US President Trump reserves his most scornful
indignation for the traditional media and US allies, while seemingly praising
authoritarian leaders abroad. Given the Administration’s domestic
challenges, no wonder a cabinet official spoke wistfully about the lack of
protests in Saudi Arabia.
The latest target for Trump’s wrath seems to
be Germany, where he and German Chancellor Merkel are trading barbs. There
is both less and more than meets the eye.
Germany is
in Trump’s cross hairs on two counts. The first is that Germany, like
most European NATO members, has not fulfilled
their agreed upon obligation of spending
2% of GDP on defense. Second, Germany runs a large external surplus that
contravenes EU rules and is a significant
imbalance which has also drawn the IMF’s ire.
The US President misunderstands about NATO
obligations. The US military might is not a mercenary force, or at
least it has not been traditionally.
The US-sponsored NATO not because Europe agreed to pay, or because the US was altruistic. Rather, the US learned in
the Great War (WWI and WWII) that the US cannot enjoy peace and prosperity if
Europe doesn’t. Preventing the spread of the Soviet Union and avoiding a
return to the Great Depression were the two main priorities of US foreign
policy at the end WWII.
The money that was to be earmarked for the defense
was not about payments to the US. In that very real sense, Germany
and other NATO members do not owe the US money. It was about building
capacity and capabilities. Nor must defense mean strictly military
resources. Germany argues that part of the defense spending is earmarked for dealing with
past wars, like the cost of refugees. If Germany’s military
spending and spending on refugees were
combined, then it would be near its 2% obligation.
Moreover, if there is another ground war in
Europe, wouldn’t Germany and European countries be paying well more than their
2%? In some ways, the US pays with dollars, what Europe would pay
with lives. Europe has skin in the game in the way that the US doesn’t.
The US troops permanent stationed in Germany are more of a tripwire than a
forward defense.
Trump also misunderstands German trade.
On the highest level, Trump and National Economic Council Director Cohn do not
appear to appreciate that the EU negotiates trade policy. Germany, and to
use Cohn’s example, Belgium are bound by the same trade treaties. The EU,
which the US traditionally has been a strong advocate for,
is a customs union.
Germany is the biggest, and arguably, the most
competitive economy in Europe. However, it does not dictate European
policy, and the interests of other members shape EU policies, including trade
policy. In some ways, it is similar to the US
experience. It is the largest economy
and even has a veto at the IMF, but the multilateral institutions do not simply
do the US bidding. In fact, the US has been critical of many of those institutions it helped
create. Trump has proposed cutting various funds for the United Nations
for example, and has declared that if a
WTO ruling is not to its liking, it may
not abide by it.
Trump has repeatedly complained about the German
auto industry. German brands have around
a 7% market share of the US auto market. Many of those cars are made in the United States.
Volkswagen, which has less than a 2% market share, builds vehicles at a Tennessee
plant that employs 2k workers directly. That plant, by the
way, was a greenfield investment.
German car companies do dominate the luxury
car market. BMW and Mercedes have
factories in the US South, which we have suggested is a larger competitor to
Detriot than Tokyo and Munich. More than 50% of the SUV’s BMW
produces at its South Carolina factory are exported. US
brands (GM and Ford) do not compete so much with German at the high end, but
rather make their business the mass-market SUVs and pick-up trucks.
The source of Germany’s large trade surplus,
like the US large trade deficit, is a function of domestic policy. The
external imbalance can be understood as
the difference between a nation’s savings and investment. Germany’s surplus means that it saves more and the US
deficit means it saves less. Many call on Germany to
boost its investment and offset some of the austerity in the periphery with
more stimulative domestic policies.
Some blame the labor reforms under the Social
Democrat Chancellor Schroeder that have kept German wages down. Even
now with full employment, wage growth is not accelerating. However, the
current head of the SPD and Merkel’s challenger in the September election,
Schulz, who has been critical of the labor reforms, is faltering in the
polls. Indeed with a strong push by the CDU and the FDP, a grand
coalition with SPD may not be needed for what would be Merkel’s fourth
term.
Merkel is in campaign mode, and sensing a popular
undercurrent, has not shied away from
poking back at Trump. And this serves to egg on the US
President. This has spurred a
bunch of navel
gazing and chin wagging as if this is the
first time the US and German leaders disagreed. Kohl did not want to put Reagan’s
tactical nuclear weapons in Germany. Schroeder was critical of Bush’s war
in Iraq. There were often asymmetrical threat perceptions.
Brandt’s Ostpoltik ruffled feathers in
Washington.
On the other hand, the rise of a new
generation of German leaders, for whom the burden and guilt of WWII have eased,
and experience of the Great Financial Crisis, have made possible, if not
necessary, the projection of German leadership. A stronger more
capable Europe is necessary regardless of who is occupying the White
House. The crisis and Brexit are changing Europe. The UK obstructed
some efforts of greater European integration, like the establishment of a
European Army.
Early in the 20th century, the US, a
revisionist power of the day, offered an alternative to the traditional basis
of international relations, spheres of influence. Wars were often
fought as one side to increase their sphere of influence at the expense of
another. Instead of fixed spheres of interest,
the US proposed variable shares, and the variability was a function of one’s economic prowess. This was first used to defend the territorial
integrity of China, which was being carved up into concessions (spheres of
influence) by the European powers and Japan. (I explore these issues in depth in my new book Political Economy of Tomorrow).
The “America First” that Trump
harkens back to was a rejection of this as embodied in Wilson’s 14 Points after
WWI. The Open Door is embodied in the
post-WWII multilateral institutions. To the extent that Trump rejects the Open Door, he signals a return to
spheres of influence. Trump reportedly briefly toyed with the idea
of formally recognizing Russia’s hold on Crimea. His trade priority is
the continental market and abandoned a more comprehensive deal (TPP) that would
have also modernized NAFTA.
A populist and protectionist in the Washington
spurs a reaction aboard. Next week’s election in Mexico’s largest
state may see the left-populist party win, setting up a national victory
next year. Several countries want to proceed with TPP without the
US. China’s One Belt-One Road is the international infrastructure
initiative of our day, and it fits well
into a Sino-sphere of influence.
The UK is abandoning the centuries-old strategy of balance-of-power
politics in Europe. The US’s pivot to Asia under Obama also made
room for continental leadership. Since the UK chose to leave the EU (52%
to 48%) last year (in what was offered as
a non-binding referendum), EU sentiment has generally
risen in Europe. In some ways, both the UK and the US are threats to the
body politic in Europe, and the response
has been circling the wagons. As great
leaders have often found, nothing unites disparate peoples like a common
adversary. Merkel has found that running against Trump
in Germany plays well.