Monday, June 17, 2019
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Europe: Trade War – Lost in the dispute of the great powers

Large upheavals often have an extensive history. For a long time, changes are so slow that they are barely perceptible. The continental plates of the earth, for example, move only a few centimeters per year – invisible to the naked eye, but eventually discharge the underlying stresses in heavy quakes.

Without accurate measuring instruments, the large shifts remain unrecognized. Dislocations then come as a surprise and strike at unprepared societies.

Something similar happens in economic development at times. The currently escalating trade war between the US and China can be understood as quakes in the context of a longer development. Creeping globalization has been on the decline for years. Now it goes bang on case. Unfortunately we are poorly prepared. It will be all the more important who will be in charge in Brussels and Frankfurt during the next legislative term. (Pay attention to the EU summit on Tuesday, which could already be the subject of important personnel decisions for the European Commission and the European Central Bank). More below.

The graphic shows the ups and downs of the recent past. She highlights one of two decades of globalization. Since the Great Recession of 2009, the international integration of the economy has developed back, After the crisis, the levels of earlier years were never reached again. We have been living in a world of creeping de-globalization for a long time – the development began years before Donald Trump became US President and the trade disputes that he had caused made the headlines.

There are three questions:

  • Where does this de-globalization trend come from?
  • What's next?
  • And what does that mean for us?

A new, negative dynamic

The creeping course of globalization is primarily a consequence of structural shifts – in the real economy, in the financial sector and in politics. Stricter regulations, introduced after the financial crisis, have made it difficult for banks to lend abroad. As a result, companies can no longer easily finance their international activities, according to Hyun Song Shin of the Bank for International Settlements (BIS) (download as PDF).

In emerging markets, especially China, a period of rapid industrialization is coming to an end. Many markets are saturated. Since the 1990s, globalization has been driven by a major barter business: cheap industrial products against Western technology goods (such as German machinery and cars) and know-how. In the meantime, China and other emerging economies are so far developed that they can and want to produce more and more high-quality goods themselves. In addition, wages there are now so high that it is often no longer worthwhile for western companies to relocate production because of cost advantages.

The political dynamic has also changed. Social tensions within countries, also a consequence of globalization, have led many governments to deliberately protect and support individual industries. For example, the World Trade Organization (WTO) noted an increasing spread of protectionist measures long before Trump took office – not a trade war, but rather a strategy of targeted pinpricks. For example, the US protected its steel and aluminum industries. China subsidized overcapacity. Countries such as India and Russia have introduced import restrictions on long lists of industrial products.

Overall, only a small proportion of world trade was affected in recent years. But it was enough to create so much uncertainty that companies began to reduce their international value chains and, if in doubt, prefer to increasingly produce locally. The creeping process of de-globalization, which is visible in the graph, took its course.

Then came Trump. With a cascade of threats, ultimatums and actual tariffs, he has kept the world economy on edge since early 2018. Other states have responded with countermeasures. The result: global trade volume, which is subject to customs duties and other restrictions, has increased tenfold over the past year, as calculations by the WTO show (download as PDF). And yet the recent escalation has not yet been considered. The long downturn in globalization is accelerating rapidly.

Improvement in sight? Are you kidding me? Are you serious when you say that

Although it is still possible for Trump to engage in a deal with China, which he could sell as a major success in the beginning of the election campaign. But even then, a return to the former normalcy would not be in sight.

The focus of politics has shifted. The focus is no longer on the free exchange across all borders and the import of cheap products from all over the world, but the protection of domestic jobs and locations. Many societies have become restless and dissatisfied, as the rise of populists and nationalists shows, not least in the EU. Strategic trade and industrial policy should ensure social peace and secure positions of power.

In the US, not only Trumpists, but also many Democrats want more well-paid industrial jobs in their own country. China's leadership relies on nationalist propaganda and its "Made in China 2025" plan, which aims to upgrade its own industry technologically and increase income levels – which in turn leads to backlash in the West, see security-driven defenses against companies like Huawei.

What is becoming of Europe in this great strategic struggle?

Gaps and breakages

Like no other major economic area, the European Union trusts that globalization is somehow continuing. While economic recovery has been sluggish in much of the EU, massive export surpluses in recent years have dragged the economy out of the crisis. Many euro states are experiencing external surpluses. The eurozone as a whole has the world's highest current account surplus: more than $ 400 billion. Germany contributes the largest contribution (national surplus: around 300 billion). For comparison: China's current account is, contrary to Trump's rhetoric, long since balanced.

We have a problem. The eurozone, the core of the EU, is extremely dependent on foreign demand. If this does not happen in the new era of trade conflicts, that is directly noticeable. New orders from the rest of the world have already fallen sharply. Especially for the important German capital goods sector, a slump is coming up.

The fact that the downturn is not already reflected in overall economic figures is mainly due to domestic consumption and the booming construction sector. However, that would change if China's growth slumped more than expected as the conflict worsened. Germany, and even more so the eurozone as a whole, would then, according to current OECD calculations, lose almost as much as the directly involved USA.

What to do? What to do!

Europe, it looks like, will have to master the next crisis on its own. For the last time, after 2009, export surpluses were the detour by which the euro countries were able to stabilize their depressed domestic economy. It will not be that easy anymore in the new world disorder.

The next Brussels management team in the Commission, Parliament and Council should therefore do their utmost to secure the eurozone – and thus the EU as a whole – at the inside to stabilize. There will be an opportunity in the negotiations on the EU budget, which will enter the hot phase as soon as Brussels has regrouped after the election.

The EU needs a forward-looking research policy, not an industrial policy that conserves traditional structures; various extremely export-intensive sectors will have to shrink anyway in the era of de-globalization.

In turn, the eurozone needs additional shock absorbers to cushion crises in individual Member States. And it requires instruments that can effectively counteract chronic imbalances in the euro area: the investment gap between southern and northern Europe has long threatened the structural design of the entire structure. Many measures are conceivable: structural reforms of individual countries in order to become more attractive to investors; additional infrastructure and education projects financed by the Community funds; a common banking hedge within the Eurozone, to protect the economy from possible bankruptcies of individual member states – preferably a combination of all.

For, despite all the breakages and contradictions in the EU, one thing is clear: the vast majority of Europeans would like to continue in the future to create a borderless area in which citizens and goods can move freely, with a common currency and a uniform foreign trade policy; This can be read from the Eurobarometer surveys.

At least there is a broad consensus: Citizens want to preserve what Europe is today – especially in the face of trade wars and superpower policies. The next Brussels management team should at least deliver this – whatever it takes.

The most important economic dates of the upcoming week


Brussels / Berlin – Federlesen – The day after the European elections and the Bremen election, the political camps are formed.

Vienna – Short-circuit? – Austria's Chancellor faces a vote of no confidence after the Strache video affair. Should he overthrow, the country is heading for a constitutional crisis.

Brussels – Trump, Xi and us – EU Trade Ministers Meeting: Among other things, it deals with the trade conflicts with the United States.


Brussels – After Juncker, after Draghi – The election results are in, the 28 Heads of State or Government are taking stock – and trying to find a quick solution to the large personal tableau that the EU is supposed to lead in the coming years. There are a lot of important jobs to fill, including President of the European Commission and the Council, President of the European Central Bank, Head of the Eurogroup, the powerful Commission for Competition and Trade, the High Representative for External Relations and some more. If a quick package solution does not come to fruition, the dispute over the top jobs could last well into the autumn – which, to put it mildly, would be difficult in the face of the challenges (Brexit, trade war).

Nuremberg – Mood! – GfK publishes news on the consumer climate index. So far, the domestic economy has been the stable pillar of the economy.

HV season I – General Meetings of Rheinmetall, Bechtle, Waywa, Air France-KLM.


Nuremberg – Running… – New figures from the Federal Employment Agency: The trend towards ever new employment highs and unemployment low is still unbroken.

HV season II – General Meetings of Kuka and Stada.


Wiesbaden – Rising prices – The Federal Statistical Office announces the first estimate of the inflation rate in May.


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