Global

An Economic Strategy for Closer U.S.-German Cooperation


Despite the growing importance of U.S.–German cooperation to the global economy, President Trump and Angela Merkel’s recent meeting at the G20 summit in Hamburg has done little to improve the deteriorating U.S.-German relations. In order to mend this relationship, Washington and Germany must formulate a strategy to increase bilateral trade and investment and align international economic policy priorities.

Image courtesy of The White House, © 2017.

The recent G20 meeting—where heads of state from 19 countries plus the European Union convened to discuss global economic challenges—took place against a backdrop of a growing divide between the United States and Germany over economic policy. Earlier this year, President Trump accused Germany of taking advantage of a weak euro and building a large trading surplus with the United States, a position that he still maintains. Indeed, Germany’s trading surplus—at 8.5 percent of its GDP—is the largest in the world, higher even than that of China, a country that was repeatedly maligned during the 2016 U.S. presidential campaign.

Germany, on the other hand, is increasingly dismayed by what it perceives to be growing isolationism and antagonism towards Berlin on part of the United States. President Trump’s earlier criticism of Germany’s export surplus and the recent U.S. withdrawal from the Paris climate accords further worsened this misgiving, leading Angela Merkel to declare last May that Europe can no longer rely on the United States and that “Europeans must take fate into our own hands.”

The rift between the United States and Germany is worrying, especially since the United States and Germany have been close allies, including in international platforms such as the G7, G20, and NATO. To ameliorate U.S-German relations, Washington and Berlin should focus on a three-pronged strategy, aimed at addressing Germany’s export surplus, increasing bilateral trade and investment, and aligning G20 priorities.

First, given the centrality of Germany’s export surplus to the deterioration of U.S.-German relations, the two countries must prioritize this issue. Germany maintains that its trade surplus is a reflection of its sound economic management and that the country should not be punished for fiscal prudence. However, Germany must realize that its surplus comes at a time when the German economy is cyclically in a much stronger position compared to the rest of the eurozone. At a time when countries in the European periphery are being required to balance their economies, the strong German export surplus makes it all the more difficult for them to do so.

To address the export surplus, Germany would need to boost its domestic consumption and investment relative to domestic savings. To that end, Berlin has a number of options: reforming the labor market, raising wages, and undertaking public investment projects. Even if such measures are not highly effective economically in reducing the export surplus, they would be politically advantageous for Germany. An attempt to reduce the trade surplus would be viewed by the United States as an effort to placate concerns about Germany’s taking advantage of a weak Euro, paving the way for further U.S.-German cooperation in other areas.

Second, U.S. and German economic policy makers must make bilateral investment and trade top priorities. In this context, Washington would do well to remember that, while Germany has a trade surplus with the United States, Germany invests far more in the United States than the United States does in Germany. In 2015, whereas U.S. investment in Germany was worth $108 billion, German direct investment in the United States amounted to $255 billion. Such investment is an important source of U.S. jobs—currently, German companies in the United States employ about 670,000 U.S. workers.

Germany’s economic contribution is particularly strong in certain states like South Carolina, where car-maker BMW employs over 25,000 Americans. Such examples of job creation should form the basis for improving bilateral relations. Especially in a political environment marked by the Trump administration’s resentment towards undervalued euro, any perceived German effort to increase investment and create jobs for Americans would likely be received positively in Washington.

Lastly, the United States and Germany must identify common priorities on which they could collaborate at the G20 level. In its present tenure of the G20, Germany has set out three main priorities for the group—ensuring stability for the global economy; sustainable development; and economic growth, particularly in Africa. This is especially true of American businesses: In 2015, more than 40 percent of S&P 500 company revenue came from foreign operations, a growing portion of them from the emerging markets. Consequently, American companies have a strong interest in ensuring continued growth and minimal risks in the global economy, in the same way as major German corporations and the Mittelstand (small- and medium-sized companies) do—a point that policymakers could use in strengthening bilateral cooperation. To this end, U.S. and German policy makers could use the G20 as a platform to identify international investment opportunities, as well as address global macroeconomics risks, from systemic weaknesses in the European banking sector to the slowing Chinese economy.

In light of the starkly different stances of the Trump and Merkel administrations on trade, the recent deterioration in U.S.-German bilateral relation is all too understandable. Nevertheless, further worsening of the relations between the largest and fourth largest economies in the world would truly be unfortunate and will have global consequences. In order to prevent this, Washington and Berlin must go beyond their diverging policy stances, and focus instead on strengthening economic relations and promoting bilateral trade and investment.

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