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US trade tariffs vs EU (German) model

06744 CC Trader Talk V2

Faithful to his promises made during the electoral campaign, President Trump in the last months gave the go-ahead to the application of tariffs on imports from EU, China, Canada, Mexico and Japan.

Although on the China front, the trade war seems to be ratcheting up, with both sides considering more measures, the US and China might eventually find an agreement on the respect of globally accepted trade rules, thanks to their interdependences as well as partial convergence of objectives. For example, the US depend on the components produced in China, whereas China is still relying on the US technologies and financial services. Additionally, if on the one hand the US want to reduce their trade deficit towards China by increasing the exports, on the other hand China has been trying to boost the internal consumption and therefore reduce the reliance on the trade surplus towards the rest of the world. China sells goods each year to the United States worth nearly four times as much as it buys.

The contraposition between the US and the EU is more problematic. The post-war EU adopted a German growth model, which relied on the current surplus as the main growth driver, with less focus on domestic consumption and investments. The limitation of salaries growth determined by deflationist pressures associated with a tight control of public expenditure helps sustaining the competitiveness of EU countries.

However, there are other elements which determine the success (or otherwise) of this EU (German) model which are not under the direct control of the EU. One of these is the availability of the rest of the world (and in particular of the US) to purchase EU products and therefore to keep (and finance) the continuous trade deficits, a situation which Trump has decided to put an end to. Additionally the tight control over the public expenditure is possible partly thanks to the fact that the military and security expense component is mostly outsourced to the US through the NATO. Again, a situation which Trump does not seem to tolerate any longer.

So ironically, Trump is indirectly asking the EU (and Germany in particular), to give a boost to domestic consumption and investments, to reduce both public and private savings and therefore reduce the trade surplus and invest more in military expense for the protection and security of its citizens. If the above won’t happen the US are ready to challenge the EU (German) model through further tariffs on the automotive sector and the progressive disengagement from the NATO.

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