June 2, 2017 | By Alexander Hitch

On German Cars, Trade Deficits, and the Relationship with the EU


REUTERS/Kai Pfaffenbach

After last week’s NATO and G7 meetings, President Trump trained his comments on the “massive” US trade deficit with Germany, which followed his earlier criticism of the “millions of cars” that Germany exports to the United States.

The problem is, of course, that neither of these gripes hold much water.

Firstly, the bilateral trade deficit is a macroeconomic consideration, not a signal of US economic weakness or unfair trade agreements, and also a matter not necessarily in Berlin’s control. As a member of the Eurozone, Germany cannot lower (or raise) the value of its currency individually, as the euro is managed by the European Central Bank in the interest of all 19 member countries. For its part, and to the potential detriment of its surplus, Germany is hoping to raise the value of the currency, but the struggling economies of southern Europe, such as Italy, Spain, and Greece, are loathe to the idea of a stronger euro.

Furthermore, as Paul Krugman recently suggested, bilateral deficits with countries in a customs union like the EU are harder to tease out, potentially because much of the US trade to the continent is registered originally in Rotterdam or Antwerp. This would mean that even if a good’s final destination is Germany, it instead becomes a US export to the Netherlands or Belgium.

Turning to the export of German-made cars, it is true that, based on value, the US imports about 3 ½ times as many vehicles, auto parts, and engines from Germany as it exports to Germany. But German auto companies also have manufacturing facilities in the United States, which produce roughly the same number of cars for export that are imported directly from Germany. BMW’s largest global factory is in Spartanburg, South Carolina, and the majority of the plant’s sales are international, counting as US exports. Similar operations exist for Mercedes-Benz in Alabama, and Volkswagen in Tennessee.

It is also important to view cars in the context of the globalized economy. With international supply chains, autos are never fully German, American, or Japanese. For example, to sell in the United States and avoid paying duty, an auto must be made of 62.5% North American – not US – parts, per NAFTA. And even if some components are sourced from Asia or Europe and augmented in Canada or Mexico, it would still count as a 100% US-made export, provided the car was finally assembled in the United States. Today's cars rely on parts sourced worldwide and assembled in various countries, and European auto supply chains are similarly diverse.

President Trump’s statements may just be political bluster to ensure his base that he is fulfilling campaign promises to get tough on trade. However, if the United States continues to harp on allies seemingly without the full context, the EU (and Germany with it) may lose patience and build stronger relations with other trading partners. Chancellor Merkel is wasting no time, already hosting Chinese and Indian representatives since last week’s summits.

This is much to risk over the German bilateral surplus and auto exports. As a relatively simple solution, toning down the rhetoric on deficits and giving credence to US-based German manufacturing would be a strong start.

About

Phil Levy is senior fellow on the global economy at The Chicago Council on Global Affairs. Previously he was associate professor of business administration at the University of Virginia’s Darden School of Business. He was formerly a resident scholar at the American Enterprise Institute and taught at Columbia University’s School of International and Public Affairs. From 2003 to 2006, he served first as senior economist for trade for President Bush’s Council of Economic Advisers and then as a member of Secretary of State Rice’s Policy Planning Staff, covering international economic matters. Before working in government, he was a faculty member of Yale University’s Department of Economics for nine years and spent one of those as academic director of Yale’s Center for the Study of Globalization.

His academic writings have appeared in such outlets as The American Economic ReviewEconomic Journal, and theJournal of International Economics. He is a regular contributor to Foreign Policy magazine’s online Shadow Government section and writes on topics including trade policy, economic relations with China, and the European economic crisis. Dr. Levy has testified before the House Committee on Foreign Affairs, the Joint Economic Committee, the House Committee on Ways and Mean, and the US-China Economic and Security Review Commission. He received his PhD in Economics from Stanford University in 1994 and his AB in Economics from the University of Michigan in Ann Arbor in 1988.

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