By Gillian Tett – Financial Times
Frederick the Great of Prussia inked a deal with US officials to promote “commerce and amity” in September 1785. It marked a diplomatic coup: Germans were the first to cut a trade deal with the new American nation.
Can Angela Merkel repeat that happy tale when she visits Washington next week? The omens don’t look good. Donald Trump, US president, has traded repeated verbal blows with the German government over issues such as immigration, media freedom and the future of Nato.
But what has really caused angst in Berlin are the accusations from Peter Navarro, the Trump economic adviser, that Germany has exploited a “grossly undervalued” euro to boost exports, leading to a $70bn trade surplus with the US. “I think it would be useful to have candid discussions with Germany about ways that we can get that deficit reduced,” he recently observed, describing the surplus as a “serious issue”.
Mr Navarro’s accusations look misguided on several fronts.
For one thing — as economist Stephen Roach has noted — it is a fallacy to think the US can fix its numerous trade deficits with other countries without addressing the other side of this tale, namely the vast US savings deficit (and Germany’s excessive saving).
Second, it is ridiculous to suggest that Germany has implemented a deliberate policy to weaken the euro for mercantilist reasons. After all, as chancellor Merkel has observed, the German government does not control the European Central Bank. And Bundesbank officials have been at the forefront of voices calling for the ECB to tighten — not loosen — monetary policy.
It is also wrong to assume that German exports have soared simply on the basis of price advantages.
Germany is hardly a low-cost base: average industrial wages run at about €38 per worker in Germany (compared with €26 in the US). As Peter Jungen, a German economist, points out, what drives a large part of the German export machine is the fact that small and medium-sized companies dominate specific global engineering and technology niches, without US competitors.
This dominance cannot be reversed simply with a stronger euro; on the contrary, currency swings change margins, not market share. Insofar as big German companies account for global trade, many have bases inside the dollar region, partly because German foreign direct investment into the US has risen since the start of the decade, and is one of its top five sources of investment.
Siemens, for example, has more than 100 manufacturing plants in the US. BMW’s largest site, with 8,000 workers, is in South Carolina.
These German marquee names would, ironically, benefit from the trade tariffs Mr Navarro has threatened. That should demonstrate to the White House the folly of an aggressive mercantilist approach. It might also offer a bit of hope; or, at least a way for Ms Merkel to dance with the White House in a more effective manner. One way to smooth over the fights next week, for example, would be to take a leaf out of the book of Shinzo Abe, the Japanese prime minister, during his last visit to Washington — and talk loudly about all that FDI.
Another sensible approach would be to explain to the Trump team exactly why those small and medium-sized German companies have come to dominate so many engineering niches, and offer a tutorial in the German education and training system. This has been dazzlingly effective in recent years in channelling young people into industrial and technical jobs through apprenticeships and adult education programmes: so much so that Germany’s youth unemployment rate is 6.5 per cent — well below the rest of the EU and the US too.
American companies and colleges badly need to adopt many of these ideas.
If Ms Merkel starts talking about these principles she will find a wildly receptive audience: by a happy coincidence, the US businesses on the White House’s advisory council are drawing up plans to launch training schemes that would offer, for example, short two-year courses in technical skills for students and German-style apprenticeships. If groups such as Siemens, BMW or others offered to share expertise and ideas, they would be embraced.
This import of ideas, training schemes and FDI is not quite “trade” as Mr Navarro defines it, let alone the type of “commerce” that predominated in earlier decades. Rather, it is what the US badly needs to reboot its economy — not wild threats of a currency war.
Let us hope that the more sensible voices around the White House prevail.