The G7 summit on May 26th-27th saw relations between the United States and Europe hit their lowest point since 2003, when the US-led military campaign in Iraq evoked criticism from the vast majority of Western European countries.
Again, the recent G7 summit in Italy revealed some issues are driving a wedge between the United States and European countries. Of particular importance are the differing views on the trade balance between the US and Germany, as well as the Trump administration’s withdrawal of the US from the Paris Accord on Climate Change.
Indeed, last year, Germany exported to the US $114bn worth of goods, $66bn more than it imported (the United States had the third largest negative balance of trade with Germany, after China and Japan). This performance was part of a general trend of Germany’s foreign trade surplus, which broke a new record last year and reached €253bn ($272bn), 8.7% of the country’s GDP.
However, allegations conveyed by Trump’s chief trade adviser Peter Navarro about Germany’s deliberate manipulation of the Euro exchange rate to sell its goods competitively are ill-founded, simply because the European currency is managed by the independent European Central Bank, which the Germans exert influence in but have no unilateral powers at. Furthermore, Chancellor Merkel sees trade with the US as a non-zero-sum game, and points to, inter alia, German foreign investments in the US.
Nevertheless, available evidences seem to suggest that the United States is likely to adopt certain measures to offset the trade balance. On March 31, Donald Trump signed the Presidential Executive Order Regarding the Omnibus Report on Significant Trade Deficits, which aims to investigate and address challenges created by what it calls “unfair and discriminatory trade practices.”
The report will be submitted to the President by the end of June, and it might be followed by protectionist actions, including tariff increases on import, imposition of non-tariff barriers, or other measures.
Ostensibly, these isolationist policies can trigger legal battles within the frames of the World Trade Organizations, as well as force American companies to buy machinery parts elsewhere at a higher price. What is more, European countries might see the need to forge economic ties with China ever more pressing.
During the G7 summit, controversies also mounted around the US stance towards the Paris climate accord, which Trump refused to endorse and later decided to entirely withdraw from. The Paris agreement represents the first-ever universal international climate pact (adopted by 195 countries), which entered into force in 2016 and which deals with effects of climate change.
The United States under President Obama did not submit the treaty to Senate approval, as required by the Constitution, and instead acceded to it as a matter of executive power. In President Trump’s account, the Paris Agreement is very unfair to the United States, and it puts the country at economic disadvantage.
Losing the second largest greenhouse gases emitter country can undermine the credibility of the Paris Agreement, but it will not disband the pact. The White House apparently believes that last week’s decision will boost economic growth in the United States in a short-term perspective.
The German trade surplus is not the result of unfair trade deals, but it is largely a consequence of a combination of several factors, mainly the competitiveness of German goods worldwide and a relatively low demand for imported products in Germany.
Therefore, protectionist measures anticipated by the United States can be seen as a wrong remedy, which will inflict severe damage to the liberal trade order. The withdrawal from the Paris Agreement may be an additional attempt to protect American workers, although the logic behind it may be sounder than the trade spat with Germany; indeed, if Germany adopts strict emissions targets while the US does not, it is possible that Trump will have succeeded.