Donald Trump has been persistent and dogged in his pursuit of countries that run large trade surpluses with the US. After taking a tough line against China and Mexico, the US president is turning his attention to the EU: tariffs may now be imposed on $11bn of EU imports in retaliation for Airbus subsides. The US administration has threatened to classify Germany as a national security threat, with possible tariffs of 25% on auto imports. The markets will have learnt, this time, that trade fights can be countered by a more sympathetic monetary policy. A US – EU trade spat matters, but it need not derail the rise in global equities.
The timing of the trade fight with China was auspicious: a clampdown on shadow bank lending was already taking its toll on the Chinese economy. The tariffs amplified China’s slowdown, and Xi Jinping was forced to backtrack. Made in China 2025 is not being touted quite so openly today.
Now would be a good moment for the US president to escalate his fight with Brussels. He will have leverage. German manufacturers are struggling. The dependency on exports – running a large trade surplus – has left Germany vulnerable. The Eurozone’s largest economy has a disproportionate exposure to low-value manufacturing. The strong jobs data seen recently in the US, the UK and Japan, for example, has been driven by a global shift towards high-value tech services, where Germany has lagged.
The pressure on Germany to restructure does open up ‘space’ for other Eurozone countries. Some are well placed to take advantage of Germany’s stumble, namely the Netherlands, Portugal and Ireland. Spain and Greece are creating more jobs in high-tech services too, but in both cases, construction is making a big contribution to jobs growth. With the S&P 500 likely to hit new highs this year, the pressure on German manufacturers should not preclude a further decline in yields for non-core Eurozone countries.
