Capital IdeasTM
Investment insights from Capital Group
Politics
Robert Lind
Beth Beckett
As expected given his campaign rhetoric, the incoming Trump administration is already warning about aggressive action on trade, with likely tariffs on US imports. Alongside China, Trump has identified Germany as a particular problem; this is not surprising as the US is running a sizeable bilateral current account deficit with Germany, principally reflecting a large deficit in goods.
But Germany is effectively sacrificing domestic consumption and recycling its surplus saving to the US in the form of large capital flows, which has allowed the US to ‘overconsume’ and run a trade deficit.
While the incoming administration might be focused on the goods trade position, it is important to take a more holistic view of flows in both trade and capital. A mercantilist1 view of the US-German trade imbalance suggests Germany is ‘winning’ and the US ‘losing’. But a view grounded in open-economy macroeconomics suggests the trade deficit between the US and Germany is the counterpart of capital flows between the two and also a reflection of differences in national saving and investment rates.
The Trump administration’s trade objective appears to be to force these countries to consume more and run down their saving rates, likely through some combination of fiscal stimulus and higher private demand. But if it succeeds, this will reduce Germany’s saving rate and its capacity to recycle its excess to the US, which could mean a reduction in net capital inflows to the US, a weaker dollar, and higher inflation and interest rates.
German net capital inflows to the US
-en.png)
Data as at November 2024. Source: Bureau of Economic Analysis
1. An economic policy that aims to increase a country's wealth and power by limiting imports and promoting exports.
Our latest insights
RELATED INSIGHTS
-
Equity
-
-
Interest Rates
Hear from our investment team.
Sign up now to get industry-leading insights and timely articles delivered to your inbox.
Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.
Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.