The contrast between President Trump's cozy relationship with French President Emmanuel Macron and his frosty relationship with German Chancellor Angela Merkel is on full display this week. Both European leaders are visiting Washington — but while Trump embraced Macron and threw him a state dinner, Merkel is getting a few hours over lunch.
Trump's rockier relationship with Merkel can be traced to numerous factors, but their respective countries' trade relationship is among the most powerful: The United States ran a nearly $65 billion trade deficit in goods with Germany last year and has had similar-sized deficits for many years, according to the U.S. Census Bureau. That's about four times as large as the corresponding trade deficit the United States ran with France.
Trump doesn't like the fact that Americans are buying a lot more German products than vice-versa. (Trump rarely mentions the services trade, where the United States usually runs a small surplus with most countries, including Germany.) He views the trade deficit in goods as a sign of weakness and a drag on the economy. While the deficit with Germany is less than one-fifth of America's $375 billion goods deficit with China, it still irks Trump, and he has been clear he wants it reduced.
Most mainstream economists think Trump is misguided in focusing on cutting the trade deficit, especially since the U.S. economy is thriving. Germany, in particular, is a close ally and one of the top foreign investors in the United States, especially in manufacturing, which generates jobs in America.
A key reason behind the U.S. trade deficit with Germany is that Americans are spenders. The U.S. government spends more money than it brings in, and American families don't save much. In contrast, Germans are big savers, and the German government balances its books. A lot of that German savings ends up being invested in the United States, but Trump seems to forget that factor when he focuses only on the goods traded on ships between the two nations.
“Debating trade surpluses or deficits is a waste of time,” said Matthew Rooney, director of economic growth at the George W. Bush Institute and a former U.S. diplomat in Germany. “The U.S. is a thriving economy that doesn’t save much, so we import capital to finance investment in our country. That drives a trade deficit.”
Instead of fixating on “fixing” the U.S.-German trade deficit, Rooney said, Trump would likely be better off doing two things when he meets Merkel: asking the German government to spend more money and seeking Merkel's help to pressure China on trade.
Getting any big concessions from Germany would be tough, because the Germans are part of the European Union, so Merkel can't make a deal with Trump on her own, as he would prefer. But Merkel and the E.U. could be helpful on Trump's goal of getting China to open up its markets more to foreign companies and to stop stealing intellectual property.
Similarly, if the German government spent just a bit more, it would likely help the European — and, by extension, the global — economy.
Germany runs a surplus with most of the world. For all the attention China gets on trade, that nation's surplus (as a percent of its economy) has fallen sharply in recent years, according to World Bank data. Germany's has not.
The Germans benefit from using the euro currency. Normally, a country saving and exporting so much would see its currency rise. That would make German cars more expensive, for example, and some people around the world would likely stop buying them. But this typical adjustment lever isn't working because other E.U. countries — such as Greece and Italy — that have been struggling also share the euro currency, which keeps the value of the euro lower than Germany's own currency would probably be right now.
Germany, therefore, has effectively found a way to lower the value of its currency. The result is that “Germany is exporting unemployment to the rest of Europe,” said Robert Scott, senior economist and director of Trade and Manufacturing Policy Research at the Economic Policy Institute.
If Germany leaves the euro zone and goes back to using the Deutsche mark its surplus would almost certainly fall, said economist Jeromin Zettelmeyer of the Peterson Institute of International Economics. But Germany is highly unlikely to do that. A German exit from the euro currency would bring a lot of turmoil to world markets at a time when the global economy is finally on the upswing.
Zettelmeyer is also advocating for the German government to spend more as a first step toward bringing down the country's vast surpluses. While no one expects the Germans to ever run American-style budget deficits, a little more spending would likely be good for all. Other European nations have griped for years about this — so if Trump could help make it happen, it would be considered a true victory.
“The Germans themselves shouldn't be happy about this surplus because it is partly a reflection of relatively low levels of investment in Germany,” Zettelmeyer said. “German infrastructure is not that great anymore. It's crumbling.”
Trump has said his main goal on trade is to get China to play fairer, and there is widespread agreement around the world that he is right on this one. What the other nations don't agree with are Trump's tariff threats, since those could have severe negative repercussions on the global economy if they go into effect and trigger a full-blow trade war. But Merkel would likely be willing to get on board in Trump's fight to pressure China to open up.
Together, the European Union and United States make up about a third of the global economy, making it difficult for China to ignore their demands — and potentially giving Trump the future grand victory he wants.