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Economy in Brief

French Trade Trends Deteriorate Along with So Much More...Incl. the Civility of International Policymaking
by Robert Brusca  March 7, 2018

French trade trends show a bigger current account deficit in January and a larger deficit on trade. Exports fell in January as imports rose. Over three months trade trends have reversed as imports are outpacing exports unlike the trends over six months and 12 months.

Trade is obviously in the news. It has been in the news for quite a while, really since the EU-UK negotiations over Brexit became germane.

Italy sits on the fringes
Italy's recent electoral reversal has put Europe back on its heels and has focused attention on how badly the Italian economy has performed since German austerity became the rule of the land in the EMU/EU. While Italy is not party to a direct trade issue, it would be foolish not to realize how much the Italian political groups understand and sell to the public the idea that being captive in the EMU adds to the pressures on the Italian economy. And Italy is not yet out of the woods. It has been suffering, but it still has a long road of repair ahead and a still-troubled banking sector. Italy is still being swamped by a migrant influx while the rest of the EU has found a way to wall them out.

The France-Germany divide and other divisions
Pressures that have built up in the global economy have been coming to a head, on Brexit, on the Italian vote and on U.S. President Trump's threat of tariffs. We do not have either free trade or fair trade, but what we have tolerated is a system that all sides have become used to until now. In the U.K. and Italy, the role and treatment of migrants or noncitizens has become a critical related factor. For different reasons in the U.S., the presence of a large population of illegal immigrants and their families has become a growing political issue. And while the migrant issue is separate from trade, it is a related problem and an example of an international force impinging on national values. Trade is not free or fair and the mechanisms put in place that are supposed to restore balance to trade flows have not been allowed to work because of various governments' contrivances. Most countries cheat on trade by manipulating their exchange rates using long-term currency purchases. Germany, uniquely, has run low-inflation policies that have buried it deep in the EMU structure as its most competitive economy so that the euro exchange rate would have to be driven to extraordinary levels to adversely affect Germany, an act that would decimate many other fellow EMU economies first.

Beyond the France-Germany divide
Against that background we see French trade and current account deficits are entrenched as Germany continues to run surpluses that are huge. How can the EMU hold together with its two largest economics on such very different competiveness footing? Make no mistake about it; Germany is a model of financial probity but it has run nothing but a 'Germany first' program to get there. It has balanced its fiscal policy by taking advantage of the U.S. protective NATO umbrella and ignored its real financial responsibilities in NATO. It bailed its own banks out of Greek exposure so they could not be influenced by negotiations there, then, after the Cyprus financial problem bank bail-ins became the rule. Now any other country wanting to bail its banks out of exposures as the Germans did can't because the Germans got their banks out then changed the rules.

Germany looks after Germany
Germany has used the financial crisis and recession to grow its surplus as a percentage of GDP- note the uptrend in the ratio since 2008. France has not seen any trend improvement and on balance seems to have suffered some deterioration. Time will tell as French trade trends are still evolving.

Tariff talk and the reality of 'free trade'
One GOOD THING about the Trump Tariffs is that they have everyone talking about trade and perhaps as they do that they see how unequal the outcomes are and how the system has clearly been gamed by some members. The U.S. can argue about whether it is well served by importing so many consumer goods so cheaply or if absorbing all the debt for future generations to support more consumption now is a good idea. But there is no argument that this is a free-trade result. The large persistent surpluses among Asian countries and for Germany are clear signs that these countries are not playing by the rules and are gaming the system bending it to their advantage. Germany has more cleverly manipulated the European system to its advantage. But in the process, Spain, Portugal, Greece and Italy have been ravaged by German medicine. It is most similar to chemotherapy since it might cure you if it doesn't kill you first.

About trade and tariff talk
I think the TARIFF TALK that is resulting is a very good thing. Tariffs themselves are not a good thing. But in the end, tariffs are like guns: guns don't kill people, people kill people. And tariffs are only the tool. In this case, they seem as a tool of last resort, and somewhat of desperation, being used on a world where trade and entitlement have run amok. I compare this to the Trump-Angela Merkel exchange over NATO. When Trump began making excuses like the U.S. would not be a full NATO supporter, Merkel lambasted him and called America a bad ally. Who was the real bad ally there? Well, the dust has settled on that skirmish. Who do you think won? Who do think history will see as being in the right? Germany has a balanced budget and does not live up to its obligations to NATO and has not done so for years. The U.S. runs huge fiscal deficits but has fully supported NATO and its bases. Did I mention that these are bases located in Europe and in Germany? Did you know that Germany benefits economically from the economic expenditures American makes on these bases? In subsequent recent reports, we are finding out how bad German military preparedness really is after years of neglect. And Merkel slammed the U.S. because the U.S. had to take dramatic actions to get Germany to pay its fair share? That made the U.S. the bad guy? We'll see what history has to say about that.

Where will tariff talk take us? Into the unknown...
I see trade as directly analogous to the NATO affair. The tariff club is a dangerous one to swing. But the U.S. labor force growth is being stunted by a different type of migration: migration out of it into the ranks of not working and not the ranks of economic dependency. If America can't create good jobs, things are going to get worse fast. I am not impressed by the massive monthly job growth in the U.S., not when I see what wages are being paid. Americans are desperate to work - much more than the U.S. labor market is 'vibrant.' And if a traditional politician will not stand up for American's rights and for fair global economic opportunity, voters will elect a nontraditional disrupter to do the job. That is the message of Trump getting elected, of Brexit and of the Italian elections. And there may be more to come. If Europe does not want to get whacked by the tariff stick, it had better dodge it and offer some compromise instead of engaging Trump with a stick of its own. The Merkel NATO defense strategy will not work here. Sanctimonious outrage by the guilty party never does.

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