Free Trade Europe’s Moment

Europe should step up and challenge Donald Trump's protectionism, argues Dennis Snower, president of the Kiel Institute for the World Economy.
Quelle: dpa
Angela Merkel's Germany must combat the tilt toward protectionism.
(Source: dpa)

The trans-Pacific free trade agreement TPP has been canceled, and punitive tariffs on goods manufactured abroad have been announced; U.S. President Donald Trump means business with his trade policy turnaround.

He understands that many Americans feel powerless. To them the American Dream - you can achieve anything if you work hard enough for it - is no longer true.

Yet President Trump's protectionism is doomed to fail.

The new U.S. government supports the mercantilist theory that goods and services are produced either in the United States or in other countries - and that the prices of foreign products are increased by tariffs, which in turn raises the demand for American products.

But today, most products in the Western world comprise many intermediary goods and services that are produced across multiple countries. Modern chains of production know no borders. Trade barriers act like a wall built inside a factory. They will damage the U.S. economy just like all the others.

Mr. Trump makes a second grave trade policy error: It is not globalization that is ruining the job prospects of many Americans. On the contrary, the United States is among the countries which benefit most from globalization. Jobs in the low-wage sector have certainly been lost to countries such as Mexico and China.

But the U.S. economy's global interdependency has created more high-grade domestic jobs in return. A study by the Bertelsmann Foundation estimates U.S. profits from globalization to be €154.8 billion ($167 billion) per year. By comparison, that figure is €103 billion in China and €11.4 billion in Mexico.

President Trump's protectionism is doomed to fail.

In fact, job security is under more pressure from digitization. For every American low-wage job lost to the Chinese, almost seven jobs are replaced by robots. If the state really wants to do something for workers in the United States then it should promote education, training and retraining with an active labor market policy. When it comes to preparing workers for changes in the working environment, the United States lags far behind other OECD nations.

On the other hand, trade barriers will force up the prices of foreign goods, which will hurt American consumers in particular. They will pay more for consumer goods while their living standards drop. In the medium and long term, this policy will cost jobs rather than create new ones.

Mr. Trump's policy will provoke a trade war, which would be felt by all. China, Europe and other world regions will not stand idly by while the U.S. economy is being promoted at their expense. The focus here will be on China and Europe in particular with their trade surpluses.

There are negative historical precedents. In 1930 the U.S. government, in reaction to the stock market crash, wanted to prevent the collapse of the real economy, so it passed the Smoot-Hawley Act. Tariffs on more than 20,000 products increased significantly. What followed was a trade war, particularly with Great Britain, France and Germany. As a result, global exports decreased in value by 60 per cent in three years. This did not help the U.S. economy, which did not recover until later thanks to high government spending as part of the so-called "New Deal" and as a result of the armaments boom during World War II.

What can Europe and specifically Germany do? They must oppose and find a viable alternative to Mr. Trump's narrative, whereby scapegoats are predominantly to be found in “other” countries. In this respect Europe can use its many positive examples to advertize the merits of an open society and open markets in conjunction with a social market economy. It will be crucial for more people to share in the profits of global trade. Their qualifications and cultural openness to a globally connected and digitized world should be promoted. They must feel capable of shaping their own future again in this changed world.

Germany's responsibility is growing as a credible proponent of policies based on sustainability and long-term stability. With this year's G20 presidency, the Federal Republic of Germany has a great opportunity to tout the importance of global cooperation. If it fulfills this role confidently, Germany can become an influential interlocutor of the Trump regime - and thus hopefully avoid many a wrong turning.

 

To contact the author: [email protected]