Dear Herr Merz,

President Trump is about to impose swingeing tariffs with the goal of reducing the US’s bilateral trade deficit with Germany and the EU.

And I know, the temptation is to respond in kind, and demonstrate that you have agency.

Don’t.

It is stupid and counter-productive, and the impact on European and German voters would be severe.

Instead, I would like to suggest an alternative approach: do absolutely nothing.

Why? Well, three reasons.

Firstly, the impact on US demand for European products will be less severe than you expect. Why? Because there aren’t thousands of empty US factories waiting for slightly higher prices for European products. It would also be a multiyear project to increase US domestic manufacturing (which, by the way would mostly involve buying… errrr… European capital goods), and most US companies will be reluctant to invest in additional capacity given uncertainty about how long tariffs will last anyway.

Yes, there will be some reduction in US demand (price elasticity and all that), but the US dollar will also inevitably strengthen on this too. The stronger dollar will offset some of the price increases for European goods, making the net impact less dramatic than the headline tariff rates suggest. And let’s not forget that many European companies have US subsidiaries that can mitigate the worst effects by shifting some production. The trade networks are far too complex for blunt instruments to work as intended.

Secondly, a focus on bilateral trade balances is dumb. Countries don’t demand American things, or French things or whatever.

Let me give you an example. Imagine the UK put a tariff on French wine. It might result in the UK (in the long run) growing a little more wine, but mostly it would just result in the UK importing more American and Australian and New Zealand wine to replace the (now more expensive) French wine. The UK’s overall trade balance wouldn’t change, it would just be that the deficit would change to being with different countries.

In the case of the US, making European cars more expensive mostly means they will instead import more Japanese and Korean cars. And those places which previously imported lots of Japanese and Korean cars will now import more German cars. Bad for consumers in general (higher transport costs in aggregate), but the effect is likely to be much more limited than you’d expect: trade is like a living organism and will try and route its way around blockages.

Thirdly, there is something you can and must do: be less dependent on external demand!

Countries should not be in perpetual trade surplus and more than they should be in perpetual trade deficit. Sure, Donald Trump is wrong to think it is all a conspiracy to defraud the United States, but that doesn’t mean that policies designed to ensure perpetual surpluses aren’t stupid and counter-productive.

Europe produces an awful lot. It’s time for it to consume more of what it makes. Doing this will make Europeans happier (they’ll have more things!), and it will make the continent less dependent on the deficits of others. Take Trump’s tariffs -foolish as they are- as an opportunity, and start consuming.

I made a suggestion in my last piece about how Europe could turn the domestic demand dial up. Have the courage, Herr Merz, and follow my advice: Voters will thank you.

Thanks Robert

Robert blogs on Substack here: https://substack.com/@robertsmithson1
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