RUTHFULLY YOURS

The European Union has consistently enjoyed hefty trade surpluses with the United States. According to the United States Census Bureau for, the past four years, those surpluses were $168, $151, $147, and $156 billion respectively. For the first six months of 2019, the EU ran a near $100 billion surplus. And this is before the European Central Bank’s devaluation of the euro via negative interest rates and more quantitative easing.

In a world where the U.S. economic establishment proclaims ‘free trade’ as the cause of American prosperity, this is an anomaly. If anything, under ‘free trade,’ it is the U.S. that should run multi-billion-dollar surpluses with Europe. That’s because America is the source of innovations and the development of cutting-edge technologies, not Europe. Add to that the fact that European industries are grossly inefficient by U.S. standards due to the EU’s extensive welfare-state laws, which are essentially pseudo-socialistic.

This anomaly exists only because past U.S. leadership has allowed it. Far too often, our ruling class has shown a greater affinity for the European elite than for their fellow citizens. They found it easier to sell out the American middle class than to inconvenience their friends in Europe.

Fortunately Donald Trump is a different breed of cat. And although the president’s main focus right now is on China, he will get around to the trade inequity with Europe in due time.  When this happens, it will be a tremendous blow to the Europeans. It will especially hurt Germany, Europe’s industrial powerhouse. This is because almost 50% of the German GDP is due to exports. A drop here and the affect ripples through the Germany and on to the rest of the Continent.

This has European decision-makers in a fix. The last thing they will do, however, is what Europe needs most. That is to reform the structure of their societies so to make them more competitive and innovative. The mental make-up of the Euro-elite is such that they can’t even imagine such a scenario, and if they did, their general populations wouldn’t tolerate it.

What are Europe’s options? Right now, the EU is trying to scare off Trump by threatening to retaliate against the U.S. if he applies tariffs on Europe.  But Europe has a weak hand. A mouse can roar but it cannot intimidate a resolute cat.

Europe’s other option — if you can believe it — is a stronger relationship with China. The idea here is that trade with China can be used to offset any loss of exports to the U.S. This is a fool’s errand. China’s economy is already reeling from Trump’s effort to adjust the terms of U.S.-China trade, and things can only get worse for the Chinese from here on out.

For the first six months of 2019, Europe suffered a $100 billion trade deficit with China. To keep its system afloat and to maintain its power, the Chinese Communist Party will be prowling the world like a ravenous wolf looking for export markets to exploit. And now that Donald Trump is in the White House, there is no fatter or softer target than Europe. Should Europe embrace China, the likely result is that its trade deficit will soar at the same time China runs off with more of Europe’s technology and intellectual properties. In return, Europe will receive low-cost manufactured goods. That’s hardly win-win no matter how ‘free market’ fundamentalists might argue otherwise.

Several other flaws are worth noting. First, given that the economies of China and Germany are export dependent, it is hard to see a trading system between the two as win-win. As stated above, Europe can only come out on the short end of this stick. Second, both China and the EU have terrible demographics. Not only are their populations projected to start shrinking soon, but the populations of each are growing disproportionately old. This means that internal consumer consumption within China and the EU will not be sufficient to support their current social structure. Both China and the EU need markets to export to, and this need will only grow in the future.

With America insisting on actual fair trade and tightening access to her markets, China and Europe will be like two scorpions in a bottle. Europe’s best option is to recognize the situation, drop its pretensions and make meaningful concessions to Trump in the hope that will satisfy American demands. But whatever Europe decides, it better batten down the hatches because it is sailing into a storm.