The potential impact and effect of Trump's tariffs: Commentary by FEPS Policy Analyst on Economy Anna Kolesnichenko

[Celerity]

https://tinyurl.com/4u2asc32

As the European Union is digesting the shock of Trump tariffs and preparing its response, it is worth taking a look at the bigger picture of what is happening. This may help the EU come up with proper policy responses.

The trade shock will clearly be disruptive for European exporting industries and may cause contraction in production. However, there is a silver lining to this story that may turn to be a major boon. It is well known that the trade regime that we had so far has produced many distortions in the global economy: some countries are running massive current account surpluses (China and Germany), others (notably US) are in current account deficit. This means de-industrialization in the deficit countries and overcapacity in exporting countries. Trump is correctly concerned about this. His method, however, is sub-optimal, to put it mildly. A much better solution would be capital controls on financial flows to the US, which would cause also rebalancing of trade. However, it is difficult to see any US administration doing that, as this would undermine the “exorbitant privilege" of the dollar as reserve currency.

With US markets less accessible for the European producers, the main solution for the EU will be to stimulate the internal demand. The reason why the trade imbalances emerged in the first place is highly unequal distribution of income and wealth. Workers in Germany have been consistently underpaid for what they produced over last decades, while business owners accumulated massive wealth. Due to wage repression, complemented by fiscal austerity, internal demand in Germany was very weak, not enough to digest the goods produced by the German industry. German (and other European) businesses offloaded their excess production elsewhere (US, China) and reinvested their profits abroad. In the meantime, German and other European workers got no upside from this lucrative trade. All in all, the trade regime we had so far did not benefit workers and led to a continuous growth of inequality.

European response to Trump tariffs, beyond trade defense measures, should be stronger government spending and investments and better remuneration of workers, so that they can afford to buy what they produce. The recent monumental shift in Germany in favor of investments is very helpful. There are many more other things that can be done: more differentiated ECB policy to stimulate investments, moving closer to fiscal union, advancing employee ownership of enterprises so that they can benefit from the upside, stimulation of local economies, etc. The current trade shock way well turn into a great motivator for long overdue policies.

[Dave Bowman]

1. These stupid tarrifs are catastrophic. And the idiot finds it brilliant.

[Celerity]

2. She is talking about how the EU can respond in internally positive ways, she never said Trump's tariffs were 'brilliant'

[Dave Bowman]

3. Trump believes his tarrifs are brilliant. I wasn't talking about her.