Germany is the global leader in exports as a percentage of GDP. It stands to lose the most in a global trade war.
Germany Exports as Percentage of GDP
Eurozone Exports as Percentage of GDP
UK Exports as Percentage of GDP
China Exports as Percentage of GDP
US Exports as Percentage of GDP
Assuming a uniform 10% collapse in global trade, here are the GDP impacts.
Percentage Point Hits to GDP
- Germany: 4.724 PP
- Eurozone: 4.408 PP
- UK: 2.826 PP
- China: 1.964 PP
- US: 1.189 PP
Pain Order
The hits would not be uniform, of course, and a 10% decline may be far too much.
However, the pain order is correct.
Pain Tolerance
Pain tolerance is important.
The US’ biggest trade deficit is with China and China has the biggest pain tolerance.
The US has the least pain tolerance with elections every four years and one coming up in 2020.
Losing Less is not Winning
Losing less is not winning.
No one wins trade wars.
This is not 1960
Finally, this is not 1940, 1950, or even 1970.
Contrary to Trump’s touting, the battle isn’t about NAFTA or the WTO.
Unwinnable Trade War
China’s inclusion into the WTO exacerbated the trade problems but did not cause them.
The roots of this crisis stem from Nixon closing the gold window in 1971.
Even if the US had a higher pain tolerance, the US cannot possibly win a trade war.
For discussion, please see Trump’s Unwinnable Trade War: Gold Explains Why
Mike “Mish” Shedlock
I think the Q3 and Q4 numbers might already show the cracks of the flawed system that is the EU. Of course, ever increasing GDP numbers isn’t a sustainable metric either, just like printing money out of thin air isn’t a sustainable or justifiable policy.
Looking at the German export share, it amazes me that I can buy cheap German household products that compete with Chinese ones. The doofuses just can’t let go of cheap, low value added industries, while always clamoring for more immigrant cheap labor. I don’t support wholesale outsourcing a la USA, but you can’t fix this stupid.
It is a mistake to look at who is suffering most from a trade war to determine who the “winner” will be. Different countries are able to withstand different degrees of suffering. Worse, suffering might be used as a weapon to unify a nation against foreign aggressors making any kind of resolution to trade disputes utterly impossible.
So what if one country’s economy is impacted more negatively than another’s in a trade war? That is meaningless when it comes to determining which nation will blink first and agree to the other nation’s trading terms. The receptivity to trade negotiations is FAR more complex than merely an analyses of GDP impact.
Worse, if the “suffering” manages to push one or more countries into a war, what good does that accomplish?
It was never about winning. It’s a distraction from criminal activity.
Mish: European countries biggest export destination is within europe. So the high export to gdp ratio does not correspond to a higher vulnerability
Spot On. Furthermore, much of the trade inside the EU can be described as vendor financing. Northern core countries banks (think Deutsche Bank) have loaned massive amount of money to the periphery countries (think Greece).
THIS is why TPTB will move Heaven and Earth to keep EU intact. The losses incurred by Northern core banks will be catastrophic if certain countries leave / default.
The simple fact is that conservative Republican policies like closing the gold window (Nixon), ballooning the federal debt and increasing military spending (Reagan, Bush the junior, Trump) allowed the American people to maintain a relatively high standard of living even while the shareholding class moved its assets (manufacturing) overseas.
It’s sustainable as long as the dollar is the world’s reserve currency. Which will continue as long as the American military can ensure the world will pay back their loans from American banks.
More or less agree … just one quibble.
It is not Republican v Democrat.
It is Haves v Have Nots.
The Haves love to distract the masses by pitting them one another on petty partisan politics … meanwhile stealing them blind … while flying high Above The Law.
Like I just said to Country Bob…it’s all a giant fucking sideshow and there’s only the illusion of democracy. The reality is of course the plutocracy and the giant, massive inequality between the haves and havenots.
Seems impossible to balance trade when we have a $15 minimum wage and endless regulations and China is paying $2/hr with little regulations. Unless we convince all consumers made in the USA is worth 3x the price.
Germany has convinced its customers that you must pay for quality, thus surviving and thriving on successive upward re-valuations of the Dm pre the Euro.
Yet how many German made goods do you see? The vast, vast majority of goods I see on the shelves are Chinese. Given another decade or 2 or 3 and it will be the Chinese goods that will be perceived as the quality goods as China follows the same evolution as South Korea and Japan.
Its a cycle, always has been, always will be.
Last year Germany exports amounted to nearly €2trn. People see Mercedes, BMWs etc… but don’t realise that most of the things people buy are made by machines made in Germany.
This is certainly the case in my business. We have a lot of German equipment. The quality is high and the price is worth it as we have less down time.
Manufacturing equipment is usually marked by long legacy times. But even so you’ll eventually see German equipment being displaced by Chinese, because the human expertise that is developing the next wave of technology is in China today. China may still be a developing economy but you only have to look at places such as Shenzhen to see the massive potential that exists.
I agree that what you say is possible. The Germans were really in a lather about the Chinese buying German machine tool companies. The Germans have stopped this practise. But anyway, how about my point that Trump has no plan to take advantage of his policies?
I didn’t reply because I agree completely. Trump is reactionary and is probably saved from his own foolishness because people beneath him work very hard to limit the damage he causes.
To say that nobody wins a tariff war is not strictly true. In the 19th century both the US and Germany grew their manufacturing industry behind a tariff wall. This policy of protection against the British Empire was hugely successful. So much so that the British Empire went bankrupt, US prosperity soared to unheard of heights and Germany, despite being destroyed twice in one century, recovered to where they are now again an economic powerhouse. Tariff wall 2, free trade 0. The thing about the trade war which I have described was that it was about making and selling things, iron, steel, widgets, cars ships etc etc. No matter what point you choose in mankind’s history the future went to those with the technological advantage. Iron beat bronze, steel beat iron and a Martini-Henry rifle beat a leather shield and a spear. Now what is the point of Trump’s policy? Is he trying to re-balance the rentier economy that bedevils the Ango-American system? Not as far as I can see. American and German politicians had a long term plan which they followed and was successful. Trump seems to move from expedient to expedient. If you believe as I do that the future belongs to the people who produce things, whether it is humans or robots. What is Trump doing to build up the import substitutes he is going to need once the tariff war is over?
To build up the import substitutes, Trump has changed tax law to make investment cost less (direct write off of Cap X), lowered the corporate tax rate, made the return of capital to US easier and lifted burdensome regulations. The actual investments and plans will need to be in the private sector. Government is awful at the allocation of capital.
And all the money has gone in stock buy backs?
How does one win a tariff war in the age of multi national corporations who straddle national borders, have assets scattered across the globe and supply chains dependent on unfettered global trade. Its like trying to win a boxing match punching you opponent with one hand while vigorously punching yourself with the other.
I think Trump is on a hiding to nothing. The Americans and Germans looked at what the British Empire was producing, set tariffs against them and as a matter of government policy actively encouraged native US industry. As has been said many times on this site the American 1% actively embraced China and hollowed out American industry. Trumps answer is to give this 1% more money to do what? Move production to Vietnam or Indonesia? It strikes me as odd to reward those who have shown contempt for the average American. For example, why is Hwawei (sic) ahead in 5G?. What America needs is someone who is dedicated to America,who will use American knowhow and workers to build an American industry to rival the Chinese and keep the work and profits in America. ( Same criticism applies to the UK) What is not needed are people who use voodoo accounting to the detriment of the bulk of the populace.
The only mechanism to put money to work in America to build American Industry is through the free market. Changes in tax law and regulation are ways to do this. I’m not sure how you can effectively allocate capital any other way.
Not true, 19th century American and German politicians showed they could allocate resources wisely. Of course the politicians have to be wise, which means you have to have an electorate who can sort the wheat from the chaff.
I don’t have any great disagreement with your points, in fact I’m largely in agreement. But to pick up on your example of an American 5G system. Great idea, I’d be very happy to see it happen.
But nothing major happens in isolation. American 5G networks would still have to interface with Huawei routers, phones and other infrastructure. My badly made point is that putting a tariff on Huawei products would just encourage the Chinese to retaliate (that Huawei router which has always functioned flawlessly in the past suddenly develops an intermittent fault after the American 5G network is installed, funny that).
More succinctly, tariffs are two edged sword. More so in this modern, interconnected world.
We are not in a unique situation today. The period prior to the first world war was also one of Globalisation and look how that turned out. My point is that Free Trade served the British Empire badly and Protectionism has served other countries very well. It all hangs on taking advantage of Protectionism. Trump does not appear to have a sensible policy to take advantage of what he is doing.
So, “In the 19th century ………………… this policy of protection against the British Empire was hugely successful. So much so that the British Empire went bankrupt “
Where do you get this tosh from? You are aware that the 19th century was the golden age of the industrial revolution in Britain and was primarily when the Empire was built? I thought not.
Britain did come close to bankruptcy in the 20th century, but only as a result of two wars, the US turning up three years late (both times) and a punitive policy from the US about how to pay for the guns and bullets we got. Even the first of two arguable defaults had to wait until 1930 when the effect of the great depression (triggered over the water) began to bite.
In fact, Britain has never even come close to a bankruptcy without there being a war somewhere in the mix. Of course, I ignore the case of Scotland, which went completely belly up when comprehensively conned by a Frenchman who had already nearly finished off his homeland.
Even in the last two centuries trade wars were not permanently winnable and certainly not today in such an interconnected world. Until countries prioritise actual local growth over capital gains from buying stuff overseas made with cheaper labour countries with a softer, pragmatic version of the old Communist command economy will wipe the floor with economies predicated on short term profitability and share price.
As always you shoot from the hip. By WWI the British Empire was already fighting a losing battle. So much so that Germany had a superior economy and America an overwhelming superior economy. The British Empire had an inferior chemicals industry, special steels and engineering sector and by 1917 had lost its dominance in insurance to America. Of course the British Empire was bankrupt, this was one of the major reasons it disintegrated so quickly after 1945. Your Description of the 19th century as the golden age is tosh. It was a time of relative stagnation and decline. The British Empire failed to compete with innovations taking place in America especially from the 1850s on. To take one example-watches. The Empire failed to compete with companies like Waltham and Dennison. These companies used machines to mass produce watch parts and cases so that the price of watches fell and more importantly repair became easy because all spare parts were interchangeable and cheap. These companies revolutionised manufacturing so much so that watches were no longer a toy for the rich but were made available to the common man. A genuine imitation silver watch cost a dollar. This manufacturing revolution was repeated time and time again in America and Germany. The Empire in the second half of the 19th century was characterised by smug complacency and an unwarranted belief in British superiority. As the 19th century progressed both America and Germany surpassed the Empire’s economy and decline became both relative and absolute. You are right that two world wars hastened the end of the Empire but it was already in decline because it wasn’t competitive.
I think, Avidremainer is referring to the period after the German reunification of 1870. In this period Germany did developed and leapfrogged Great Britain thanks partly to selective tariffs. But tariffs didn’t do the trick alone. By the first world war, a period of Pax Britanica, Germany was playing in a different league. We have been in this before.
It is important to point out the during the rise of Germany in pre-1st war period, it was a constitutional monarchy with limited parliament, and concentrated political and economic decision making. In the US, the two party system financed by the same classes, functioned much the same.
The answer is not to go back to the “Status Quo” where American just rolled over on trade and saw its manufacturing base destroyed.
“No one wins trade wars.”
China has been in a trade war with America for the last 30 years. And they have won every year. It took Trump to actually admit we are in a trade war and, at least, start to do something about it.
China has not been in a trade war with the United States. China did not force American manufacturers to move to China. America’s shareholding class made that decision. America’s rich are at war with America’s working class. And they won. Not only did they win big, they got American’s to think someone else was at war with them.
Sadly I have to agree, but its the same all over the western world.
Correct, but nowhere more than in English speaking countries, where the middle class is under assault by both multiculturalism and outsourcing to maximize profits.
Bravo! finally somebody can so clearly expose the truth! Hope Trumptards get it!
“So what made Nixon decide to close the gold window in 1971?”
I just wrote a detailed post answering the question. Will post tomorrow some time.
I thought DeGaulle wanted to trade dollars in France for gold which would have depleted quite a bit of the US stockpile. I could be wrong, but I thought this was the major reason. Looking forward to your article. In the 1970s my mother bought Kruggerands once US citizens were allowed to buy bullion coins.
According to the Energy Department, the US was a net importer every year since at least 1950 (that is as far back as their website data goes). In 1970, the US was importing approximately 20% of its petroleum usage (more than 3mm bpd):
Nixon ended the gold window, but there were several devaluations before that. The US government was spending money faster than the US economy could supply it.
LBJ’s accounting practices would make Enron blush.
None of those reasons (Mish always fails to mention the reason why Nixon did it and it wasn’t because he just felt like it).
1970-1971 was when US oil production finally fell below consumption and the US became a net importer (which is still is today to the tune of 10 million barrels a day even with fracking). Once any country turns into a net importer of energy it will go broke fast and the US gold reserves would have been gone in a few years and the economy would have crashed VERY hard if he hadn’t (think riots over gas shortages as every one would have had to do with 1/2 the oil they actually used).
For a recent example of this, look at Egypt during the ‘Arab spring’. That’s the moment it also turned into a net importer of energy and not surprisingly their economy crashed and the Arab spring happened.
Mish — “The roots of this crisis stem from Nixon closing the gold window in 1971”
So what made Nixon decide to close the gold window in 1971?
Vietnam? LBJ’s “Great Society”? Putting a man (several) on the moon and then just dropping it after spending billions?
Too much government spending caused the dollar to lose so much value vs gold. Too much overhead made US factories and US workers noncompetitive
The swamp needs to be drained
Umm so then why isn’t the USD following now when all the things you said are massively more? Becay you’re wrong, that’s why. Get a clue: read up on MMT. The only monetary policy that actually works.