Is A US-German Trade War Imminent?

In the aftermath of the stunning statement by Trump’s top trade advisor, Peter Navarro, who indirectly warned that a currency, and therefore, trade war with Europe may be imminent after he told the FT what everyone else knows but is unwilling to admit, namely that Germany is using a “grossly undervalued” euro to which was like an “implicit Deutsche Mark” whose low valuation gave Germany “an advantage over its main partners”, analysts are asking if this is the precursor to a third front in Trump’s currency wars, which most recently included China and Mexico.

While one look at the rising European currency reserves driven by the soaring current account surplus, mostly out of Germany, suggests that Navarro’s allegation that Germany is a currency manipulator does have some validity. But isolating the problem is only the first step: a full-blown trade war with Europe, or Germany, would have profound consequences not just for the two counterparts, but the rest of the world.

Here are some further thoughts on this red hot topic, courtesy of SMI.

Is a U.S.-German Trade War Looming?

U.S. President Donald Trump’s policies have begun to take shape, and Germany’s strategy for reacting to them has already been made clear. Germany has long considered a strong alliance with the United States to be a cornerstone of its foreign policy, and it will do everything it can to protect that partnership. However, Germany will also take steps to protect its massive current account surplus — now the largest in the world — from becoming the next target of punitive trade measures.

Over the past five years, Germany’s current account surplus (a figure that includes the country’s trade balance) has almost doubled, reaching 256.1 billion euros ($274 billion) in 2015. Trump has accused Germany of not doing enough to increase its imports while having such a sizable trade surplus, and in October, the U.S. Treasury Department listed Germany as a country to watch because of its current account surplus. Germany’s own euro zone peers have accused it of encouraging saving over consumption, slowing the currency area’s recovery in the process.