Berlin may be hoping that President Trump didn’t read the Wall Street Journal this weekend—because if he did, he might conclude that the greatest threat to U.S. trade interests comes not from China but from Germany:
China bears the brunt of U.S. anger over unfair trade, but Germany’s foreign surpluses are now far larger and may be more consequential for America’s economy and the rest of the world.
Low-wage Chinese workers have put downward pressure on U.S. manufacturing wages for years, but Germany’s industries compete more directly with U.S. industries.
Nine of Germany’s 10 top export categories, such as machinery and electronic equipment, are the same as the U.S.’s top-10 exports, says Caroline Freund at the Peterson Institute for International Economics.
The weak euro—which has lost around a quarter of its value against the dollar over the last three years—gives German companies an extra edge in international markets.
The WSJ makes the important point that Germany is abusing the world trade system in a way that China and Mexico are not. Whatever may have been the case in the past, China is not depending on an undervalued renminbi to prop up its exports; if anything, China is worried that its currency will fall too low. And globally, Mexico is running a trade deficit—though like most countries, it has a surplus with the United States. By contrast, Germany’s policies in Europe contribute to a massive undervaluing of the euro, and German exporters are therefore able to enjoy huge international sales that, without the currency distortion, they could not achieve.
The core problem here is that Germany is more deeply rooted in the old blue model system—a stable national economy in which mass manufacturing and clerical jobs undergird a system of safe, lifetime employment—than even some of its European neighbors. German culture strongly values stability, social justice, and adherence to the rules of the system. German politicians fear that an upheaval in the economy, like the transformations that have shaken the political order in the English-speaking world and Southern Europe, would unleash a new wave of German nationalist populism with dire consequences. A German Le Pen or a German Trump terrifies the German establishment as much as the prospect would terrify some of Germany’s smaller neighbors.
The euro crisis and the subsequent lost decade of growth in Club Med and weaker European economies was good for Germany. The troubles of countries like Italy, Spain, and Greece kept the value of the euro low, boosting German exports. Meanwhile, the weakness of their economies and banking sectors meant that lenders were willing to accept extremely low yields on corporate and government debt in Germany even as bank capital almost dried up in the south. Cheap capital and easy exports: this combination has insulated the Germans from the transformative pressures reshaping the social order in much of the world.
The cost has been high, but so far it is more political than economic, at least for the Germans. The European Union has been weakened and Germany’s popularity has collapsed. Europe is a weaker entity than it was in 2007, but Germany is a stronger country.
The German establishment has a hard time understanding this. It continues to see itself as a model of pro-European policy, unfairly beset by ingrates like France and cheats like Greece. It perceives its battle against Russian revisionism as one of values, with Germany standing up for the rule of law and human rights against Russia’s piratical authoritarianism and ruthless lawbreaking. It compares its own sane and moderate policies (as it sees them) with the irresponsibility of U.S. policy, especially but not only in the Trump Era.
There is some truth in these perceptions, but not the whole truth. The German establishment is not really aware of how ruthlessly, if unconsciously, nationalist German policy has actually become. Germany’s vision of the future of Eastern Europe, in which it passes from an era of Russian dominance to an era of integration into a German-dominated European order, isn’t just a vision of the rule of law spreading eastward. It is also, and especially from Russia’s point of view, a shift in power—in which Russia abandons its attempt to recover the power lost with the breakup of the Soviet Union and Germany consolidates its position as the leading state of Europe from the Urals to the Atlantic.
In the same way, Germany’s European policy, which many Germans sincerely believe is motivated by their country’s unswerving commitment to a post-nationalist Europe, is much more nationalist than Germans think. Germans unhesitatingly bailed out East Germany to the tune of a trillion or more dollars (for a country of 17 million people), but no German politician could propose similar generosity toward Italy, Greece, or Spain. Germany, despite its self-image, is still a nation, and the Germans feel a responsibility to other Germans that they do not feel to other EU members.
This is not evil and it is not fascist, but many Germans don’t understand that. Fearing that nationalism is evil and destructive, many Germans pretend to themselves that they are no longer actuated by such motives, even while their behavior reflects the continuing power of German nationalism in the hearts of the German people.
The result is something worse than what a frank avowal of German pursuit of German interests would bring. Unwilling to acknowledge that it pursues a ruthlessly mercantilist trade policy and that it has sacrificed European solidarity to preserve German political harmony at home, Germany has become less an upholder of Western order than a problem for the West. Yet it is hard for Germans to recognize, much less to deal with, this painful reality—and it is difficult for Germany’s neighbors and partners to engage Germany productively when its political class is operating in a fantasyland.
The other European countries no longer have the power to force Germany to rethink its European policy. France can hope to influence Berlin, but there is no prospect currently that a coalition of European powers would impose a new European policy direction on Berlin. With Brexit, the best realistic hope of an EU solution to the new German question disappears.
The prospect for change comes from outside Europe. Putin’s Russia is actively working to destabilize Germany’s Europe, and Erdogan’s Turkey shares in this ambition. The U.S. attitude is more complicated.
On the one hand, Americans share Germany’s desire to see a European Union that is free of outside influence, at peace with itself, and committed to participating in an open capitalist system worldwide. That has been the basis of the U.S.-German relationship since 1990, and it was the basis on which the George H.W. Bush Administration promoted German unification against the wishes of Russia, Britain, and France. It is why the Americans worked with Germany and others to expand NATO and the European Union.
For most Americans in the foreign policy establishment, the basis for U.S.-German relations remains sound. But the Trump Administration, among others, is ready to ask some hard questions. If the U.S. perspective on Germany changes, and Germany is no longer seen as a loyal pillar of the West upholding the principles of liberal order, but as a reckless and mercantilist power that undermines Europe and damages the U.S. economy in a blind quest for stability, how solid is the basis of the U.S.-German relationship then? In the new round of competition between Germany and Russia to control the future of Eastern Europe, where do America’s interests lie?
Stories like this one in the Wall Street Journal will deepen the already evident skepticism in the Trumpiverse about the German alliance. Meeting its NATO obligation and addressing its trade surplus with the United States would go a long way toward creating the basis for a renewal of the U.S. commitment to the alliance with Germany. But both of those steps threaten German social peace at home. Will Germany cut social spending to raise spending on defense? Will it accept a loss of the exports that keep German workers employed in high-wage jobs? And will it do all this to win the favor of Donald Trump, a man who is hated and despised by the entire German establishment and much of the population at large?
The Trump Administration’s foreign policy intentions, so far as they have become clear, are to strengthen traditional U.S. alliances in the Middle East and Asia, but put our European alliance system into question. It is too early to forecast what the result will be, but Germany needs to understand that high trade-deficit numbers trigger the Trump Administration. Germany’s current course, however popular it is domestically, looks unsustainable. If Russia, Turkey, and the United States are united in opposition to the German project (though not for the same reasons or with the same priorities), and if much of the EU is increasingly sullen under German leadership, the system will sooner or later come up against challenges it cannot surmount.
Germany has rarely needed proactive, forward-looking leadership more; the status quo, while comfortable, cannot last, and the longer Germany delays a change of course, the more wrenching it will be, and the higher the price that will have to be paid for it.