Trump plans for tariffs – „there will be a loss of prosperity“
Mr Kater, a different wind will be blowing in the White House with US President Donald Trump in the future: more protectionism and tariffs instead of globalisation, China seen as a political enemy, and the Europeans as economic opponents, so to speak. His economic ideas are – to put it mildly – unconventional, and detrimental to transatlantic cooperation. What is your biggest concern in this mixed situation?
My biggest concern is that Europe has not realised what is happening and is not reacting and acting accordingly. Because nothing less than a turning point has begun in the USA: transatlantic relations are crumbling.
What is driving Trump to do this?
He has reacted to the fact that global liberalisation has not taken many people in the USA with it – those who have become victims of hyper-globalisation. This – together with a number of other social trends –has made the forces that Trump represents so strong that things are now moving in the other political direction: „globalisation“ solely according to US rules and for the benefit of the USA.
How does this affect the economy?
Every economy needs framework conditions, security and rules. After the Second World War, the USA provided and financed many of these rules. It was the Americans who led the way in dismantling tariffs, which had an enormous knock-on effect on other countries and allowed everyone to prosper economically. Trump now refuses to continue paying for the public good of security and infrastructure for the global economy. America First applies – even if the previous stance has made the USA a global leader. Trump also wants to reverse tariff liberalisation because he expects industrial jobs to return to America.
I see both negotiating partners on an equal footing.
How dangerous will this be for Europe? How much damage will he do to the European and German economy with his policies?
Firstly, I see both negotiating partners on an equal footing. However, the EU must take a united approach in order to protect its own interests – especially on trade issues. I am confident that this will work because this has been a core competence of the EU from the very beginning. The Europeans certainly understand the possibility of using their own economic power and also have the tools to act together. The great danger lies in an escalating tariff war.
But economists are universally warning of dramatic trade losses.
Of course, if you slice up global trade, the individual pieces are worth less than the whole before. In other words: There will be a loss of prosperity in any case. This is particularly due to the division of production: in future, it will take place behind the respective customs walls. This means more factories, but smaller ones. As a result, economies of scale will be lost.
How do you assess Brussels' negotiating power?
The position in international negotiations results from two elements. On the one hand, the size of the market is decisive. As far as this point is concerned, the Americans and Europeans are on an equal footing. The markets are similar in size. On the other hand, Europeans rely more on exports than the USA. This puts them at a slight disadvantage, but overall the dimensions are not that far apart. The bottom line is that I see these two negotiating partners as equals. In this respect, I assume that a compromise will emerge at the end of the negotiations.
The European side should make deals with the USA.
What negotiating approach would you advise Brussels to take?
The European side should make deals with the USA, for example by promising the USA higher energy purchases in return for lower tariffs. However, this would further strengthen the dollar.
But that can't really be what Trump wants, can it?
What Trump doesn't understand is that he has to accept a current account deficit because the USA is a capital-importing country – also because of its attractive location. If you import capital, you inevitably have to accept it. It's simple arithmetic. Trump cannot continue to woo money from abroad and at the same time want to have a balanced current account. If he does, the dollar will appreciate. I don't think he will be able to cure the US current account deficit.
Germany may be forced to change its own business model.
And what role does Germany's export orientation play in this context?
Germany may be forced to change its own business model. Not just because Trump is introducing tariffs. But because German companies are losing market share due to shortcomings in technology and high costs. All national governments in Europe are now required to improve the economic framework conditions and ensure more growth, so that the community can stand on its own two feet as stably as possible.
And is that enough?
Punitive tariffs aside, if German companies are competitive, there will be plenty of sales opportunities in this big world. So basically, it is more about the performance of German companies than about protectionist tendencies in the global economy.
Ultimately, all of Trump's concrete election promises will generate more inflation than before. So how can he keep his central promise of lower prices?
Firstly, Trump has simply capitalised on the effect that people still have the feeling of dramatically rising prices and are still lagging behind in terms of income. This is partially true, although inflation has been falling for some time. But if he raises tariffs, there will initially be a new wave of price increases, and with regard to monetary policy, chain effects will then come into play. I am curious to see how he will argue then.
In what way?
Powerful politicians under pressure have to come up with special stories. Turkish President Erdogan, for example, has said that low interest rates work well against inflation. We still expect the Fed rate to be reduced by 25 basis points in December. However, based on current inflation figures, a discussion will increasingly develop as to whether the Fed should actually cut rates.
Disappointment is likely to spread in the USA if the promised golden age is shattered by the grey reality.
The financial markets are still celebrating developments. Will they soon buckle in disappointment?
In fact, despite all the uncertainty, the calm situation in the financial sector is a real contrast. We have many crises, but no financial crisis. In macroeconomic terms, we are on a normalisation course. Global economic growth is steady, inflation has fallen faster than expected, and interest rates have also come down again. We do not see any overburdening in terms of private debt. And rising government debt is only likely to have a negative impact later on. However, disappointment is likely to spread in the USA in the medium term if the promised golden age is shattered by the grey reality.
Will this give him room for radical tax cuts, as he has announced?
The economic policy measures that Trump is planning are business-friendly, but the announced tax cuts are not aimed at more growth, but will increase corporate profits. The market has recognised this and is therefore positive.
Trump also comes across as quite modern because he wants to grant cryptocurrencies more space and more recognition. What does this mean for the dollar?
Ideas from the Trump camp even go as far as free banking, or the authorisation of competing currencies. Of course, this will make the crypto and Bitcoin scene rejoice. But I think this is speculative and not feasible, even for Mr Trump.
Anyone who weakens the dollar is sawing off the branch on which he sits as the world's largest debtor.
Why?
The USA's debt capacity is based on its ability to print a currency that is the only valid currency on US territory, and which also has the privilege of being circulated around the world. If he plays with breaking this up and wants to grant cryptocurrencies a similar status, this will reduce the country's debt capacity. Anyone who weakens the dollar in this way and undermines its status as a global currency is sawing off the branch on which he sits as the world's largest debtor.
You said that Germany should focus more on improving its own location than getting bogged down in trade disputes. Where should the priorities lie here?
Germany has never been strong when it comes to high and ultra-high technology and its initial translation into market products. We are successful in technology in the medium high-tech sector. Accordingly, it is important to first regain strength in the old business model, where we have lost a lot of ground. Companies therefore need to invest heavily and rebuild confidence in the economic future. We therefore need a fresh start in terms of the economic framework conditions. The previous government did not take the problem seriously enough and then got lost in confusing measures. We urgently need to change course here.
We need a new start for the economic framework conditions in Germany.
And what direction should this take?
Flexibility for companies, giving them the opportunity to invest without being hindered. To be able to access skilled labour and cheaper energy. That speaks in favour of an agenda solution, because you have to organise and reconcile many different political measures.
How would you describe the new agenda?
The communication could be that we have realised that the wind is blowing in the face of the German economy from all directions. We no longer want to gloss over the situation; instead, we want to prioritise change. This starts with a renewed commitment to economic growth. Only in this way will we be able to deal with challenges such as the environment, defence or competitiveness. A high-growth economy is the basis – we create the framework conditions for this and the companies have to do the rest.
And which political braids would you cut off?
The idea that the state can plan progress. Our research funding, which involves project funding and small-scale funding measures controlled by a tightly meshed bureaucracy, is comparatively unsuccessful.
But if there is one thing that the population liked about the old government, it was that it set up funding programmes and pumped money into the system. Germans tend to be sceptical about the market, competition and capitalism.
Yes, there are traditionally broad reservations in Germany about economic liberalism and market mechanisms. In addition, in recent years people have observed that the state fixes everything in crises anyway and can provide money at will. These two experiences have led some people to conclude that markets are the devil's plaything and that the state can do everything. On the one hand, the state is increasingly reaching its financial limits and, on the other, it is paying too little attention to efficiency.
If we don't move now, we in Germany will remain stuck in the prosperity of the last century.
What will happen if we continue to do business as we have in the past?
Prosperity is a relative state. If we don't move, we will simply fall behind. In the meantime, other regions of the world are generating completely different forms of prosperity, in which we will no longer participate. If we don't move now, we will remain stuck in the prosperity of the last century in terms of technology, material things and the associated services. And that should not be our endeavour.
The interview was conducted by Detlef Fechtner and Stephan Lorz.
