September 5, 2018 / 11:12 AM / 2 months ago

COLUMN-Huge surplus draws Germany back into Trump's trade war line of fire: McGeever

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Jamie McGeever

LONDON, Sept 5 (Reuters) - German trade figures later this week will serve as a reminder to global economy watchers, especially the primary occupant of 1600 Pennsylvania Avenue NW, Washington, D.C., of the chasm between countries that run huge current account surpluses and deficits.

U.S. president Donald Trump last week renewed his attack on Germany and Europe for, in his view, manipulating the euro lower to boost exports and trade in their favour at the expense of U.S. companies.

“Almost as bad as China, just smaller,” Trump told Bloomberg News.

In fact, when it comes to trade surpluses vis-à-vis the United States and more broadly, Germany is bigger than China.

If that U.S.-German chasm is allowed to go unchecked and stretch further, the snapback could trigger a surge in currency market volatility - currently near historic lows - and maybe even pose a threat to global financial stability.

Euro/dollar is the world’s most liquid and important exchange rate, accounting for almost a quarter of all FX trades, or around $1 trillion a day. It is so stable precisely because it is so deep and liquid.

But there’s no guarantee it will remain an oasis of calm. Developed markets have been largely untouched by the volatility tearing through large parts of emerging markets right now, but no corner of world markets would be spared from turbulence, stress or rapid moves in the euro/dollar exchange rate.

Germany had the largest trade surplus with the United States than any other country in the first half of this year, worth some 24.4 billion euros ($28.5 billion) which contributed to a global trade surplus of 121.5 billion euros.

Germany has run a current account surplus every year since 2002, and in 2015 it reached 8.9 percent of GDP. It has narrowed slightly since, but was still 8 pct last year, well above the 6 pct average over three years that the European Commission has suggested as a general upper limit.

According to the Munich-based Ifo institute, Germany is on track to post the world’s largest current account surplus for the third year in a row this year at $299 billion. That’s 50 pct more than the next biggest surplus from Japan, which Ifo estimates at $200 billion.

It’s no surprise, then, that Trump has turned his attention back to Germany, echoing comments from his trade advisor Peter Navarro in January last year that Berlin is using a “grossly undervalued” euro to “exploit” the United States.

It’s questionable, to put it diplomatically, that Germany is somehow manipulating the euro’s exchange rate. Indeed, out of the three biggest surplus countries in the world, it is the one which exerts the least influence on its exchange rate.

China may be allowing more flexibility and two-way trading in the yuan, but it is still a tightly managed currency in a country with significant capital controls. The yuan basically goes where Beijing wants it to go.

And Japan has, by a distance, intervened in global FX markets over the past 20 years more than any other developed nation, almost always to weaken the yen or, at the very least, to prevent it from strengthening.

The three exporting powerhouses have posted current account surpluses every year since 2002, China’s first year as a World Trade Organization member and the year Germany moved out of current account deficit into surplus.

Their combined, cumulative surplus since is $8.6 trillion at current exchange rates, according to International Monetary Fund and World Bank data. That almost perfectly mirrors the cumulative U.S. deficit of $8.3 trillion over the same period.

Successive U.S. administrations have long accused Japan, China or Germany of manipulating their currencies and using other mercantile practices to give themselves a competitive edge on the global market stage.

Japan was president Ronald Regan’s bete noir in the 1980s, China was George W. Bush’s in the 2000s, while Donald Trump has turned his wrath toward Beijing and Berlin.

Since Reagan took office in 1981, the United States has posted a current account deficit every single year bar one. That was 1991, and it barely counts, as the surplus was just 0.046 pct of GDP, according to World Bank/IMF data.

Perhaps Trump’s ire at what he perceives to be America’s losses and failings on the global trade stage should be directed closer to home. (Reporting by Jamie McGeever Editing by Andrew Heavens)

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