The Trump administration just fired the first shot in the US-European currency, and thus trade, wars when Trump’s top trade advisor Peter Navarro accused Germany of using a “grossly undervalued” euro to “exploit the US and its EU partners“, the FT reported noting the comments are “likely to trigger alarm in Europe’s largest economy.” News of the statement sent the EURUSD surging and the dollar tumbling to fresh 2 month lows.
Navarro, the head of Mr Trump’s new National Trade Council, told the Financial Times the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany an advantage over its main partners. While not necessarily novel – Germany has often been accused of being the biggest winner from a weak euro at the expense of peripherla Europe – his views suggest the new administration is focusing on currency as part of its hard-charging approach on trade ties, according to the FT. Furthermore, virtually assuring a deterioration in US-German relation, and in a departure from past US policy, Navarro also called Germany one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a Transatlantic Trade and Investment Partnership dead.
“A big obstacle to viewing TTIP as a bilateral deal is Germany, which continues to exploit other countries in the EU as well as the US with an ‘implicit Deutsche Mark’ that is grossly undervalued,” Mr Navarro said. “The German structural imbalance in trade with the rest of the EU and the US underscores the economic heterogeneity [diversity] within the EU — ergo, this is a multilateral deal in bilateral dress.”
The comments highlight a growing willingness by the Trump administration to antagonise EU leaders and particularly Angela Merkel, the German chancellor. Besides publicly supporting Mrs May’s government in its negotiations with the EU over the terms of its exit, Mr Trump called the EU a vehicle for Germany, and Nato an obsolete alliance.
Mr Navarro’s intervention follows a visit to Washington last week by Theresa May, the British prime minister, in which she and Mr Trump discussed ways to launch negotiations for a US-UK trade deal.
“Brexit killed TTIP on both sides of the Atlantic even before the election of Donald Trump. I personally view TTIP as a multilateral deal with many countries under one ‘roof’,” Mr Navarro wrote in emailed responses to FT questions. Trump last week also withdrew from a 12-country Pacific Rim deal negotiated by Mr Obama.
In further bad news for globalists, Navarro said one of the administration’s trade priorities was “unwinding and repatriating the international supply chains on which many US multinational companies rely, taking aim at one of the pillars of the modern global economy.”
“It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” he said. “We need to manufacture those components in a robust domestic supply chain that will spur job and wage growth.”
As the FT also notes, Navarro effectively endorsed an import tax plan pushed by Republican leaders in the House of Representatives that has split the US business community. The proposal would eliminate companies’ ability to deduct import costs from their taxable revenues while making any export revenues tax-free. It drew attention last week when the White House pointed to it as one way in which it could pay for a wall on the Mexican border. Navarro rejected the argument that US consumers would end up paying the cost of such a tax change. That was “an old and tired argument the globalist wing of the offshoring lobby has used for years to put Americans out of work and depress wages by shipping our jobs offshore”.
The proposal has seen mixed reactions among the US corporate community. Exporters such as General Electric have hailed the switch to a “border adjustable” system as putting them on an equal footing with international competitors that are able to claim value added tax refunds on their exports. Retailers such as Walmart and other import-dependent businesses, however, say that what would amount to 20 per cent tax on imports would raise consumer prices and hurt their businesses.
A bigger implication of a border tax, however, would be a potential surge in the dollar. As we reported on many occasions before, analysts argue that at least some of the impact on consumers would be absorbed by a one-time appreciation in the dollar which could push the USD as much as 15%. That in turn could also impact on US export competitiveness and lead to a widening of the US trade deficit with the world, which the Trump administration has vowed to reduce. Navarro, however, said he was not concerned about the possibility of a stronger dollar and its impact on US exports.
“I worry about the actual impact America’s trade deficit in goods is having on our rates of economic growth and income growth.”
It was not immedately clear how Navarro’s easy stance on a stronger dollar due to BAT would reconcile with his accusations that the EUR is being held artificially weak which implies that if anything the Trump administration should be seeking policies that weaken the dollar. So far it has failed to reconcile this fundamental FX/trade quandary.