Trade Wars Have No Winners, Only Losers

“America First” may not do itself much good

With the Maastricht treaty of 1992 and the introduction of the euro in 1999, the Eurocrats set out to create the economic mechanism which was supposed to create a political order as an automatic consequence in a few years. It was not explicitly stated that there was a political consequence to follow from the introduction of a common currency, but this was the chief objective from the beginning. The explicit objective which both the federalists and sovereignists could accept was purely economic. It consisted in the promise that the common currency would improve the efficiency of the Common Market and raise its growth capacity by one percent a year or so, a promise that did not seem to threaten the sovereignty of the member states of the Eurozone.

The treaty touched upon several nice objectives, each of them unenforceable, or enforceable in theory but not in practical politics. It obliged the member countries of the Eurozone to keep their average budget deficit at or below three per cent of GDP—a limit which had no particular justification in economic theory and has proven itself open to severe criticism. Investment as a percentage of GDP and the balance of payments would have been easier to justify as rational, but the magic three per cent has become the rule which many member countries have not hesitated to exceed in any given year, always with the attached promise they will not do so again the following year.

Almost from the beginning, the Eurozone divided itself into two classes of countries, one with France, Belgium, Italy, Spain, Portugal and Greece and the other side with Germany and the rest of the member countries. Also at the beginning, Germany undertook serious reforms of its labour market, which soon enabled it to respect the three per cent budget deficit limit, despite the burdens of its reunification with East Germany. The other side of the Eurozone, with France at its head, during the same period continued to run budget deficits which have become more and more difficult to justify, as the overall interest burden of the debt of each country kept growing with the addition of successive budget deficits. The chronic deficit countries soon reached stunning cumulative deficits, that is to say total national debts, the interest burden of which was high enough as a percentage of GDP to threaten insolvency in some cases, Greece for example.

After 2012, there was a movement by Eurocrats in Brussels to persuade Germany to move to a policy that would have produced a smaller surplus in its balance of payments, and would be expected to produce the opposite effects for the Eurozone deficit countries. There was even an unofficial proposal for cutting the Eurozone in two halves, one with Germany and its closed economic relations in Northern and Eastern Europe in Class I and the “Club-Med” countries as Class II, adopting the Class II euro as a devalued currency. It was pointed out with some irony that instead of doing this, it would be even more logical to give every country a currency of its own and a deficit conforming to its particular situation- in other words to forget about the euro and come back to the beginning with nation with its own currency.

Germany at this point semi-officially refused all these arguments for saving the “Club-Med” countries, pointing out that it was being consistent with its treaty obligations, and should not be expected to adjust its budget and economic policies to save the other countries from the consequences of their own policy defects. Germany was lending its cheque book for purposes of the common interest according to needs agreed in Brussels, and could not be expected to do more than this. The “Club Med” deficit countries should instead keep their own policies in order, as Germany was doing with its own. This is a classic position of what we might call an “innocent” trader which has forges, laboratories, and design bureaus, and cannot be blamed if customers the world over, including customers from other European countries, come and purchase what the forges, laboratories, and others can usefully produce. Considering it as a matter of who is “innocent” and who is “guilty”, there is a strong case for considering Germany as the “innocent” party. The “guilty” parties, if they want to keep a place in the Eurozone, have to adjust their own policies to keep as close as they can to the magic three per cent, which they do by cutting their investments in order to save their consumption, because consumption can only be cut at the cost of the defeat of the government at the next election. The outcome, in other words, is the adjustment of the policies of the “guilty” parties to what their economies can support in the Eurozone- exactly what the euro as a clandestine mechanism for creating a political outcome from an economic instrument was predicted to do, though it is doing it in a most unpleasant way.

“The Art of the Deal”

At this point we have to expand our horizon to include America and its new President, Donald Trump. He and his chief economic adviser Peter Navarro are both convinced that American prosperity depends to a large extent on the American foreign trade balance, which in turn is an American disadvantage when foreign governments manipulate their own currencies to make their exports more competitive and the American dollar dearer. Among the culprits they have put much blame on the euro, which is supposedly manipulated downwards and the dollar upwards. This was purportedly done by the European Central Bank manipulating European interest rates downward. The beneficiary of all these manipulations is Germany, which has a current trade balance surplus of nearly $300 billion. However, bad luck, President Trump and Peter Navarro have apparently been uniformed that their culprit, Germany, is in fact opposed to this so called manipulation, which it does not need, does not benefit from, and is only tolerating because the other euro countries, especially the “Club Med” ones, have both trade and budget deficits and a low rate of economic growth to suffer. The supposed effect of this manipulation is that Germany is exporting its goods too cheaply and the “Club Med” countries are exporting more than they can afford. To attack Germany instead reminds us of the comic gangsters of “The Gang That Couldn’t Shoot Straight.”1 Perhaps President Trump and Peter Navarro could learn to shoot straight as they are trying to turn the world’s economic system in America’s favour.

President Trump is also the author of the how-to-be-successful book “The Art of the Deal.” My style of deal making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing and pushing to get what I’m after. Sometimes I settle for less than I sought, but in most cases I still end up with what I want,” he says.2 He is now aiming to make a deal with Mexico and China, forcing Mexico to accept an import tariff of 35 per cent and China of 45 per cent (not to speak of the cost of the wall between Mexico and the United States which he wants built and to be paid for by Mexico). The 45 per cent import tariff he claims will be imposed on Chinese imports (which he cannot really mean to take seriously) is supported by Peter Navarro’s argument that Chinese exports benefit from a subsidy of 41 per cent. For this to be credible, Chinese domestic industry would have to be larger and richer than is really the case. In any event, while President Trump may get some of his demands accepted by Mexico as the weaker and smaller victim he may have a much harder time getting anything much from the Chinese. He may have to reflect on the recent declaration of President Xi Jinping that “trade wars do not have winners, only losers.”