President Trump warns Germany on trade. Economists wonder why?

President Donald Trump has a new country in his crosshairs: Germany. The president says the US is running a “MASSIVE” trade deficit with Germany, but “this will change.”  

On his recent visit to Europe, President Trump told European officials that Germany is “very bad” on trade. Administration officials say Germany has exploited a weak euro to put American exports at a disadvantage.

The US ran a $65 billion trade deficit with Germany last year. In terms of trade imbalances, that ranks third, behind US deficits with China, at $349 billion, and Japan, at $69 billion.  

Those may sound like big numbers, but economists agree: Don’t worry.

“Every economist will tell you that a trade deficit is not necessarily a bad thing,” says Lee Branstetter with Carnegie Mellon University, speaking about bilateral trade between countries. 

“Bilateral trade deficits, like a trade deficit with China, those matter almost not at all,” says Michael Klein with The Fletcher School at Tufts University. “If you think about it, you could be selling something that one country really wants and then you have a trade surplus with them, but then you could be buying something from another country. So, focusing on a particular bilateral trade deficit is really not at all the way to go in thinking about this and is often used just to demonize another country.”

Economist Marc Melitz with Harvard University says think of a trade with another country like going shopping: “The bilateral trade deficits have no real meaning. It’s as if you were being asked what your balance of trade was with a store.”

In other words, if I like clothes from Macy’s, or in this case, cars from Germany, does that mean Macy’s or Germany is taking advantage of me? No, I just prefer purchasing their items.

And trade statistics can be very misleading. Consider an example economists love: the iPhone.

Michael Klein, who is also the executive editor of EconoFact — a website put out by a few dozen economists who tackle economic issues for a lay audience — wrote this memo about it. In short, the iPhone is recorded as a $225 import from China to the US. But only $5 of the work is actually done in China. So, on paper, according to trade statistics, it looks like China is exporting a lot to the US. But is it?

Lee Branstetter, who also contributes to EconoFact, argues that the Trump administration’s focus on manufacturing deficits (trade in goods) ignores our strengths: US exports of services, where the US actually runs an overall surplus, as well as bilateral surpluses with most nations. Service exports include things like finance and insurance, cultural and recreational activities, and computer and information services.

But back to Germany and goods. The Trump administration says Germany relies on a weak euro to prop up its exports. (In fact, German officials have consistently argued against European Union policies helping suppress the value of the euro.) And, the administration argues that German taxes on American-exported cars are higher than US taxes on German imports of German cars. That’s a long-standing concern.

But the US does benefit hugely from our trade relationship with Germany: German companies — including automakers, like BMW, Mercedes and Volkswagen — employ some 700,000 American workers. Many of those cars are bought by American consumers or exported, which actually helps the US trade balance. (The overall US trade deficit was $734 billion last year.)

And American consumers can buy precision-engineered products from Germany.

So, if bilateral trade deficits are essentially meaningless distractions, according to economists, why does President Trump care so much?

“Trade is a very complex topic, and I understand that it gets to be very political and very emotional,” says Frayne Olson, an agricultural economist at North Dakota State University. “In economics, when we study trade, we look at the aggregate benefits. In an aggregate sense, there are more winners than losers, but for those people that are involved that have the reductions, it can be really, really painful.”  

North Dakota is a net exporter. Rust Belt states that have lost manufacturing jobs, in part due to the forces of globalization, are not.

“Right now, it’s the uncertainty part that is bothering a lot of people,” says Olson. “President Trump’s basic premise is that he firmly believes that he can negotiate better deals than we have in place. And I certainly hope he’s right, but also understanding trade is like any other negotiation, there’s always give and take.”

In other words, revisiting trade policies — slapping on tariffs, rewriting trade deals — comes with risks and rewards. So, while the president could be able to prop up one sector of the economy, another sector could easily falter.