Tag Archives: weaponization of trade

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/

 

 

 

September – Trade Outlook

Trade Wars: Why the US must think before it acts

There are times when it is helpful for a nation’s leaders to think carefully about the consequences of their statements. North Korea tested an H-bomb capable of being fitted to an Inter-continental ballistic missile on the 3rd September. Without any exaggeration, this is a momentous time for the world’s security. North Korea is playing with both China’s will to intervene substantively and the US’s will unilaterally to start a major war on the Korean peninsula. China is keen to avoid any action that will result in a stream of refugees coming across the border from North Korea. The US, despite statements from President Trump that any aggression by North Korea will be met with “fire and fury” will be reluctant to avoid full-scale conflict because of the risk of retaliation.

So this has become a Trade War. On the 3rd September, President Trump tweeted, “The United States is considering in addition to other options, stopping all trade with any other country doing business with North Korea.” This is a bold statement targeted, of course, at China which accounts for around 85% of North Korea’s trade value. Since Steve Bannon’s statement in August 2017 that the US is effectively fighting a trade war with China, the statement could be interpreted as simply a desire to take on China’s relationship with North Korea and its trade surplus with the US at the same time.

President Trump should be wary what he wishes for. Apart from China, North Korea’s top ten trade partners (imports and exports) include, Russia, India, the Philippines, Singapore, Chile, Germany, Hong Kong, Indonesia, Switzerland and Mexico. China itself exports around $US 2.8bn into North Korea and other countries are substantially smaller. Russia, for example, imports just $US 68m and India some $US 54m. For many other countries the amounts are in the low millions. However, if the President’s words are to be taken at face value, then all of these countries should be included. Taken together and including China, these countries accounted for nearly 48% of the US’s total trade of $US 3.9 trillion in 2016 (Figure 1).

 

 

Figure 1:          Value of US trade for North Korea’s top 22 trading partners ($US bn)

Source:            Equant Analytics, 2017

Of greater interest is the sectors that would be affected by trading with countries that “do business” with North Korea. Mexico is a major player in the US’s electronics, automotive and machinery and components sectors and, of course, in oil. But its trade with North Korea is small, as is the trade of many other countries with North Korea. It makes sense to look just at China and how its key sectors are interwoven into strategic sectors for the US (Figure 2).

This chart in itself depicts the frustration that the US has with China’s dominance of its trade. US supply chains, are irretrievably interwoven with China. For example, many of the imports from China in Electrical Equipment and Machinery are intermediate manufactured goods, nevertheless, these goods are part of other supply chains, for example in automotives or aerospace.

 

Figure 2:          US trade with China in non-oil strategic sectors ($US million 2016)

Source:            Equant Analytics, 2017

 Quite apart from any impact that the decision to stop trading with all those nations that have trade with North Korea, there is a sense in which any sanctions, or sanctions-like move, is counter-productive. North Korea, it seems, already has nuclear launch capacity and this is not a new phenomenon. The trend started in 2008 in nuclear-related dual-use goods and, during the process of Kim Jong Un’s accession, imports of propulsion equipment started to increase (Figure 3).

 

Figure 3           Value of North Korea’s trade in selected dual-use goods, 1996-1997, $USm)

Source             Equant Analytics, 2017

There are already signs that North Korea is winning the deterrence war. Their calculation is that both China and the US are “paper tigers”: they can bluster, but in the end there is little that they can materially do. There are no clear diplomatic or military answers – all have unimaginable consequences and are therefore likely to be avoided if possible. Accepting North Korea as a nuclear power will be a tough pill for the US to swallow and again is unlikely without some form of diplomatic ‘victory.’

But what is absolutely clear is that economics solutions may well be equally as unimaginable. Loose words in military terms may increase the risk of miscalculation and war as a result. Equal discipline should be applied to the use of language in economic and trade terms. Ending trade with countries who do business with North Korea is impractical and would be an act of assured economic destruction for the US itself. Maybe this is the ultimate deterrence against a trade war with China as well; weaponizing trade cannot be the way forward.

“The Weaponization of Trade: the great unbalancing of politics and economics,” by Rebecca Harding and Jack Harding will be published on the 25th October by London Publishing Partnership. Click here to find out more and to pre-order a copy.