© dreamstime dimitios kaisaris Analysis | January 26, 2017

Trump is playing with fire

Even though concrete political measures are yet to be determined, the first ramifications of Mr. Trump’s announcements have already become apparent.
Up to now, Donald Trump, the new President of the USA, has indicated that he will pursue protectionist trade and investment policies. Even though concrete political measures are yet to be determined, the first ramifications of Mr. Trump’s announcements have already become apparent. “We wish the new President all the best for a good start in his new role. But since he was elected, there is growing uncertainty about the future economic direction of the USA – and insecurity ultimately results in reluctance to invest. The first sign of this could be machine deliveries to the USA, whose decline accelerated in the fall of 2016,” says VDMA Executive Director Thilo Brodtmann.

Exports to the USA fell by 3.4 percent between January and October 2016, and by nearly 5.8 percent in the period between August and October. “The United States of America will continue to be the largest single export market for German mechanical engineering companies in 2017. And no one knows exactly how and to what extent the new US President will shape global trade. In addition, it remains to be seen whether the US Congress and the Senate will simply rubber-stamp Trump’s proposals or subject them to close scrutiny. What is certain, however, is that protectionism and new trade barriers will not result in new jobs and additional growth – neither for the USA nor for its trade partners. In this regard, President Trump is playing with fire,” adds Brodtmann.

Isolationist policies would put the USA in harm’s way

Isolating the American economy by establishing new tariffs and walls would not only be harmful to its trade partners, but also to the USA itself. Many US companies are part of global value-creation networks and rely on business in foreign sales markets. In 2015, the US manufacturing industry exported goods to the value of USD 1,112 billion, mainly to Canada, Mexico, China and Japan. The cross-border movement of goods also contributes to the creation of jobs in the USA. What is more, the import of machines makes up more than a third of the volume of the American market. This is due to the fact that the US market can no longer compete at international level in many mechanical engineering sectors. Machine deliveries from Germany come in at fourth place and play a considerable part in fostering the American industry’s competitiveness.

“If Donald Trump goes through with introducing punitive tariffs to force domestic and foreign companies into keeping their production sites in the USA or building new ones there, this may very well result in the preservation of some company sites in the short term. In the medium and long term, however, such coercive state policies will lead to investors looking for opportunities elsewhere – which ultimately translates to losses in economic prosperity,” says Ulrich Ackermann, Head of the VDMA Foreign Trade department. Furthermore, it is highly doubtful whether these methods will actually be helpful in breathing new life into the barren American industrial regions that Trump referred to in his promises.

Punitive tariffs are in violation of international rules

The introduction of punitive tariffs would also mean hard times for the USA from a commercial perspective. In any case, a unilateral increase in import tariffs for mechanical engineering products would be in violation of the rules stipulated by the World Trade Organization (WTO). After all, the USA is contractually bound to import tariffs of between 0 and 5 percent for mechanical engineering products. In accordance with WTO rules, imposing a so-called protective tariff would only be possible if proof could be provided of considerable damage to domestic manufacturers. But this is certainly not the case when it comes to mechanical engineering products from Germany and Europe.


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