What Does the New U.S. Presidency Mean for Europe?

The new U.S. President Donald Trump has begun to unveil the first contours of his economic policy: the threat of punitive tariffs on Mexican imports, an entry ban on immigrants from seven predominantly Muslim countries and the construction of a wall along the southern border. Friedrich Heinemann, a research department head at ZEW, critically assesses the actions of the Trump administration thus far.

What does the election mean for Germany as an export country?

Nearly ten per cent of German exports are sold in the U.S., making it the most important national market for German companies. Moreover, Germany has a very high trade surplus relative to the US, which could put the German export economy in the crosshairs of the Trump administration. If Trump makes good on his idea of raising protective tariffs, we will feel the pain. Not only does it stand to hurt trade between our countries; there’s also the indirect harm from losses incurred by German companies with factories in Mexico.

Are there rational economic arguments for stronger protectionism

on the part of the U.S.?

Donald Trump’s economic policy, insofar as it resembles anything like a coherent position, borders on mercantilism. The mercantilists argued very much like Trump: a country increases its wealth by protecting its industries through tariffs and increasing domestic capital through exports and current account surpluses. But classical economists debunked mercantilism two hundred years ago. Mercantilism primarily serves domestic companies, while the wealth of nations grows more in the long run when they embrace international competition. It is no surprise that Trump has many enthusiastic fans among American manufacturers. But Trump is a neomercantilist and a wall builder, which distinguishes him from his economic forbearers. The mercantilist did everything to attract people from other countries. They understood that hard-working economic migrants were a boon.

How will Trump’s economic policy affect global economic growth?

The greatest danger is that aggressive U.S. tariffs will trigger retaliation from its trading partners. Another problem is the unpredictability of Trump’s economic policies. Mexico has already felt the effects of this uncertainty, seeing its currency tumble and international companies suddenly halt new investment. The shock waves have reached far into South America. And hopes driving up the stock markets – namely, that large U.S. stimulus packages will have a positive effect – are inflated. It is the wrong time to stimulate the U.S. economy with tax cuts and investments. It is already doing well and already on the verge of full employment. Additional fiscal stimulus will create inflation and force the U.S. Federal Bank to raise interest rates significantly, ultimately leading to higher exchange rate and financial market volatility around the world.

How should Germany and the EU respond to trade difficulties?  

With a level head. We shouldn’t answer irrationality with irrationality. The Trump era will come to an end, perhaps faster than we think. By keeping cool and de-escalating trade policy conflicts, we will be investing in a good relationship with Trump’s successor. This means that the EU should not let itself be drawn into the fray. If other countries are foolhardy enough to impose tariffs that make their own consumers poorer, that’s their decision.