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.
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.
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.
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.