China tariff deal was easy compared to the EU's bazooka-proof trade walls

American President Donald Trump seen in between the flags of the U.S. and the European Union.

Didier Lebrun | Photonews | Getty Images

The present U.S. administration has only itself to blame for wasting nearly three years of its term of office without balancing trade accounts with China. Instead of focusing on changing America's trade flows with China, Washington overreached into sovereign domains Beijing could not accept.

Hopefully, things are now back where they should have been three years ago: Washington and Beijing call it "phase one" of a trade agreement that should provide immediate and substantial relief to the damage currently inflicted by China's excessive trade surpluses on American economic growth, employment creation and manufacturing output.

In spite of that, this administration deserves enormous credit for trying to put an end to decades of America's trillion dollar trade losses, soaring net foreign debt, thoughtless outsourcing and cavalier handling of U.S. intellectual properties.

China, for its part, apparently accepts and understands that trade with the U.S. has gone much too far in its favor to be fair and sustainable. Beijing, therefore, seems ready for change — even though a fast and significant restructuring of manufacturing sites and export hubs will cause considerable short-term problems for China's massive trade adjustment.

China was a walk in the park

Washington should show understanding for that in search for acceptable modus vivendi with a global power where other "solutions" could spell the end of humanity.

Trade progress with China is good news. The statesmanship and the symbolism the U.S. and China leaders will project on a world stage — by signing a trade deal during the Asia-Pacific Economic Cooperation meeting in Santiago de Chile less than a month from now — will be one of the brightest pages in the countries' relations.

Sadly, that's not what one can say about the European Union.

America's European friends and allies, and their media, are falling over each other in pouring scorn on Washington for literally anything. They are now seething with anger about the World Trade Organisation's arbitration authorizing American countervailing trade tariffs for the EU's illicit aircraft manufacturing subsidies. And they apparently can't wait to retaliate with their own tariffs on U.S. goods, in addition to levying billions of euro fines on IT giants in the U.S.

One of those usual family quarrels? You couldn't be more wrong, if that's what you think.

Europe's $146.7 billion trade surplus with the U.S. in the first eight months of this year — an 11.3% increase from the same period of 2018 — has deep and enduring political and institutional roots. 

The European trade bloc is an outgrowth of a U.S.-encouraged and financed process of Europe's postwar reconciliation in an attempt to keep France and Germany off each other's throats.

The U.S. economists, however, added a rider to Washington's blessings, and pointed out structural disadvantages the European customs union would present for American trade of goods and services.

U.S. politicians shrugged that off on strategic grounds to keep the USSR out of Western Europe. Europeans were happy with that, enjoyed a free ride of American protection and a virtually unlimited access to the large and wealthy U.S. markets.

A German-run EU is looking for trouble

But the economy kept intruding into the putative trans-Atlantic romance. American businesses kept complaining about Europe's discriminating trade laws and practices, while the Europeans were aghast about the U.S. ability to pay foreign trade bills with greenbacks they printed at will and refused to redeem into gold.

Predictably, a permanent trans-Atlantic trade war was born. The Europeans, led by France and Germany, also moved in the late 1960s to create their own currency to escape the dollar-dominated world economy, and to impose an external constraint on Washington's economic and political policy making.

Below are some reasons why the U.S.-EU trade negotiating process will be much more difficult than the one currently conducted with China.

First, economic, political and security issues with China are clear. By contrast, nothing in those areas is clear with the EU. On top of that, the U.S. is facing an institutionalized customs wall, and a consensual negotiating mandate of 27 countries (assuming the UK leaves the EU). China, by comparison, is a marvel of flexibility, where President Xi Jinping calls all the shots.

Second, the U.S. trade problem with the EU is twofold. There is America's large and structural trade deficit with that region caused by misaligned tariffs and trade practices — that is the first set of problems that Washington must address. A much more difficult issue for the U.S. is that the EU's economic policies are shrinking the European markets, the destination for one-fourth of American goods sales abroad.

What are those growth-depressing EU policies? They are simply steadfast refusals of budget and trade surplus countries to stimulate domestic demand because they want to live off net exports to the U.S. and the rest of the world.

Germany — with last year's budget and trade surpluses of 1.7% and 7.4% of GDP respectively — is the ringleader of Europe's mercantilists.

Germany's Finance Minister Olaf Scholz said last week that his country was investing a lot, but that is nowhere to be seen in an economy languishing at an average quarterly growth of 0.1% in the year to last June. And then he offered a new definition of fiscal policy by calling systematic budget surpluses an expansionary fiscal stance. He then went on to say that Germany does not want "extra debts" in an economy where government coffers are overflowing with cash generated by cumulative budget surpluses of 5% of GDP between 2014 and, including, 2018.

Clearly, Scholz is taking the world for morons. Washington, the EU, the International Monetary Fund and the Organisation for Economic Co-operation and Development have nothing to say about that.

Third, Germany is throwing a huge challenge to the U.S. and the rest of the world. Washington should respond by targeting Germany's manufacturing with blistering trade tariffs — instead of targeting wine and cheese that will hit France, Italy and Spain, economies already victimized by EU surplus runners.

Investment thoughts

Trade and politics are well aligned to complete a "phase one" trade deal with China.

By contrast, Germany is at the center of a stormy U.S.-EU trade negotiating round. Berlin is not only running systematic and increasing trade surpluses with the U.S., but is also inflicting additional damage on American economy by stifling economic growth in European markets that are taking one-fourth of American goods exports.

A tough and uncompromising U.S. approach to its EU trade is in order. In particular, targeted U.S. trade tariffs on Germany would probably be cheered by the long-suffering EU countries whose economic growth and employment are being held down by German export-driven growth strategies.

Commentary by Michael Ivanovitch, an independent analyst focusing on world economy, geopolitics and investment strategy. He served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York, and taught economics at Columbia Business School.

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