Trump's Trade Deal With The EU Is Hardly A Breakthrough

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Posted: Aug 13, 2018 10:53 AM
Trump's Trade Deal With The EU Is Hardly A Breakthrough

President Donald Trump is out on the hustings telling voters he is accomplishing great things. The economy is growing faster and creating more jobs but the deals with North Korea and the European Union he touts don’t ring true.

The Chinese and Russians are apparently helping North Korea evade sanctions and it has not slowed its missile program. U.S.-EU trade relations dodged a full blown trade war with the recent agreement to negotiate lower barriers to commerce on many industrial, agricultural and energy products but it is doubtful those talks will radically reduce the overall U.S. trade deficit.

European Commission President Jean-Claude Juncker did promise to take more natural gas and soybeans but Russian piped natural gas is simply a lot cheaper in Europe than U.S. LNG. Juncker can’t arm-twist his members to make bad commercial decisions.

Soybeans are a fungible commodity on global markets. With China shifting purchases toward Brazil in the wake of U.S. tariffs on metals and other products, the Europeans, who don’t grow a lot of soybeans and are looking for the best price, will naturally source more from the U.S. farmers no matter what Juncker and Trump decide.

Modern trade agreements are the product of sound economics and a sensible reflection of political realities. Governments lower tariffs and accept disciplines on subsidies, product standards, foreign investment rules and similar practices that can favor domestic suppliers over imports to create a broader international market where businesses can compete, specialize and accomplish scale efficiencies in production and R&D.

Voila, the iPhone designed in America but assembled in China from components and software from across Asia, America and elsewhere. The internet and Windows platform provide a global framework for the inexpensive exchange of ideas and deal making.

Jobs get rearranged, and jobs are votes. Consequently, the multitude of World Trade Organization, EU, North American Free Trade Agreement, and other trade and investment agreements were crafted with the express intent of creating a balance of benefits. American frustration stems from the increased trade deficits that came after China was admitted into the WTO and with Mexico after NAFTA.

China has not become more open and instead imposes egregious conditions on foreign firms seeking to enter its markets, strong arms or outright steals technology. Instead of being illegal, industrial espionage is virtually a state-sponsored industry.

But the specific problem with U.S.-EU relations is that mercantilism is not an Asian specialty. Germany and several other Northern European nations have purposefully engineered huge trade surpluses inside the EU and with the rest of the world.

Germany has a current-account surplus (the broadest measure of a nation’s trade account) exceeding 8% of gross domestic product. That drives huge imbalances with Italy and other Southern European nations, and it significantly instigated the dissatisfaction that elected a euroskeptic populist government in Italy and begot Brexit.

Long ago, the EU ceased to be about building an open internal market. The common currency has become a mechanism for German domination through trade with its southern neighbors.

The Brussels rule-making bureaucracy has become a French Frankenstein that seeks to regulate every business decision. It imposes huge fines on American companies for business practices considered benign elsewhere—witness the $5 billion penalty assessed on Google GOOG, +0.76%  for providing the Android operating system based on an advertising business model.

U.S. negotiators are naïve to expect that a deal with the EU to further reduce tariff and nontariff barriers would radically redress the $150 billion trade deficit with Europe.

Without breaking up the euro EURUSD, +0.1139%   and German economic policies that require the common currency to be weak against the dollarBUXX, +0.22%  to prop up troubled southern EU economies, and without curbing the regulatory terrorism of the politically unaccountable Brussels bureaucracy, no deal with the EU will be worth much more than the 2001 WTO accession agreement with China.

What the EU is offering is disingenuous. It’s too limited and merely an obfuscation engineered by the Brussels bureaucracy to boot trans-Atlantic trade problems to the next U.S. administration.

U.S.-EU trade relations may have been saved from the calamity of a trade war but they are hardly headed for better days — unless you speak German.

This article originally appeared on MarketWatch.