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Who is right in the high-profile foreign trade dispute?

14 Jun 2018 16:37|Marcin Lipka

“The American President is suggesting that his country is doing badly regarding trade with the European Union. However, the leaders of the EU Member States reject the accusations by presenting their own data. Who is right? And is America's trade deficit with the EU a problem that is worth tackling at all?” writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

During the recent G7 summit, Donald Trump said that America lost $817 billion in foreign trade last year. A few days ago, the US President also wrote on Twitter that the European Union had a USD 151 billion trade surplus with the United States. German Chancellor Angela Merkel also joined the discussion and said that the EU had a trade deficit with America. Who is wrong? Is the trade balance really so important for the economic powers?

Deficit or surplus?

According to official data from the Bureau of Economic Analysis (BEA) of the US Department of Commerce, the US had an $811 billion goods trade deficit with the world last year. This would mean that Donald Trump's estimates are consistent with reality, although the term 'loss' appears to be significantly exaggerated since a negative balance does not necessarily mean loss but only an advantage for imports over exports.

It is worth pointing out, that at present, foreign trade is not only about goods. The share of services in trade between countries is growing steadily. The United States has already had a significant surplus here (USD 242 billion). As a result, the US trade deficit is falling to USD 568 billion (less than 3% GDP). What is the balance between the US and the EU and who is closer to the truth - Merkel or Trump?

To make sense of this, we also use BEA data by country and region. Looking at the goods balance alone, in 2017 the US had a 150 billion dollar deficit with the EU, but when we add the services sector (51 billion dollar surplus for the US), the deficit is falling to 100 billion dollars. However, it is still significant. So was the German Chancellor wrong?

The current account is true. The USA on a slight plus

Apart from international trade in services and goods, there is also another category worth noting, i.e. the primary income balance. It shows what capital flows from investments look like (e.g. profits of US companies in the European Union or revenues from treasury instruments purchased by Americans in the EU).

BEA data show that the US is a much larger beneficiary of investments in the EU than vice versa. It was the United States that had a primary surplus of 105 billion dollars with the Union in 2017. As a result, taking into account three categories (trade in goods, services and primary balance), the US has a minimum surplus with the EU (around USD 5 billion). Therefore, it could be said, that Chancellor Merkel was also right.

Summing up the individual categories, we are starting to approach the entire current account showing the competitiveness of a given country. However, the balance of secondary income (mainly the transfer of funds) still needs to be added to three categories. As a result, the entire current account between the USA and EU is positive for the USA (approx. 15 billion USD). It should be stressed, that in the scale of both economic areas, it is even a microscopic difference (about 0.1% of US GDP). Therefore, it can be concluded that the current account between the US and the EU is balanced and should not be open for further discussion.

The apparent problem

BEA data show that the current account between the EU and the US is balanced. The United States suggestions that it is losing trade with the European Union are just as wrong as hypothetical allegations that the Americans are exploiting Europeans by economic engagement in their territory and thus, making a profit. The dispute between Washington and Brussels should therefore, be regarded as ostensible and even a little ridiculous.

14 Jun 2018 16:37|Marcin Lipka

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