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Graph of the week

Graph of the week

14-02-2020 | Visione

Everyone first!

  • Peter van der Welle
    Peter
    van der Welle
    Strategist

Britain first! The Staple Act of 1663 required all colonial exports to be routed through English ports before being distributed to the rest of Europe. The law was an attempt to undermine the hegemony of the Dutch commercial fleet. In the 16th and 17th century, foreign trade was believed to be a zero-sum game: one person’s gain was another’s loss. 

A gain that had to manifest itself primarily as a significant surplus on the trade balance (pro-export, anti-import based) and a correspondingly healthy stock of gold and silver to maintain a professional army. 

It was Adam Smith who, in his 1776 Wealth of Nations, effectively argued that free trade could bring mutual benefits and thus advocated the laissez-faire of the emerging market capitalism. Thanks to Smith, the heydays of mercantilism are behind us, even though its spirit lingers on. 

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Mercantilism

America first! Peter Navarro, top trade advisor to President Trump, has a vision that leans heavily on mercantilism. In the recent State of the Union speech, Trump himself also underlined that ‘unfair trade’ was perhaps the single biggest reason he decided to run for president. 

Although the coronavirus is dominating the headlines, the importance of the US trade balance figures published last week should therefore not be underestimated. 

These numbers show that the country’s total goods and services trade deficit with other countries was still USD 616.8 billion in 2019, which is 22% higher than in Obama’s last year as president. 

However, the trade deficit with China has dropped to USD 345.6 billion (orange line). The effects of the tariffs on Chinese exports are thus already evident from the continued import demand from US companies and consumers. In ‘Phase 1’ of the China-US trade deal, China promised to import USD 200 billion in US goods and services in the next two years, which would further reduce the trade deficit with China. 

Et tu, Europe?

The apparent turnaround in the long-term trend of the US trade deficit with China may reinforce Trump’s belief that trade wars are easy to win and the performance of the Obama administration can still be matched. Oval Office trade hawks are therefore gradually setting their sights on another region: Europe. 

After China, Europe is the region with which the US has the biggest trade deficit, which now stands at USD 177.8 billion (green line). In 2018, “tough cookie” Claude Juncker was able to prevent Trump from imposing a 25% trade levy on Europe’s automotive sector. The car tariffs were not mentioned in the first introductory meeting that the European Commissioner for Trade held last month with his US counterpart. 

Two issues are a thorn in the side of the US: the French digital services tax, which would affect US technology giants, and the European government subsidies to Airbus. There is movement. France's compromise to delay the tariff on digital services until 2021 is a first olive branch to the US. It may even be abandoned, if the OECD provides a multilateral solution for technology sector tax avoidance. 

Das Auto

The World Trade Organization (WTO) has ruled in favor of the US in a long battle on the EU’s provision of state aid to Airbus. The WTO is also due to rule on an EU claim that US multinational Boeing has, in turn, benefited from illegal US state aid. There’s a fair chance that this will end in a tie. 

Yet this wouldn’t mean that the European export industry is out of danger. If, as a result of the coronavirus, China is unable to fulfill its promises concerning the purchase of goods and services from the US (which is not unlikely), Trump will redirect his ambition to reduce the trade deficit towards German car exporters. 

As Europe could be next in line to face Trumpian mercantilism, former Defense Minister and current President of the European Commission Ursula von der Leyen now faces the task of battening down the hatches for a new front in the trade war.

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