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25.07.2017

OF WINNERS AND LOSERS - TRUMP'S ECONOMIC COURSE

Donald Trump will definitely leave a mark as President. The list of his protectionist announcements is long and growing. None of them have been implemented yet. But some direct and indirect consequences of Trump's policies can already be seen. An analysis.

By Holger Paul

One of Trump's announcements: A wall along the US and Mexican border. <br>© Fotolia | chess_ocampoSix months after taking office, it is clear that Donald Trump will have a special place in the history of American Presidents. His style and messaging are unique and quite often, his tweets have confounded or even appalled the public as well as whole industries, including the mechanical engineering sector. A wall along the US and Mexican border, a new and unfriendly focus on trade imbalances, thoughts about border adjustment taxes - the list of Donald Trump's protectionist announcements is already long and getting longer.

However, none of these measures have been implemented so far, and there is hope among experts that most of them will remain campaign pleas. But there's no guarantee that Donald Trump will really back away from his troublesome promises.

Trump sees free trade as a threat

The most important thing to keep in mind with Donald Trump is that his main focus is rather straightforward. "Jobs and growth", political observers explain. What makes Europeans feel uneasy, though, is that the US President sees free trade as a threat to both, rather than a prerequisite. In his inauguration speech, Trump said "Protection leads to great prosperity." And for the time being, no-one knows where this new course will lead.

"Some direct and indirect consequences of Trump's policies can already be seen," explains Ulrich Ackermann, Managing Director of the VDMA  foreign trade department. The US is getting out of the planned TPP agreement, which includes Asian as well as North and Latin American countries, and has started a process to renegotiate the free trade agreement Nafta. Indirect consequences are that the Mercosur-states in particular are seeking closer contact to the EU and that China is presenting itself as a new major advocate of free trade. "Thanks to Donald Trump, the EU has become much more attractive again as a trade partner," explains Ackermann. He is backed in this observation by former VDMA President Dr. Reinhold Festge, who recently visited Mexico alongside German chancellor Angela Merkel. "On the surface, business between Mexico and the US is back to normal," he says. "But reading between the lines, one can sense the uncertainty. That's why the Mexicans are looking with great fervor for new investors, especially from Europe."

Will there be a border adjustment tax?

In the US, meanwhile, Donald Trump and parts of the Congress are busy trying to find a way to boost the economy and to finance the modernization of the physical and digital infrastructure. 800 billion dollars shall come from private investors and 200 billion dollars from federal and state budgets - a giant task. Financing this ambitious plan will be all the more difficult as the US President is also planning a massive cut to corporate taxes - from 35 percent today to 15 percent. There is a certain temptation to close this gap by introducing a border adjustment tax. "Normally, such a border adjustment tax would be dead on arrival into Congress," political observers say. But as long as Donald Trump's economic course remains unclear, anything is possible.

And that's exactly why businesses remain wary concerning their prospects in the US. "We're not about to change our business plans or operations in North America in the near future. Until now, nothing has really changed," says Dr. Christof W. Bönsch, operating manager of the German tool maker Komet Group, which has subsidiaries in the US as well as in Mexico. "But of course, the situation there is being closely monitored," Bönsch adds. "Many parts are shipped back and forth between the two countries and if a border tax is brought in or if Trump really starts to build a wall, these supply chains might have to be rearranged," he explains.

US industries rely on imports

The sad irony is that US industries would be hurt the most by such protectionist measures, explains VDMA Chief Economist Dr. Ralph Wiechers. "Today, many plants in America run on outdated machines and often there are no US companies left to provide the state-of-the-art equipment in order to modernize these machine parks. Thus, the US needs imports," Wiechers says. But if Trump raised taxes or other barriers on these imports, it would probably affect the domestic industry negatively. Still, that doesn't mean that the German machinery engineering industry can feel safe, Wiechers warns. "If Trump decides on any kind of measure, it will damage the competitiveness of our US clients and subsidiaries. And this will have negative consequences for us, too."

750 billion dollars - that was the US goods deficit in trade with the rest of the world in 2016. (It is reduced to 502 billion dollars when services are included.) 347 billion dollars of that deficit come from trade with China, 65 billion dollars from trade with Germany. "Trump is dead set on reducing this deficit," one expert says. "The discussion is not new, but what's new is the rhetoric." In Donald Trump's view, a trade surplus means you are a winner, and a trade deficit stands for being a loser. And that's the last thing the US President wants to be called…   

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Contact
Holger Paul, VDMA Communications.