President Donald Trump, miffed that German chancellor Angela Merkel proved as immune to his modest charms as to his attempts at bullying, has moved the U.S. trade deficit with Germany to the top of his rhetorical agenda — at least for five minutes, until the next shiny object comes into his line of sight.
The United States does run a trade deficit with Germany, about one third of which comes from the sales of vehicles — Americans love German cars, for good reason: German cars are really good. People around the world like German cars for the same reason they like Swiss watches, Japanese electronics, and American aircraft.
But trade imbalances aren’t only, or even primarily, about consumers’ preferences: They are driven by investors’ preferences. This basic economic fact rarely enters the Washington discourse about international trade, but it is fundamental to understanding what is actually going on in U.S. economic relations with Germany, Europe, and the world. One of the many downsides of the president’s being advised on trade by fools and cranks like Peter Navarro is that there is no one around to explain the basics to him.
Say you are a big muckety-muck at Mercedes-Benz, and, after ruthlessly exploiting those poor, underpaid, marginalized, defenseless German automotive workers, you sell an SUV to some feckless American consumer who doesn’t understand that what he really wants is a $45,000 Buick Enclave instead of a $45,000 Mercedes GLC. What do you do with that $45,000 dollars?
Or you could take that $45,000 (and a bunch more money made the same way) and invest it in the United States.
If you are Mercedes, investing in the United States makes a lot of sense. Mercedes sells a lot of its SUVs in the United States, because Americans love SUVs. Mercedes could build them in Stuttgart and put them on boats, but instead it builds them in Alabama and puts them on trains and trailers, which turns out to be more efficient. Mercedes also sells a lot of its relatively inexpensive C-Class cars in the United States, and it builds those in Alabama, too. But if Mercedes puts $45,000 into a factory in Alabama, then that $45,000 is not available to use to buy American-made consumer goods. And so it adds $45,000 to the U.S. trade deficit with Germany, which is the flip side of a U.S. capital surplus with Germany.
If you are Mercedes, investing in the United States makes a lot of sense. Mercedes sells a lot of its SUVs in the United States, because Americans love SUVs.
If you like those good factory jobs — Mercedes in Alabama, Nissan in Tennessee, Toyota in Texas (because where else are you going to build pickups, really?), Honda in Ohio — then you like trade deficits, because those trade deficits are synonymous with the capital surpluses that make those investments possible. Honda is an awesome company that is building its awesome NSX with awesome U.S. autoworkers to sell in the U.S. market, from which it hopes to derive some awesome profits — which you, and anybody else, can get a piece of by buying Honda stock. There isn’t really a downside here, unless you’re trying to sell Audi R8s or Nissan GT-Rs to American buyers.
It’s the same thing where the United States has trade surpluses. We run a $25 billion trade surplus with the Netherlands, not because Americans don’t like Unilever personal-hygiene products (seriously — Americans do not hate Axe body spray) or Schlumberger drilling gear or sundry other Dutch treats (Heineken’s worldwide sales are approximately the same size as the U.S. trade surplus with the Netherlands) but because the United States invests just about $25 billion a year — where have you seen that number before? — in Dutch businesses, mainly in finance and insurance, but also in pharmaceuticals and manufacturing. The Dutch are okay with this, because overseas investment, driven in no small part by U.S. companies such as Tesla and Oracle, created about 9,300 jobs (for a population of only 17 million) in 2015, and foreign companies invested at record levels in 2016. The Netherlands, with its business-friendly tax and trade policies, high-performing work force, sophisticated financial sector, and proximity to big European markets is a great place to do business. The next time one of your progressive friends starts lecturing you about how the United States should be more like Northern Europe, ask them what the top corporate-tax rate in the Netherlands is.
Picking a fight with the Germans over automotive trade is one of the single dumbest ideas to come out of an administration that churns out economic illiteracy the way the hard-working men in Tuscaloosa roll out Mercedes SUVs. Trump understands why Americans like Mercedes, in no small part because he’s an American who likes Mercedes — you think he was driving a Buick before he decided to run for office? Maybe somebody could explain to him the value of having Mercedes invest in the United States as well as sell cars here.
— Kevin D. Williamson is National Review’s roving correspondent.