Tag Archives: Trade War

October – Trade Outlook

The aftermath of Germany’s election: how does trade help?

Germany’s election at the end of September was predicted to be dull. Angela Merkel was to be re-elected, possibly on a larger share of the vote, and the country would be able to focus on defining its role at the heart of a re-generated Europe. In the end, the Alternative für Deutschland won 12.6% of the share of the vote – the largest share of parliamentary representation of any extreme right wing party since the World War II. Germany’s parliament is now divided between six parties and the centre right CDU-CSU and the centre left SPD parties have been given a warning by voters that “business as usual” is not enough. Their votes shrank to 36% and just over 20% respectively.

Inevitably there will be a period of domestic uncertainty. The SPD has already stated that it would not be part of a new Grand Coalition. This leaves Angela Merkel the complex task of forming a “Jamaica” coalition of the CDU-CSU, the liberal FDP and the Greens (so called because the colours are those of the Jamaican flag). This will not be an easy process. There are rumours, following the departure of Wolfgang Schäuble from the Finance Ministry that this post is being left open as a negotiating tool for Angela Merkel as she starts discussions with the other two parties.

However, it is possible that trade offers a solution to at least one of Germany’s persistent problems: under-investment in some of the infrastructures in the country that are weak and that may have contributed to the sense of social as well as economic exclusion that the voters in the eastern regions exhibited. In 2016 Germany posted its largest trade surplus ever at some US$300bn – nearly a third higher than China’s at US$200bn (Figure1). Germany’s budget surplus, to which the trade surplus contributes, was €18.6bn in the first half of 2017. Much of this surplus has been achieved through its adherence to stringent, and well-documented, austerity measures. But even in Germany economists and politicians alike are beginning to worry that the surplus is unsustainable: the broadband and road infrastructures in the country are under-invested, for example, and some fiscal stimulus would further boost the European economy.


Figure 1:          Germany’s trade with the world, 1996-2016 (US$m)

Source:            Equant Analytics, 2017

Germany is to some extent a victim of its own success. The Hartz reforms in the 1990s and aggressive austerity in the wake of reunification provided the country with a more flexible labour market alongside lower government borrowing than any of its European counterparts. But Germany has also been hugely successful in its main economic focus – trade. Its goods are competitive abroad and its supply chains extend throughout Europe and beyond.

Yet this causes political problems in terms of its foreign relations. Throughout his presidency so far Donald Trump has branded Germany and its surplus as “bad, very bad” in his tweets. He has attributed Germany’s success in exporting to the US as a product of the under-valuation of the Euro that has enabled Germany’s manufacturers to price their goods advantageously in overseas market undermining, for example, American manufacturers. The size of Germany’s trade surplus with the US, and the fact that it has widened since the introduction of the euro is a function both of this and of the fact that Germany’s products compete on quality as well (Figure 2).


Figure 2:          Germany’s trade with the United States, 1996-2016 (US$m)

Source:            Equant Analytics, 2017

But while Germany does export successfully to the biggest countries in the world, among them China and the US, it also operates its supply chains across Europe. In other words, the budget surplus may create distortions, particularly in weaker European countries, but it also helps fuel growth in those very same countries. The automotive sector is the best example: Figure 3 shows the projected annualised growth of German cars and components for its top five import and export partners. It shows how car and component imports from the likes of the Czech Republic and Hungary are predicted to grow to 2020 more quickly than from the US, France or Spain while exports of cars and components from Germany are growing at a slower or similar pace.

Germany’s top five import partners

5.1%    Czech Republic

3.2%    Spain

-1.1%   France

3.0%    USA

5.4%    Hungary

Germany’s top five export partners

2.9%    USA

4.3%    UK

1.9%    China

-0.5%   France

1.1%    Spain

Figure 3:          Projected annual growth of Germany’s top five import and export partners in the automotive sector, 2016-2020

Source:            Equant Analytics, 2017

Germany’s surpluses tell the story of its success in adjusting to two major shocks: its reunification and the global financial crisis. The process has been tough on many Germans, particularly those in the eastern regions and this was reflected in the recent election result. However, Germany is not about to become less domestically stable. It may enter a period of self-reflection, and this is not necessarily a good thing while geopolitical uncertainties are rife. But the AfD and die Linke (the extremist left party) account for just over 21% of the vote between them. Populism in Germany, as with other countries in Europe, has been driven by a sense of economic and social exclusion, largely in the eastern regions of Germany and catalysed by Angela Merkel’s controversial response to the migrant crisis in 2015. To some extent it would be possible to argue that the rise of extremism, because it is so predominantly in the east, is a function of the last nearly 30 years since reunification. Where in other countries populism is a function of exclusion from globalisation, in Germany it is driven by a sense of exclusion from Germany’s second “economic miracle”.

Angela Merkel will realise that this domestic uncertainty is dangerous. Using the surplus to focus on some of the problems of under-investment, including suitable structures to integrate the large numbers of immigrants, will undoubtedly help. It is unlikely that the trade surplus will diminish any time soon – Germany is too competitive for that. But with the trade surplus comes influence, particularly in foreign policy terms. In the run up to the election, Germany’s voters seemed very aware of the responsibility that they had in providing the stability at the heart of Europe in what seem to be turbulent times. The Chancellor’s challenge now is to convert that responsibility into policy.


“The Weaponization of Trade: the Great Unbalancing of Politics and Economics” 
Rebecca Harding and Jack Harding.

October 25th 2017 * 170pp paperback *£9.99
ISBN 978-1-907994-72-2

PRE-PUBLICATION ORDERS, WITH FREE UK P+P GO TO: http://londonpublishingpartnership.co.uk/wot-advance-purchase/




August – Trade Outlook

What does a US trade war with Russia mean?

Just as the world thought it was safe to go on holiday, at the beginning of August President Trump signed legislation to place severe sanctions on Russia because of their alleged interference in the US Presidential elections. At the same time, he declared the legislation to be “seriously flawed” and “unconstitutional.” Russia’s Prime Minister, Dmitry Medvedev responded on Facebook, that the action was, “the declaration of a fully-fledged trade war” against Russia and would damage US-Russian relations for years to come. More than this, he also stated, “The US establishment fully outwitted Trump… the Trump administration has shown its total weakness by handing over executive power in the ‘most humiliating way.’ ”[i] President Trump’s response? To tweet “Our relationship with Russia is at an all-time and very dangerous low. You can thank Congress, the same people that can’t even give us HCare!”[ii]

Escalation of tension

The politics of the escalation of tensions between the US and Russia clearly matter, but do the economics? From a US perspective it may appear not. Russia is not a top-ten import or export partner of the country. Its US$ 32bn of trade is less than 1% of the total value of US trade of US$ 3.9tn and has been falling since sanctions against Russia were first imposed in 2014 (Figure 1). Some of this may also be due to the collapse in oil prices between 2014 and 2015. A momentum-based projection into 2017 suggests that the increase in both imports and exports between 2015 and 2016 is unlikely to continue.


The trade between US and Russia between 1996 and 2017

Figure 1: US trade with Russia, 1996-2017, US$ bn (2017 projection)
Source: Equant Analytics 2017

What does the US Export to Russia?

US exports to Russia are predominantly in aircraft and aerospace (Figure 2). It accounted for US$ 3.2bn in 2016 and this was nearly double the second largest export sector, machinery and components, which includes computers and data storage. In every year since 2011, and in spite of sanctions against Russia, US exports in aircraft have grown by just over one third. This is admittedly from a relatively small base but it does demonstrate the fact that there is activity in what is both a highly politically sensitive and strategic sector for the US. On the basis of a momentum projection into 2017, it might be expected that exports would grow by a further 8%. This represents a lost value of around US$ 256m, which is small in the grand scheme of US exports. Although it represents a sector-specific loss, Russia is a relatively small export destination and does not feature in the US’s top ten biggest market in this sector.


the change in US exports to russia in different sectors

Figure 2: US top five largest exports to Russia, Compound Annualised Growth Rate, 2011-2016 and year-on-year projected growth 2016-17 (%)
Source: Equant Analytics, 2017

What does the US Import from Russia?

Just over 52% of the US’s imports from Russia are in oil and gas. It is the US’s fifth largest import partner in this sector but the value of US$ 10.6bn is dwarfed by Canada at over US$ 72bn. Russian oil and gas imports represent just over 4% of US total oil and gas imports and have been falling over the past five years (Figure 3). In fact, the only area to show any substantial increase is fertiliser imports which are projected to grow by 7.9% between 2016 and 2017 but from a low base and a period of five years during which they have declined annually by around 1% each year.


change in us imports from russia

Figure 3: US imports from Russia, Compound Annualised Growth Rate, 2011-2016 and year-on-year projected growth 2016-17 (%)
Source: Equant Analytics, 2017

Figure 3 illustrates two things: the US has imposed sanctions on Russian imports progressively over the past five years and the downward trend is likely to continue. But second, and perhaps more importantly, the substantial drop in oil and gas trade with Russia reflects the US growing independence in this sector as its own exports increase and as shale gas production becomes increasingly efficient.

What are the consequences?

So what does this tell us about the importance of a trade war between the two countries? From a US perspective, Russia is another country with whom it has a trade deficit, albeit proportionately small at US$ 6bn in 2016. It has been reducing its imports from Russia and the country is not a major trading partner. In terms of the economics of its own trade, it loses relatively little and is making a strong political point. But equally, the US is not a top ten importer into Russia and is only its sixth largest export destination. Even though this has been driven in the last few years by sanctions and dropping oil prices, it seems that the relationship is economically less important than it is politically.

It is the politics that are the key point here. When leaders of two major countries start declaring a “trade war,” they are raising the stakes. Trade becomes political rather than economic and this is dangerous.