The new US sanctions against Russia – passed by US Congress, signed into law on August 2 by President Donald Trump and likely to hit some major European companies – have led Germany’s political and industrial establishment to air their grievances vis-à-vis Washington. This is only the last episode of a growing trade dispute between the two sides of the Atlantic. Such tension was not built in a day, but it has heightened since the beginning of 2017 due to a “disruptive innovation” called “Donald Trump” and to his original approach to trade.
The US administration has been advocating for a world trade that is fair for Americans and for less overt protectionism from its partners, at the same time challenging the traditional G20’s anti-protectionism stance. In order to build confidence in “fighting protectionism”, members of the G20 should strenghten the credibility of their pledges on trade. As a matter of fact, according to data brought up by the US administration and some independent think tanks, G20 countries score lower than expected on market openness and reciprocity of their trade policies towards the US.
In particular, the new American approach risks setting the US and Germany – a major export powerhouse, with a strong trade surplus with Washington – on a geopolitical collision course even faster than previously imagined; and Italy’s economy may be involved in this clash due to some of its structural features.
Trump and protectionism: a controversial relationship
In order to explain Trump’s trade policy, mainstream media have focused their attention on the rhetorical posture of the American Administration in the main global forums, in particular the G20. US Secretary of the Treasury Steven Mnuchin caused an outcry when he first met his colleagues from the other 19 powers, on March 17-18 in Baden Baden, and insisted that his country could no longer accept previous G20 statements dating from 2008 and vowing “to resist all forms of protectionism”.
Then came the relief for opinion makers when they found out that the anti-protectionist formula was backed in the final statement by the heads of state and government at the G7 in Taormina (May 26-27) and then at the G20 in Hamburg (July 7-8), although references were added to “job creation” as one of the main goals of international trade, to the principle of “reciprocity”, to the fight of protectionism “including all unfair trade practices”, to “the role of legitimate trade defenses instruments”.
Such diplomatic posturing might overshadow an even more disruptive effect caused by the current US administration. Within the G20 framework Trump could indeed play the same destructive role as the child in the famous short tale “The Emperor’s New Clothes” written by Hans Christian Andersen in 1837. Questioning the G20 stance on free trade, he could be the one crying out at the forum’s nakedness – when it comes to confronting protectionism – that no one dared to notice.
Before examining the “Emperor's new clothes” – that is the classic G20 anti-protectionist position – let’s try to understand the “child”/Trump's attitude towards trade policy. Last March the US President pledged to implement a trade agenda which set the goal of expanding “trade in a way that is freer and fairer for all Americans”. As summarized by the Peterson Institute for International Economics, “a frequently cited central objective is to reduce the US trade deficit, which has hovered at $500 billion in recent years. The four enunciated priorities are: a) defend US national sovereignty; b) strictly enforce US trade laws; c) use leverage to encourage other countries to open their markets to US exports of goods and services, and provide adequate and effective protection and enforcement of US intellectual property rights; d) and negotiate new and better trade deals”.
In order to move in this direction, the Administration has already implemented a wide array of actions: executive orders, trade cases initiated by the Department of Commerce against dumping, ad hoc investigations involving steel and aluminum imports, review of international trade agreements (e.g. withdrawal from the TPP) and finally a changed diplomatic posture in the international forums.
What are the chances for the other G20 actors of counterbalancing the effects of Trump’s agenda, if they decide to do so? This will also depend on the credibility of their track record in trade policy. New data just published by the Global Trade Initiative – from a database that the IMF defined as the most comprehensive coverage of crisis-era trade distortions – suggest that the G20 cannot easily take the moral high ground in confronting Trump on protectionism.
Simon J. Evenett and Johannes Frits, the two authors of the report, write that “over the years, such is the failure of the G20 “no protectionism” pledge that, if the Trump administration goes looking for evidence to bash trading partners, they will find it. There is no escaping the fact that, by the end of 2016, the total number of G20 beggar-thy-neighbor acts that still harmed US interests stood at 1,883”.
Hence when President Trump is urging trade partners – in particular the European Union and China – to dismiss discriminatory measures against US interests, his position doesn’t appear so groundless. Notwithstanding the two authors of the report underlining the uptick in discriminatory measures taken by the US in the last six months towards their G20 partners, condemning this attitude.
In order to understand the increasing friction between Washington and Europe’s export powerhouses (Germany, but also Italy as a distant second), it is worth noting how this new American approach is having consequences on the international stage. Such consequences are not easily foreseen: most of G20 members, for example, have shown some sort of a cooperative stance towards Washington’s new requests.
Since the beginning of 2017, protectionist and discriminatory measures approved by G20 members have been decreasing: “Overall, then, since the beginning of the 2017, rather than maintain the same resort to protectionism and shift towards less transparent ways to tilt the commercial playing field, the rest of the G20 appears to have responded to President Trump’s shock and awe on trade by resorting to less protectionism outright and, in particular, to much fewer measures that harm US commercial interests”.
In the authors’ opinion, most of G20 governments did not wait for diplomatic skirmish over G20 statements to promptly react to Trump’s “transactional” view of the world trade debate. These same countries reacted by rolling back a few measures that inappropriately benefited national firms and therefore limited the trade of goods made in US. Not all the G20 members have reacted in the same way to Trump’s pressure. Always according to the Global Trade Alert Report, emerging countries have been more likely to offer a constructive response to Washington’s requests.
Other countries, especially European ones, are not rolling back measures in favor of national firms and on top of that they are resorting to crypto-protectionist measures. Italy, Germany and Japan, in this order, historic members of the G7 forum, lead the G20 ranking in terms of number of trade distortions introduced this year compared to the same period last year.
Germany and Italy, in this order, also top the list of European countries with the largest trade surplus with the US. According to Eurostat, Eurozone’s trade balance went from a €62 billion deficit in 2008 to a €227 billion surplus in 2016 outside the Euro area. Last year the US were the leading trading partner for extra Eurozone trade and remained so in 2016 (Figure 2). In 2016, the United States accounted for 13.6 % of the Eurozone members’ export, the United Kingdom for 13.4%. China instead was the most important trading partner for Eurozone imports in 2016 (13,8% of total Euro area imports), the United States was the second most important partner with 10.2%.
When it comes to member states’ trade relations with Washington, Germany is the European country with the biggest trade surplus towards the United States: in 2016 the value of goods that Berlin exported towards the US exceeded the value of goods it imported from the same country by €63 billion. Italy is a distant second with a €23 billion surplus towards the US, followed by Ireland with a €19.8 billion surplus.
In a German-led economy, Europe’s trade surplus towards the US - as noted by the Italian analyst Carlo Bastasin – will become even more visible in a medium-term perspective. According to the International Monetary Fund (IMF) forecasts, the US current account deficit will not go away in the next years; while China’s current account surplus is already contracting, Europe’s one will increase mainly due to the German export powerhouse.
In short, in the first half of 2017 Germany is holding (and improving) two records that might transform the country into a regular target of the Trump administration. On one hand, Berlin posts Europe’s largest current-account surplus towards the US (and the second largest in the world), a fact that president Trump did not fail to underline in private conversations, even with abrupt manners.
On the other hand, Berlin, together with Rome, enjoys the G20 lead when it comes to new protectionist measures against the US compared to 2016. Therefore Germany and Italy are challenging two main tenants of Trump’s rhetoric in the international economy debate: the idea that overcoming trade deficit is important for the US to regain a true world economic power status, and the request to other countries to open their markets to US exports.
How is the US reacting to this? Until now, it has retaliated mainly with harsh rhetoric. President Trump recently used Twitter to accuse the E.U. of being “very protectionist with the US”, therefore asking to “STOP!”. And US Secretary of Commerce, Wilbur Ross, has publicly recalled that EU tariffs are higher than those of the US in 17 of the 22 major categories of goods.
On a diplomatic level, on top of the G20 infighting that we have already seen, the Trump administration has revived the special relationship with the United Kingdom even on trade subjects. When the US president says he expects a trade deal with the UK to be completed “very, very quickly”, he means that London could theoretically jump the queue and strike a free trade deal with the US before it brokers one with Brussels.
Still on a diplomatic level, Mr. Ross has made clear the US administration will use “every available tool to counter the protectionism of those who pledge allegiance to free trade while violating its core principles”; and consistent with WTO rules, “the US has since Jan. 20 brought 54 trade-remedy actions—antidumping and countervailing duty investigations—compared with 40 brought during the same period last year”.
If China has been the main target of these trade-remedy actions until now, the new US Trade Representative is already officially monitoring Europe on three different issues: 1) the fact that the European Union promotes adoption of European regional standards by foreign governments in markets worldwide, often forcing US producers to choose between the costly redesigning or reconfiguring of products to the European standard, supplying markets from EU manufacturing operations, or exiting the market; 2) the US administration is also considering to reinstate trade action against the EU when it comes to meat and meat products; 3) subsidies to Airbus, that are regarded as WTO-inconsistent, are also being challenged.
It is true that such conflicting trade policies between Washington and Berlin are not completely new. In 2016, after years of Obama administration's moral suasion, US Treasury placed Germany on a currency watch list, warning that the country faced extra scrutiny and potential retaliation by Washington as a result of concerns over currency manipulation and growing imbalances in its trade relationship with the US.
A controversy that is not unrelated, among other things, to the decision to scrap the Transatlantic Trade and Investment Partnership (TTIP) talks by both sides of the Atlantic. But now with the Trump administration, chances of a full-fledged clash are even higher. Trump’s own diplomatic style surely plays a role in this, although we should also not forget his more explicit trade policy. For both reasons, “President Trump is to trade relations what Uber is to licensed taxis – as written by the aforementioned Evenett and Frits – a disruptive, brash force against which rules and conventional practices pale”.
Tensions are already rising, as proven by the words uttered in July by Germany’s Economy Minister, Brigitte Zypries, who evoked the possibility of a trade war with the US after the US Congress passed sanctions on Russia, which are likely to hit some major European companies.
According to Germany’s Foreign Minister Sigmar Gabriel, the new sanctions against Russia that Trump signed into law on August 2 are “more than problematic”: “The draft law makes clear that they’re pursuing economic interests and we think that’s not acceptable”.
These are just the most recent hints of why America’s and Germany’s economic and trade approaches are on a collision course, with Italy risking to be on the German side of the fence due to some structural features of its economy and not because of a committed choice about its geopolitical future.
 “G20 Leaders’ Declaration”, Hamburg, 7/8 July 2017 (https://www.g20.org/Content/EN/_Anlagen/G20/G20-leaders-declaration.pdf?__blob=publicationFile&v=11)
 “100 Plus Days of Trade Policy: A Review of Key Administration Actions”, by Cathleen Cimino-Isaacs, Peterson Institute for International Economics (https://piie.com/blogs/trade-investment-policy-watch/100-plus-days-trade-policy-review-key-administration-actions)
 Carlo Bastasin, “Commercio, crescita e protezionismo. Suggerimenti all’Europa per non scontrarsi con Trump”, Luiss Open (http://www.luiss.it/news/2017/06/22/luiss-open-commercio-crescita-e-protezionismo)
 “The Germans are bad, really bad. Look at the millions of cars they sell in the US. It’s terrible”, President Donald Trump allegedly said during a meeting with European Union officials in Brussels (https://www.washingtonpost.com/world/trumps-alleged-slight-against-germans-generates-confusion-backlash/2017/05/26/0325255a-4219-11e7-b29f-f40ffced2ddb_story.html?utm_term=.6f190668cc0e)
 “Working on major Trade Deal with the United Kingdom. Could be very big & exciting. JOBS! The E.U. is very protectionist with the U.S. STOP!”, President Donald Trump’s Twitter account, 25/07/2017
 “USTR Enforcement Priorities”, July 2017, (https://ustr.gov/sites/default/files/files/reports/2017/USTR%20Enforcement%20Priorities%20Report%20%28to%20Cmtes%29.pdf)
 “Deutschland warnt USA vor Handelskrieg”, Handeslblatt, 27/07/2017
 “New U.S. sanctions are more than problematic: German minister”, Reuters, 04/08/2017