German trade surplus with US far more complex than Trump makes it

As President Trump has tweeted, Germany has a significant trade surplus with the United States. In 2016, Germany sold $67 billion more in goods and services to the United States than it bought. The U.S. administration, from the president on down, has been very critical of Germany’s exporting success. In two forthcoming government reports, one on surpluses and one on steel exports, Germany is expected to be identified as a country whose exports are problematic.

But invoking a national security exemption to limit German steel imports or putting other restrictions on German exports is not an effective way forward. Such actions will not solve the issues responsible for Germany’s strong exports and will add to the growing tensions between the United States and a key friend and ally.

{mosads}U.S. policymakers need first to broaden the context surrounding Germany’s trade surplus. Germany is a major investor in the United States; in 2015, German companies invested $255.5 billion in the United States, while the U.S. invested much less — $108.1 billion — in Germany. Total U.S. assets in Germany are now $813 billion, while German assets in the U.S. have reached almost $1.5 trillion.

Companies such as Siemens, T-Mobile, BASF, Daimler and Aldi have a major manufacturing and retail presence in the United States. Together, German businesses employ almost 700,000 American workers.

This level of investment has a direct impact on trade. Germany exports so much to the United States in part because global supply chains involve shipping parts across national borders several times before a complex product — such as a car or electronic good — is finished. Some of those German exports to the U.S. are BMW shipping parts from Germany to its Spartanburg, S.C. plant, from which finished cars are exported. According to a June 30 report in Automotive News, BMW is actually the largest single exporter of cars by value from the U.S.

Second, U.S. policymakers should realize that the rules governing U.S.-German trade are not set in Berlin. Rather, trade is governed by the tariff schedules negotiated by the European Union and the United States. Because Germany has ceded its right to negotiate trade agreements to the EU, it cannot make a bilateral arrangement with the U.S. to restrain imports.

In the absence of a U.S.-EU trade agreement, the current situation will stand, unless the U.S. imposes unilateral penalties. The EU has already made very clear that it will retaliate if the U.S. pursues that course. On the other hand, a U.S.-EU trade agreement, perhaps derived from the Transatlantic Trade and Investment Partnership (TTIP), currently on hold, could address tariffs and other barriers that may limit U.S. exports to Europe, such as the EU’s current 10-percent duty on imports of cars from the U.S.

Third, policymakers must consider Germany’s key role as a U.S. partner and ally. The leading EU member state, Germany is also a vital NATO nation, one that has significantly increased its defense spending in recent years. Relations with Germany have been strained since the advent of the Trump administration, with differences over Russia, Iran and climate change contributing to tension in the partnership. The administration’s attacks on the German trade surplus have certainly added to that tension.

So, should the Trump administration simply ignore Germany’s trade surplus with the U.S.? Definitely not. Germany does need to reduce its global surplus, which totaled €248 billion in 2015. Germany has benefited from a relatively weak euro — last year the International Monetary Fund (IMF) estimated that Germany’s real effective exchange rate was 10-20 percent undervalued.

The Economist magazine has argued that German labor should get a pay raise, which would increase the cost of exports and boost consumer spending. Whatever the answer, the U.S. should join with others — including many in the European Union — to encourage Berlin to examine its economic policy.

But two more steps are likely to help rebalance the German-U.S. economic relationship. First, the administration should encourage even more German investment in the U.S. These investments not only hire workers directly, but also support local suppliers and communities. Threatening German industry with trade penalties does not encourage such investment — quite the opposite.

Finally, the U.S. administration should encourage Germany to open its services market. The U.S. had a services export surplus with the EU of $54.7 billion in 2016, but a modest deficit with Germany of $1.7 billion, indicating that the German market is probably less open than the EU market overall. The EU has struggled to reduce barriers to services trade among its members, and Germany has retained many restrictions.

The most effective way to address these obstacles to greater trade would be through a U.S.-EU trade accord that covered services. This will not be easy, but it is likely to be far more effective than threatening our German ally with trade defense measures.

Frances G. Burwell is a distinguished fellow at the Atlantic Council and a senior adviser at McLarty Associates. Her work focuses on the European Union and U.S.-EU relations as well as a range of transatlantic economic, political, and defense issues.

The views expressed by contributors are their own and not the views of The Hill.