Does the U.S. have a 'massive' trade deficit with Germany, as Donald Trump said?
Following tension-filled interactions at the NATO and G-7 summits, President Donald Trump and German Chancellor Angela Merkel have been engaging in something of a war of words.
For instance, Merkel said at a May 28 campaign event, "The times in which we could fully rely on others are partly over. I have experienced this in the last few days. We Europeans really have to take our destiny into our own hands."
Two days later, Trump fired back on Twitter: "We have a MASSIVE trade deficit with Germany, plus they pay FAR LESS than they should on NATO & military. Very bad for U.S. This will change."
Trump has a point here about Germany’s military spending. Germany spends 1.2 percent of its GDP on defense, which is well below the 2 percent target for NATO nations. (Trump was more accurate in this most recent tweet than in some previous comments;, he didn’t say that Germany has to pay that money directly to the the United States or NATO.)
Here, we wanted to look at the first part of Trump’s tweet -- that "we have a MASSIVE trade deficit with Germany."
We checked with several economists, and they expressed varied views on whether "massive" was an appropriate word to describe the United States’ trade deficit with Germany.
In an interview, Peter Navarro, the director of the White House’s Office of Trade and Manufacturing Policy, defended Trump’s stance on the trade deficit with Germany. When we checked with outside experts, however, even those who expressed some sympathy with Trump’s choice of the word "massive" found his general discussion of this issue problematic.
In this case, "massive" seems to be in the eye of the beholder. We’ll review the evidence so you can decide for yourself.
How appropriate is the term "massive"?
In the most recent full year -- 2016 -- the U.S. trade deficit in goods with Germany was a little under $65 billion.
Specifically, the United States bought German goods worth $114 billion and sold goods worth $49 billion; subtract the latter from the former and you come up with $65 billion. (For this article, we will set aside the separately calculated trade in services between the two countries; in 2015, the U.S. had a smaller deficit in services, less than $2 billion.)
In dollar value, the U.S. trade deficit with Germany ranks third biggest of any country. Only China ($347 billion) and Japan ($69 billion) had bigger trade deficits in 2016. Mexico ($63 billion) was not far behind.
I. M. "Mac" Destler, a professor of public policy at the University of Maryland and author of the book American Trade Politics, said it’s not unreasonable to use the term "massive" to describe the trade deficit with Germany.
But other experts cautioned against using that word.
"This is equivalent to 13 percent of the total U.S. trade deficit with the rest of the world, and is not massive, considering that Germany is one of the United States’ key trading partners," said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics.
Jeremy Shapiro, research director for the European Council on Foreign Relations at the Brookings Institution, called the trade deficit with Germany "large" but said the word "massive" includes some inappropriate undertones.
" ‘Massive’ in my view connotes that it is inappropriately large or somehow unfair, so I wouldn’t use that term," Shapiro said.
Even if it is "massive," is such a deficit problematic?
Not necessarily, our experts agreed.
"All this means is that U.S. consumers buy more German goods than German consumers buy U.S. goods," de Bolle said. "There is no value judgement in a trade deficit -- it’s simply a matter of accounting and underlying macroeconomic trends."
Shapiro concurred that "bilateral trade deficits are never problematic, or even individually meaningful."
Specifically, the deficit stems from demand among U.S. consumers for products that U.S. producers cannot meet, whether that’s because no American company makes the product in question, because American companies aren’t making the product cheaply enough, or because U.S.-produced wares simply aren’t appealing enough to consumers.
"If it is from Germany rather than France or the United Kingdom that we want to buy from, who cares?" Shapiro said. "The suggestion here is that bilateral trade distortions -- tariffs, currency manipulation or other forms of protectionism -- cause trade deficits, but this has long been shown not be true, and in the case of Germany it is doubly absurd since there are basically no such distortions. They have a very open economy and as fair a trade relationship with the U.S. as exists."
Navarro countered such points by arguing that Germany is playing on an uneven field. He said German taxes on imported U.S. vehicles are higher than those on U.S. imports of German-made vehicles, and that Germany benefits from an undervalued Euro.
"The president is absolutely correct to single out Germany as a bad actor" on trade, Navarro said. "They hide behind the fence of the Eurozone as a way to exploit the U.S. market."
In the crucial automobile market, Navarro said, "Germany literally takes bread out of the mouths of American workers."
Wade Jacoby, a Brigham Young University political scientist who specializes in the U.S.-German economic relationship wrote after Trump’s tweet that "even if Trump’s criticism rests on dubious assumptions, the United States is not the only country worried about Germany’s economic policy, and some of the U.S. concerns are both reasonable and long-standing."
Risks of Trump’s language
Still, getting into a war of words with Germany could cause tangible economic harm, independent experts said.
Germany both invests a large amount of money in the United States and buys a lot of U.S. exports.
Germany ranked fifth among countries in foreign direct investment in the United States in 2014, the most recent year for which data is available. Specifically, German entities directly invested $19 billion in the United States that year, the fifth highest of any country, trailing the Netherlands, Japan, Switzerland and Canada.
Meanwhile, Germany ranks fifth in the value of products it imports from the United States -- $49 billion in 2016, trailing only China, Canada, Mexico and Japan.
The six biggest German companies with operations in the United States includes several well-known brand names: Daimler (which includes Mercedes-Benz), Volkswagen, T-Mobile, BMW, BASF, and Siemens.
Alabama, South Carolina and Tennessee all have major German-owned automobile factories -- meaning that they employ a lot of workers in high-wage, blue-collar work.
If the United States were to, say, impose tariffs or otherwise tilt the playing field for trade, these investments and purchases could be put at risk.
Navarro said he doesn’t expect that to happen. To the contrary, he said he sees Trump’s efforts to negotiate with Germany as a way of, for instance, getting German carmakers to use more auto parts made in "South Carolina rather than in Bavaria."
"The more productive thing would be for Germany to get off its high horse and sit at negotiating table and figure out an honest way to reduce the trade surplus," Navarro said.
However, Shapiro and other independent experts say they are worried about the type of rhetoric Trump is using.
"This type of language encourages the population’s worst instincts on trade, is economically illiterate, and could possibly result in tit-for-tat protectionist spirals that would negatively affect U.S. and global prosperity," he said.
Destler added that trade policy isn’t even the right lever to use to close the trade deficit.
"Germany could reduce it somewhat by pursuing more stimulative fiscal policies, something Berlin is very reluctant to do," Destler said. "It does not, however, control either its trade or its monetary policy, these being under the jurisdiction of the EU and the European central bank."
And Trump’s intention to cut taxes, Destler added, might only make matters worse by boosting consumption more than production.
Meanwhile, mismanagement of trade policy could spill over into other vital policy areas, such as national security, de Bolle said.
"This kind of rhetoric alienates our trading partners, which also happen to be strategic international allies," she said. "It adds to the perception that the U.S. is no longer a trustworthy partner not only for matters of trade, but also for matters of international diplomacy. Trade and international diplomacy go hand in hand."