The trade war is definitely on, no matter how Wall Street wants to deny it. Serious investors have downplayed recent events as part of a grand strategy, a negotiating tool that will all work out in the end. The reality, that there isn’t really a good strategy in place here but simply petty tactics, has not sunk in yet, at least in America. But the rest of the world knows better.
For the purposes of this discussion, the European Union will be diminished to Germany. After all, this is the economic engine that powers the continent right now, and Merkel’s leadership is critical. Where is Germany going? The long and short of it, the strategic and the tactical, is to the east. This response is proof enough that there is no US strategy which makes any sense.
Two boring technocrats who together make for an exciting time. Seriously.
The relationship between Germany and China has been strengthening for at least a decade. As a trading partner, China accounts for $170 billion of the $2.2 trillion in German trade, higher than the $165 billion in US trade. Chinese companies have been investing in Germany while the German presence in China grows dramatically.
The trade war is taking on the characteristics of the US against the world, which is to say that everyone has an interest in standing up to the US together. China is obviously the larger target in this dispute, which gives us the first and most immediate reason why Germany and China need to stay together: China is a great distraction for the US. As long as we are focused on issues with China, there is little time to worry about something as small as Germany.
It’s in Germany’s interests to encourage China to stand firm. A good way to do that is to provide a strong alternative by presenting greater access to the similar-sized EU economy.
China is moving higher tech and higher value added all the time.
But the relationship is not at all tactical, it’s for the long haul. That’s where the US hand is much weaker than the sheer volume of trade with China would suggest. American exports to China, like our imports, are heavily skewed to cheap, bulk items. We send them tons of soybeans, they send us a lot of plastic stuff. The value added is small and the number of jobs provided is equally paltry.
China, as a nation with an industrial policy, wants to move into higher value added technology based items, and it is doing so rapidly.
German engineering is without parallel in many key areas, particularly mechanical and systems engineering. China has a strong base in electronics and now heavy industry. They are a perfect match for each other and both sides know it. They each have what the other needs. In terms of markets, German has entry to a wealthy, developed market and China is just plain huge and developing.
In strategic terms, Germany and China have a lot to gain from each other for the long haul.
Where are all those containers going?
This is the main reason why the trade war, fought broadly around the world, is particularly stupid. If we had a war like this with China only it would be easy to justify and we would hold a far stronger hand. There are serious problems with Chinese protection of intellectual property and their currency is indeed undervalued by as much as 40%. Both of these are highly technical and systemic problems that are best solved without a trade war, but additional pressure could make them more urgent and force greater cooperation towards solving them.
The lack of such an effort shows that the US is not being strategic, but simply lashing out for a quick tactical advantage. The global nature of the trade war drives this point home.
How will the trade war go now that it is fully engaged? Badly. This can’t go well at all. At stake are 11 million US jobs tied to export, and they are all at risk. Importation of talent and capital is likely to dry up once the reality of this sinks in. When the rest of the developed world has to choose between the US and China the choice will gradually become more and more obvious – it has to be China.
We can’t win this war, at least not the way it is being fought. The growing industrial relationship between Germany and China shows exactly why.
Barataria - The work of Erik Hare 
All good points, we are screwed.
Reblogged this on Filosofa's Word and commented:
Donald Trump has started a full-blown trade war with his tariffs on both allies and others. He claims that “a trade war is easy to win”, but nothing could be further from the truth, and frankly Trump’s simplistic view is tiresome and dangerous. I have a good grasp of what the short-term effects of this trade war are likely to have here in the U.S., but beyond that, my understanding of macro-economics is sketchy. Fellow blogger Erik Hare, on the other hand, is an economist and therefore understands far better than I what is likely to happen on the global scene. Please take a few minutes to read Erik’s assessment of the current situation. Thank you, Erik, for your keen insight and for allowing me to share this post.
A great article! Thank you for sharing your insight! Very informative!! 👍
Also Germany fears the ongoing robbery of intellectual properties by the Chinese, they are well-trained in fakes of antiques since long time, so the Chinese do not follow a new strategy overall. They want to become no. 1 and the only question is when. Greetings from Berlin!
Dear Erik,
You are so on the money but I suspect that President Trump gets this as well and that is why he attacked the German Chancellor Angela Merkel so aggressively at the NATO summit. If there is one leader that President Putin and by default, President Trump would love to dethrone is the German chancellor.
Her economy is doing great even if she is in trouble over immigration. I’m convinced that her success drives President Trump nuts.
I have been calling our US lawmakers to get them to act to stop the president’s imposition of tariffs on our neighbors and friends.
Hugs, Gronda
Erik, well done. Long term strategy is not a term I would use with the US President. To me, tariffs are a bad idea especially when placing them on allies for national security reasons. But, to bully allies and lie to and about them is even worse. The US Senate voted Tueday night by 88 to 11 to have a non-binding say over tariffs for national security. It is short of the Corker bill, but does make some statement.
In my view, this is an unforced error on the part of the President forcing countries and companies to look into other options for sales and supplies. The biggest benefactor of Trump’s efforts is China. What Germany and China are doing more of shows a path forward. When you add the Asia-Pacific deal that went on without the US after Trump bailed is an example of the world moving forward with other options.
Trump is making America alone. Keith
Love the post, Erik, and even though I don’t usually get involved in economics, as spirituality is my specialty, this world is about to change, but not the way the Declarer of Tariffs thinks it will. Meanwhile, the world needs a huge change, spiritually speaking, and this could be part of it.
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