects. The EU is not only hooked on exports but also on producing cars to sell to the world.

US tariffs are only one of three potentially destabilising shocks for the car industry. Another is a cliff-edge Brexit. I do not expect that to happen, but it is a more plausible scenario than a revocation of Brexit. In that unfortunate scenario, the UK could end up imposing tariffs on cars imported from the EU. According to the latest German statistics, the US and the UK constitute the largest and second-largest sources of Germany’s trade surplus. The combination of US tariffs and a cliff-edge Brexit would be a debilitating shock.

A third and more predictable problem is the ongoing collapse in the sale of diesel cars. A recent court ruling by Germany’s highest administrative court has given the green light to bans of diesel cars in German cities, many of which have no other way of meeting their emission targets. The German car industry placed a heavy bet on the longevity of diesel technology, and is having to come up with a plan B. Having invested in the wrong technologies for too long, the car companies are unlikely to be champions once the world is taken over with self-driving electric cars.

From a strategic point of view it is utter madness for the EU to have allowed itself to become so dependent on the export of a late-lifecycle product. Its entire business model turns out to have been based on the bet that Mr Trump would not become US president, that there would be no Brexit, and that you could cheat on emissions targets forever.

From a US perspective, the tariffs may be economically counterproductive. But this is a geopolitical power game: start with a tariff on steel and aluminium, wait for the EU’s counter-reaction (maybe tariffs on peanut butter or orange juice) and then hit back with a tariff on cars. The European Commission has a list of US goods for potential retaliatory sanctions. Germany wants the commission to tread softly. The US may still exempt the EU from the steel and aluminium tariffs but on tough conditions: a cap on steel exports and an increase in defence spending. There is a lot of diplomatic activity.

But EU leaders are in a weak position and have relied for far too long on the US for its external security and, more recently, as the absorber of its structural current account surpluses. With his trade tariffs, Mr Trump has a single instrument to influence both the EU’s trade policy, and the defence spending targets of member states and their contributions to Nato.

One could argue that it is immoral to use trade policy in this way. But that argument loses force if you consider the morality of the EU’s policy to run a large and persistent surplus with the rest of the world. Or indeed of making defence spending promises they had no intention of keeping.

This trade war is indeed easy to win. It is going to be the equivalent of the fool’s mate in chess: the game could all be over in two moves.

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