April 23, 2017
Germany is running an annual trade surplus of more than 8.0 percent of its GDP (equivalent to $1.6 trillion in the U.S. economy). This huge trade surplus translates into large deficits for the rest of the world. This is the largest single cause of the problems facing Greece, Italy, Spain, and even France. All are seeing their growth and employment seriously constrained as a result of the large German trade surpluses.
In the good old days before the euro, Germany’s trade surplus would have led to a run-up in the value of its currency making its goods and services less competitive in the world economy, which would have diminished its surplus. However, now that Germany is in the euro, this mechanism for adjustment does not exist.
In the absence of an exchange rate adjustment, the mechanism for addressing the trade imbalance would be more rapid inflation and growth in Germany. The inflation would adjust relative prices and the growth would pull in more imports from Germany’s trading partners. For reasons that seem largely grounded in superstition, Germany refuses to embark on a more rapid growth path (it is running a budget surplus) and continues to maintain a very low inflation rate. (The two are directly linked, since more rapid growth would be the mechanism for increasing the inflation rate.
Instead of giving these basic facts to readers, the NYT ran a Reuters article that reported the dispute as a silly he said/she said. It told readers:
“The Trump administration has criticized Germany for its large trade surpluses with the United States, while Germany has said its companies make quality products that customers want to buy.”
The German response is of course meaningless. The fact that it has a trade surplus means that people want to buy its products at their current prices. If there was an adjustment process that made the German products, say 20 percent more expensive, many fewer people would want to buy them.
The piece also bizarrely asserts that the reform of the corporate income tax being considered by Republicans is “protectionist.” It is not obviously protectionist in a way the refunding of the value added tax on exports is protectionist, and it is certainly not as obviously protectionist as patent and copyright protection. In effect, what Reuters was telling readers is that it doesn’t like the tax proposal and they should not either.
Note: Typos corrected from an earlier post. Thanks to Robert Salzberg and MichiganMitch.
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