Trump is Right about Germany, for the Wrong Reasons
Readers of this blog know that I share with Donald Trump the belief that Germany is harming the world economy. (Ok, ok, it is not bad Germany, it is bad German trade. ). Yet, I think it is worth pointing out something trivial that is not emphasized enough. Trump is right about Germany, but for the wrong reasons. The problem is not the number of German cars circulating in the US, but the number of American cars not circulating in Germany.
The trade balance is a subtraction, exports minus imports. Thus, it can be small when a country does not trade a lot (small exports are similar in size to small imports), but also when the country trades a lot (large exports are similar in size to large imports, the difference being small). The size of the trade balance has all to do with the relative size of imports and exports, and very little to do with the openness of the economy.
Trivial, isn’t it? And yet, Trump, and many (way too many) commentators forget it when they argue that we should stop seeing many German cars circulating in the US. Protectionism is just one of the possible solutions to widening trade imbalances. As it does not directly address the excess savings (or spending) in countries in disequilibrium, its effectiveness can be questioned (and the jury is still out on this). Among other things because protectionism is a declaration of war, and likely to trigger a race to the bottom.
A more direct, and certainly effective way to reduce imbalances is to reduce the excess surplus (deficit) of domestic demand on GDP in deficit (surplus) countries. This is where more American cars in Germany would help. I don’t think that I am saying anything new here…
I know the answer to this. “How can you force Germany to rebalance its economy, and spend more?” “That will never happen.” “Germany only cares about its interests”. I have heard all of these. I am conscious that the problem is not economic, but political. But the political difficulties of this (too long) moment, and the stubbornness of the German elites don’t make protectionism less problematic.
Norms exist in Europe, requiring external rebalancing. And Germany has been breaching them since the crisis started. It exists a narrow path to building a “coalition of the willing” among European countries, to force Germany to tackle its imbalances. Difficult? Certainly. Unlikely? Maybe. Costly? Probably. But still less than embarking the world economy into a trade war, and/or dissolving the euro.
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Sparse Thoughts of a Gloomy European Economist 
How should the German government increase German imports? This requires influencing decisionmaking of private investors. In the past monetary policy would have been the tool of choice, but it is no longer in German hands.
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Am I correct to say that if Germany would reduce the VAT rate, all imported goods would benefit of an increased competitiveness? I am sure there are also other tools available, but acting on the VAT is one of the most powerful. And this would be a political decision.
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How can we make German people want a Cadillac instead of a Mercedes-Benz?
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And not only german people, as many american cars, although they usually look “robust” in terms of style, they are gas-guzzling monsters, and with the over-taxed fuel prices that the european countries have, simply won’t interest to the “old Europe” customer (unless he/she has the necessary budget to fill that monster regularly). Can be said that american cars, simply don’t fit to Europe. Maybe if the americans copy what germans (and Japanese) are doing for cars, people on the other side, will buy more american cars instead of “foreign” ones
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But aren’t the US receiving German cars as payments for U.S. planes?
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Francesco,
You are right to write that Germany has been breaching the European norms since the Eurozone crisis started. However, this does not apply only to the external balances, but also to the mechanisms of the market economy. In this later case, Germany breached these norms by benefiting fully legally from the ECB’s Target2 system.
German exports were massively supported by the Bundesbank under the Target2 system. The cumulative amount of this support reached 751 billions €, 28 % of German GDP in 2012, at the expense of the producers of the countries in difficulty (Italy, Spain, Portugal, Greece) and in contradiction with the European principle that the competition must not be distorted.
Without this massive help authorized by the ECB without any counterpart, German exporters would have much more suffered from the crisis of the Eurozone and the German politicians would have better understood what “interdependence” means.
Without Target2, the German exports to these countries would have been almost totally stopped, not because the German companies were no more industrially competitive, but because the counterparts of the importers banks had no more value. In other words, Target2 allowed the German companies to sell goods and services to insolvent importers.
If the German companies had stopped to export to the countries in difficulty, as it would have happened without the Target 2 breach of the rules of the market economy, the producers of these countries would have benefited from this protection generated by the collapse of their banking system: they would have had the capability to sell in their own countries without having to bear the competition of the German exporters, although they were still less competitive than their German competitors in industrial terms.
For this reason, we must consider that Target2 has maintained under water the head of the producers the countries in difficulty by interfering with the free market mechanisms which would have guaranteed them an important reduction of the foreign competition in their national markets as long as the counterparts of their banks had no value in the interbank exchanges.
Target2 was rightly justified by the necessity to restore the fluidity of the trade between the EZ member states. However, the ECB should have offered to the countries in difficulty a counterpart to the loss of the protection deriving from the financial collapse of their banking system. This counterpart might have been to oblige the countries like Germany to launch a stimulus package in order to compensate the loss of the protection of the companies of the country in difficulty by an increase of their potential export market. Obviously, this stimulus package would not have benefited always exactly to the sectors who suffered from this loss of protection, and would have sometimes benefited to other sectors. However, this would have alleviated the global difficulties of the countries in difficulty, whereas Target2 maintained their heads under water for many years, by helping the German exporters to circumvent the rules of the market economy.
More details on this subject in these articles, written in French : http://pierrejeanraugel.blog.lemonde.fr/2014/09/02/ne-negliger-ni-linterdependance-des-pays-de-la-zone-euro-ni-leur-heterogeneite/ and http://w.latribune.fr/opinions/tribunes/20130520trib000765438/target2-la-roulette-russe-de-la-zone-euro.html.
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