French President Francois Hollande and German Chancellor Angela Merkel, who held their first meeting yesterday, might want to consider that they have been attacking the problems of Greece, the euro, Spain, Portugal, Italy, and even France backwards.

All the talk and all the effort has been aimed at keeping Greece and the others in the euro. But the real, ideal solution is to get Germany out.

It's simple. Because of Germany's great international competitiveness and the fact that it is the largest euro zone economy, the euro is much stronger than it would be if it were the currency only of a euro zone minus Germany. On the other hand, because of the drag of the competitive weakness of the rest of the peripheral euro zone countries, the euro is too weak for Germany which consequently racks up chronic trade surpluses both within the EU market and in the external world markets.

Prior to the advent of the euro, the rest of the EU countries maintained their competitiveness and living standards vis a vis Germany by steadily devaluing their currencies against the D Mark. The adoption of the single currency, of course, put a halt to that. In the past two years, the effort of the EU has been to raise the competitiveness of the peripheral countries by reducing their unit labor costs through the imposition of austerity measures aimed at making the rest of Europe more like Germany.

But this is only causing these economies to implode as their politics explodes, and as this happens, the euro is steadily weakening and making Germany even more competitive. At the same time, even though the Germans have leeway to increase wages and consumption and public spending in a way that might relieve the pressure on the rest of Europe, they are not doing so. Effectively, Germany is telling Europe, "it's my way or the highway."

The political, economic, and national security implications of this path are seriously disastrous. Greece has become virtually ungovernable, Spain has over 50 percent youth unemployment, the extreme right and left of France control 30 percent of the vote between them, and the Swastika is again being flown in parts of the old continent.

The much easier and much more logical solution is that suggested by Washington  financier and hedge fund manager John Prout -- get Germany back to the D Mark. At one fell swoop, the remaining euro zone countries would become competitive via devaluation of the euro versus the D Mark, and this without the grinding pain of austerity. The pressure and need for a giant rescue fund would disappear. At the same time, Germany would lose its somewhat artificial competitiveness and would automatically have higher income, consumption, and inflation as a consequence of a D Mark that would be stronger than the present euro.

I know it sounds radical, but it really is time for outside the box solutions.

You may remember that the U.S. government and the global media uniformly hailed the progress achieved at the U.S.-China Strategic and Economic Dialogue completed on May 4 in Beijing. China's agreement to allow foreign financial firms to increase their share of ownership of Chinese firms from 33 percent to 49 percent was cited as a major element of this progress.

So why was there no announcement of regression last week when Beijing suddenly announced that the China branches of the Big Four global accounting firms must be headed by Chinese nationals and have 80 percent of their accountants be Chinese nationals within five years? In view of a recent string of accounting scandals that have raised serious international doubts about the quality of Chinese auditing, this is only likely to complicate the task of understanding what is really going on in China. What difference does it make to own 49 instead of 33 percent if you don't have any idea of what you own?

Much more important than this, however, was the release last week of the March trade statistics which showed that the U.S. trade deficit for the month jumped 14 percent to $51.8 billion as imports rose 5.2 percent to a record $238.6 billion. On an annual basis the trade deficit is on track to rise by 7 percent to over $600 billion or about 4 percent of GDP. In view of the fact that economists generally consider any trade deficit over 3 percent of GDP to be unsustainable for the long term, this increase is a seriously troubling development. The more so because President Obama recently emphasized that his administration is on track to reach its goal of doubling U.S. exports over five years.

He is correct. Indeed, the March export performance was quite good with total exports up 3 percent and shipments to Europe rising over 11 percent to an all time high of $25.1 billion. Great, except that imports from Europe were up by more than 22 percent to an all time high of $35 billion.

I hate to have to keep saying this, but the president's goal of doubling exports is a stupid, meaningless goal as long as imports are absent from the equation. The only meaningful goal would be a goal to cut the trade deficit in half, or, better yet, to eliminate it all together. That would mean not only exporting a lot more but also importing relatively a lot less and producing domestically a lot more of what we consume. That's what rebalancing has to mean. We will not be able to rebalance simply by exporting more.

In this context, one development last week was most disheartening. California's BART (Bay Area Rapid Transit) system has been considering bids on 775 new light rail cars. Of the two final bidders, Canada's Bombardier came in at $1.54 billion versus $1.72 billion for Alstom of France. But the French company was promising 95 percent U.S. content while Bombardier could only offer 66 percent U.S. content, meaning that its bid would actually create fewer jobs and add less to the U.S. economy than that of Bombardier. BART announced that it will be going with the Bombardier bid. Alstom is offering to revise its bid which it says is a perfectly valid procedure under the terms of the bidding contracts. But it is not clear that BART will go along with that.

Of course, one can sympathize with BART since the Bombardier bid would save it money. But for the U.S. and California economies, it would be nice if Alstom could get its price down while maintaining its high U.S. content offer. Someone in a high place should be leaning on BART to let Alstom revise the bid.

Otherwise this will become another example of the problem of demand leakage. Paul Krugman is out with a new book called End this Depression Now. In short, it argues that there is not enough demand in the U.S. economy and that government should step in to correct that with a good old Keynesian stimulus program to pump up demand and consumption. The notion is that if consumption rises, it will spark more production to meet the demand and the new production will create jobs and prosperity. The problem with this is that if the consumption is primarily of imports then the demand leaks out of the U.S. economy to places like Japan, South Korea, Germany, and China. If we pump up demand only to have it supplied from abroad, our problems will only get worse. The great problem of the U.S. economy is not so much a lack of demand as a lack of production. Were our trade in balance instead of in deficit, unemployment would be at about 4 percent.

Which leads to my last point. An industry that should be booming in the United States is that of solar panels. I don't mean installation of solar panels. That is booming. I mean production of solar panels. The United States has a huge market. The industry is not labor intensive like apparel or shoes. Rather it is more technology and capital intensive like semiconductors and steel. It is the kind of industry economists say America should be good at. In fact, America is good at producing solar panels. But China has been both directly and indirectly subsidizing its industry heavily as part of its targeted industry strategic development program. Chinese products have been aggressively dumped into the U.S. market with the result that the U.S. based industry is barely holding on.

The president has said he will insist on a level playing field for U.S. industry and has said that America always wins when the playing field is level. Well, this week is the week when the administration must decide how to respond to China's industrial policy for solar panels. This decision will tell us whether Obama means business or whether all the activity around the creation of a trade enforcement unit is just a mirage.

In an attempt to recover from its bumbled handling last week of negotiations over  the blind Chinese dissenter, Chen Guangcheng, the Obama administration was at pains over the weekend to present the results of its concurrent Strategic and Economic Dialogue as a resounding success that will rebalance U.S. -China trade, spur U.S. exports to China, and stimulate U.S. job growth while turning China into a U.S. style consumer paradise.

Amazingly, U.S. media like the Wall Street Journal, New York Times, and Washington Post, that had done an admirable job of uncovering the administration's Katzenjammer Kids approach to Chen, swallowed the economic success story hook, line, and sinker. All ran triumphal Sunday stories essentially parroting the great progress line being promoted by administration spokespersons. This is even worse nonsense than Hillary Clinton's line that the deal over Chen was "his wishes and our values."

To understand fully just how bad the whole week was, let's go back to the original Wednesday announcement of a deal that had Chen going to Chaoyang Hospital in Beijing to be reunited with his wife who had been brought from the Shandong village out of which he had made his earlier escape. This was when Clinton made her wishes and values statement, and that story was accompanied by pictures showing U.S. Ambassador to China Gary Locke and Assistant Secretary of State Kurt Campbell holding Chen's hands as they accompanied him to a limo for the drive to the hospital. They were widely described in the press as America's most experienced and savvy diplomats. What wasn't clear but subsequently became so was that the deal had been hastily put together in order to prevent the Chen issue from impinging on the Strategic and Economic Dialogue scheduled for Thursday and Friday. The administration had half the U.S. cabinet and some 200 top officials coming for those talks and the last thing it wanted was a breakdown.

In their haste, however, the top diplomats made it clear to Chen that if he didn't leave the haven of the U.S. embassy for the hospital controlled by Chinese security forces that his wife would be sent back to the tender mercies of the local goon squads in Shandong. Maybe this wasn't a threat, but nor was it a show of friendly support. Moreover, the top diplomats failed to achieve any continuing presence at the hospital or any way of assuring continued good treatment for Chen. They and he were now at the mercy of the Chinese security forces which is why Chen got scared and things began to break down. Eventually, of course, a new deal was apparently worked out to let Chen come to America to study law. Whether and how this will actually work is still unclear.

What is clear is that a great sigh of relief went up from the U.S. delegation when the Chinese proceeded to move ahead with the Strategic and Economic Dialogue on schedule. There had been concern that they might postpone or call the whole thing off in response to the U.S. handling of Chen.

Perhaps out of gratitude and certainly to prove to themselves that it had all been worth the effort, the U.S. team then proceeded to present the Dialogue as an outstanding success -- one obviously worth the ambiguity with Chen.

So of what did all this success consist? According to the Wall Street Journal, China agreed to consider making changes to boost domestic consumption, to rely more on domestic consumption than investment or exports for growth, to boost dividends paid by state owned companies to the national treasury to support social spending that arguably will enable Chinese consumers to spend more of their earnings instead of saving, and slightly open the Chinese economy to additional competition.

For instance, foreign financial firms will now be allowed to increase their stake in Chinese firms to a maximum of 49 percent from the current 33 percent. There was also agreement to consider reducing some of the favorable export financing provided to Chinese exporters and thereby bring China's practice into conformity with global standards. China will also give consideration to removing or reducing advantageous financial and regulatory standards for state owned enterprises. And, although there was no Chinese commitment of any kind on currency valuation, Treasury Secretary Tim Geithner could not repress the urge to point out that the yuan has appreciated by 13 percent in real terms over the past two years.

Some of this may indeed be useful, although Chinese and American analysts differ about the likely effects. Americans think increased Chinese consumption will boost U.S. exports and jobs. The Chinese don't believe that but think the increased consumption might make for more balanced and stable domestic growth. But in any case none of it is game changing in the least, partly because, as the Journal's Bob Davis was quick to note, none of the agreements to consider doing various things are at all binding on Beijing, or the United States for that matter.

More important, however, are the questions of framework, direction, and impact on long term wealth creation and power. Clinton could not repress a telling burst of clichés. "Our countries," she said, "have become thoroughly, inescapably interdependent." And, "the United States believes that a thriving China is good for America, and a thriving America is good for China."

I guess, she has to say that, but why does she particularly want to celebrate this interdependence? China is clearly doing its best to become less interdependent. And is it true that a thriving China is good for America and vice versa? Well, it may or may not be true. It depends on circumstances. And Clinton's job is quintessentially to assure that circumstances in China are favorable to making America thrive and perhaps making America less interdependent.

At the moment, the circumstances are such that most of the incentives in the U.S. -China relationship are to move the production of tradable goods and the provision of tradable services and the related jobs out of the United States to China. Under those circumstances a thriving China does not necessarily result in a thriving America. What are those incentives? Regardless of Geithner's praise of the revaluation of the yuan in real terms, it is still undervalued. Moreover, the markets know that the Chinese can and will increase the undervaluation whenever it suits them.

So the initiative and the dynamics are with China. Investment incentives of both the financial and administrative guidance type are set in a pro-China anti-America direction. In many industries like avionics and aerospace, it is clear to market players that if they want to sell in China they will need to produce in China because of both overt and covert Buy China policies and attitudes. By the same token, it is also the case that China provides very aggressive tax, investment grant, and other financial investment incentives that are usually unmatched by the United States. The use by China of Value Added Taxes combined with their non-existence in the United States is a powerful incentive to move production to China.

Until these fundamental factors change, no amount of agreements to consider having state owned enterprises pay more dividends to the Chinese national treasury and to allow foreign financial firms to invest up to 49 percent in Chinese firms is going to change any important trajectories. In particular, they will not change the trajectory of loss of American wealth producing capability and global influence.

Not only have our "top diplomats" led by Clinton given us a feckless performance in Beijing. They are leading to nowhere in particular. They are captives of the status quo, of slogans and shibboleths and the march of events. No one is thinking. They're all too busy doing Dialogues.

So Hillary Clinton and half the U.S. cabinet members have now landed in Beijing for the semi-annual U.S.-China Strategic Dialogue. Had it not been scheduled for the Chinese capital far in advance, it might have been better to have held this meeting in Tokyo. The drama seems to be much more Kabuki than Chinese opera.

I'm trying to imagine Hillary's opening statement. Let's see:

"Excellencies, President Obama has asked me to assure you that he wants a strong and prosperous China so that you can better prevent dissidents from escaping house arrest and taking refuge in locations (the U.S. embassy) that force us to raise embarrassing human rights issues at what are supposed to be strictly strategic discussions. Of course, the president does also believe that you will become stronger as you open up and liberalize your system by blanking out half the Internet and removing references even to fifty year old American movies. I also want to assure you that our recent pivot to Asia and renewed military emphasis in the Pacific is in no way aimed at you in China. On the one hand, you see, our mutual friends in Asia such as the Southeast Asian Countries and Japan and South Korea want to keep doing business like crazy with you, but also want us to be a kind of counterweight so that they don't totally fall under your influence. Because we are no longer economically competitive our only counterweight tool is our military which we are anxious to  You know. To a guy with a hammer, all problems look like nails. But we don't really think you are a nail. It's just that we only have a hammer now that you have pretty much taken all the other tools.

On the other hand, our global corporations like Apple and GE need to be sure that their global supply chains here in Asia are safe and secure. As you know, there are a lot of intra-Asian disputes over islands and oil fields and the like and our companies think our military presence tends to dampen those disputes and keep the supply chains running without a hiccup so that we can be sure that, in the words of Steve Jobs, ‘those (supply chain) jobs are never coming back' because we don't want those kinds of jobs for Americans. Of course, executives like GE CEO Jeff Immelt who also heads the president's Commission on Jobs and Competitiveness want to move their high tech jobs to China as well because they know from reading your five year plans that if they want to sell advanced products like GE's avionics in China they'll have to produce them in China so that China can learn the technology. We therefore hope that you will welcome such action by GE and others.

You are no doubt aware that some American analysts think you are manipulating your Yuan to keep it undervalued against the dollar as a way of subsidizing your exports. Although Treasury Secretary Geithner believes a stronger yuan would help China better to contain inflation, you don't have to worry because neither he nor anyone else on the U.S. delegation will accuse you of manipulating the Yuan. On the one hand, we certainly have no intention of embarrassing you by seeming to suggest that you are not playing strictly by the rules, and, on the other, we don't want to deprive the almighty American consumer of being able to buy ever less expensive imports. Beyond all that we are looking forward to hearing more about your strategic economic policies. Of course, as usual, we will have nothing to say in this area because, as you know by now, we believe having no strategy is the best strategy. But listening to yours does alert us as to the industries we will be losing in the future.

Finally, you know, of course, that for domestic political reasons I must always raise the issue of human rights. I thought we had persuaded the blind self-taught lawyer dissident Chen Guangcheng to leave our embassy and entrust himself to your growing appreciation of the need for openness and guaranteed human rights to make your system stronger. Apparently it was actually your threats to beat his wife to death if he didn't leave the embassy that actually did the trick. But never mind about that, the main thing now is to be sure you will have no objections to him and his wife moving to America where we can guarantee their obscurity without the necessity of your beating them to death. Let's now agree on this quickly so that we can get to the main business here which is to assure a continued welcoming environment in China for American investment, and the offshoring of American based production and R&D."

Upon returning to her seat after this statement, Hillary probably should avoid drinking or eating anything that might be served. Indeed, the whole U.S. delegation should probably go on a starvation diet while in Beijing. Or maybe it should arrange a temporary sushi supply chain from Tokyo to avoid any risk of the poisoning that has been the recent fate of foreigners in China who have gotten too involved with China's elite leadership.

If nothing else, the U.S. delegation should at least have a survival strategy.

U.S. Trade Representative Ron Kirk was here in Singapore yesterday and told an audience at the Singapore Management University that prospects are good for completion of talks by the end of July to establish a Trans-Pacific Partnership (TPP) free trade agreement among the United State, Singapore, Chile, Peru, New Zealand, Australia, Brunei, Malaysia, and Vietnam.

Since Singapore has been the brains and driving force from the beginning behind the TPP, it was only fitting that Kirk should give his status report here. However, it is the nature of these things that the truth is usually pretty much the opposite of what is publicly stated. Certainly that is the case with the TPP.

While Kirk was addressing students, I was speaking with several of Singapore's diplomats, journalists, and academics. Their views were much less sanguine than those of Kirk. Indeed, they sounded somewhat scared.

As originally planned by the strategists at Singapore's Ministry of Foreign Affairs, the deal was to be part of a grand scheme to reaffirm and revitalize the U.S. presence in Asia and to keep Washington engaged as a counterweight to Beijing in the region. The idea was to build on existing free trade arrangements between Singapore, the U.S., Australia, Chile, Peru, and others to create a high quality, so called 21^st century, agreement that would serve as a core around which others could be gathered to eventually encompass most of the major trading countries in the Pacific basin.  As a start, it was considered necessary to include key members of the Association of Southeast Asian Nations (ASEAN) such as Malaysia and Vietnam in addition to Singapore. Vietnam was particularly important because it represents a country that is at earlier stages of development and is coming out of a centralized communist environment.

Singapore also reckoned that the United States would quickly act to bring in Mexico and Canada with whom it, of course, shares the North American Free Trade Agreement. In addition, it seemed obvious that any free trade deal in the Pacific could not ignore the world's third largest economy -- Japan. Singapore thought the U.S. would manage to persuade Japan to sign up as well.

Well, we know the best laid plans often don't work out. Washington shied away from including Canada and Mexico until discussions had already gotten fairly far advanced and inclusion of the two other NAFTA members would have complicated matters for meeting the Obama administration's self-imposed deadline of completing the first deal before the U.S. election season. Moreover, Mexico had its own elections and free trade deal ideas. As for Japan, Washington was actually ambivalent. It knew that Japan's powerful agriculture lobby would be a problem and that that would slow down achieving any fast positive results. Of course, the White House wanted Japan in eventually, but just not quite now. But then Japanese Prime Minister Noda began talking like he was going to make a real effort to bring Japan in. Washington could not say no out loud and so welcomed the Noda initiative. The Japanese agriculture lobby had an entirely different reaction and geared up big time to stop all this dangerous talk of market opening in agriculture.

However, Noda's biggest problem was his own priority of getting an increase in the Japanese consumption tax. This is badly needed in order to keep the Japanese public debt from going too far beyond the 200 percent of GDP mark. (Yup, you got that right. Japan makes Greece look parsimonious). To get the consumption tax, which is opposed by many in his own party, Noda may have to play ball with the Liberal Democratic Party which looks like it is willing to play but only if Noda forgets about TPP and agrees to dissolve the Diet and call for new elections.  

Of even more concern, however , is the sudden questioning by the Chileans of the value of the deal as presently being constituted. Chile had been considered a slam dunk supporter. So its raising of questions is a red flag danger signal. Beyond that it seems that the Malaysians are also questioning whether any benefits they may be getting are worth the trouble of further liberalization of their domestic economy. And just to put the icing on the cake, it is becoming ever clearer that the Vietnamese, whose economy resembles that of China with large segments controlled by state owned companies, are going to have great difficulty in actually meeting the high standards being proposed.

So even as Kirk talked success, the platform was trembling beneath his feet.

This is the problem with trying to use trade deals as tools of diplomacy. It may sound nice and positive for two countries to say they are tightening their relationship by doing a free trade deal. But eventually at some point, someone has to count the jobs and the balances of trade and financial flows. Typically, deals done primarily for geo-political purposes don't add up, and when they don't, all the "strengthening of commitments " in the world often doesn't save them.

We'll have to wait and see about the TPP, but things are not getting easier for it.

I must say that I have had a revelation about Japan this past week. There really is no one in charge and the country is adrift.

Yes, I know you've heard this many times before. For years, prime ministers came and went in Japan even more rapidly than in Italy. Ministers were a dime a dozen. Just about the time you remembered the name of the minister of foreign affairs or finance, the guy would be gone and you'd have to start trying to remember all over again.

But in the old days there was a division of labor in Japan that may have been  murky to outsiders but that was very clear to those who ran and understood the system. The political scene was dominated by the Liberal Democratic Party. Of course, it was neither liberal nor democratic, but it was a party that understood how to grease the wheels of Japan's politics. So it did the politics. Meanwhile, Japan's superb bureaucrats took care of vision, policy, and actually running the country.

I remember being awed in the era 1965-2000 by the power of officials such as the vice minister of International Trade and Industrys (MITI), the director of the Industrial Policy Divison, and even the assistant director of the Auto Industry Section. I recall in 1984, Sony Chairman Akio Morita telling me apropos of disputes between the U.S. and Japanese semiconductor industries that the MITI officials needed to give "strong guidance" to the CEOs of the Japanese electronics companies. I recall being in the office of important Japanese CEOs such as the head of NEC when he received phone calls from these MITI officials and took them immediately. In 1985-86, I and Michael Smith and other U.S. trade negotiators cut a deal with the Japanese officials that halted dumping of Japanese semiconductors in the U.S. market and that assured the U.S. semiconductor industry or a very high probability of gaining a twenty percent share of the Japanese semiconductor market. Not only did these officials have the power to cut that deal, but they made it stick.

Well that was the "good old days" that are no more. Over the past week, I spent time at Japan's Ministry of Economics Trade and Industry (METI). It is the successor to MITI but only as a pale, pale facsimile. In discussion with one high official I noted that Japan is suffering a hollowing out of its big manufacturing industries such as autos, semiconductors, and consumer electronics (Can you imagine that South Korea's Hynix may acquire the bankrupt Elpida, Japan's last maker of semiconductor DRAMS?). His response was that METI's new theme is "Cool Japan" with emphasis on the writing of Manga (cartoons), cooking, and development of computer games. He actually said that Japan is suffering fatigue from its competition with Korea. I nearly fell off my chair. Where were the do or die men of yore who dared to challenge and beat the giants of American industry, men like Naohiro Amaya, Makoto Kuroda, and other unsung heroes of Japan's economic miracle.

Well, apparently what has happened is that in the past ten or fifteen years, the politicians have decided to do policy as well as politics. Power has moved out of the bureaucracy to the prime minister's office and to the Diet. Of course, this is what we Americans always wanted in the past as we wrestled with the bureaucracy. But what we missed at the time was the fact that, difficult as it was, the bureaucracy had a vision and ideas and a plan for realizing them. Unfortunately, today's Japanese politicians seem to have no vision and no ideas and no plan.

Years ago I wrote a book entitled Trading Places. It referred to Japan overtaking the United States in key areas of technology and industry. Now that seems to be happening in the political realm as well. Japan, like the United States, increasingly seems to have no idea of where it is going or how to get there.  

In the context of the struggle over Iran's development of a nuclear industry and possibly of nuclear weapons, one often hears that Israel considers development of an Iranian nuclear bomb as an existential threat. The concern, of course, is that if they had the bomb, some of Iran's leading Mullahs might be mad enough to try to use it to wipe out Israel in one strike.

It is to counter that threat that there have been threats and much discussion of a pre-emptive Israeli or Israeli-U.S., or solely U.S. strike against Iran's nuclear development facilities.

Lost in the whole discussion is what any of these strikes might do to Japan. I know that might seem irrelevant in view of the fact that Japan is physically several thousand miles away from Iran and Israel. In actuality, however, Japan is right in the middle of the Persian Gulf. Let me explain.

As a result of the March 11, 2011 earthquake and tsunami, Japan's Fukushima nuclear reactors were knocked out and largely destroyed. Then safety checks and scheduled maintenance stops halted the remaining active reactors. Today, only one of Japan's reactors is operating and it is scheduled to go down for maintenance soon. Once the reactors are turned off, it is proving extremely difficult to overcome public opposition to turning them back on. Those living near the reactors are afraid of a repeat of the Fukushima experience and don't want to hear about the power being turned back on. While understandable, this means that over a third of Japan's electric generation capacity is out of action. With Japan's hot, humid summer approaching, there is fear of serious power shortages despite draconian conservation measures.

Now here's where the Persian Gulf comes in. To replace the lost nuclear power, Japan has been importing large quantities of oil from the Gulf to power its remaining conventional generators. This has driven up the price of oil, but at least it has relieved to some extent the electricity shortage.

However, any kind of strike on Iran or military action in the Gulf is virtually guaranteed to close, at least temporarily, the Straits of Hormuz and thereby to shut off the oil shipments to Japan. Thus, in a very real sense, a strike on Iran is also likely to be a strike on Japan.

At the German Marshall Fund meeting that I attended earlier in the week in Tokyo, there was much discussion of the North Korean missile failure and its implications. In the midst of this discussion, a senior Japanese official almost screamed at the audience not to become preoccupied with North Korea and missiles. Said this person, "the North Korean missile is not a real threat to Japan. The much greater threat is a closure of the Persian Gulf. We must prevent that by all means."  

In the past six months, Washington has made much of its new "pivot to Asia" policy under which U.S. resources and priorities are to be concentrated on the Asia-Pacific region as a way of reassuring its Pacific allies of America's commitments to them. This is supposed to strengthen U.S. ties with key Asian countries as well as promote American exports and economic interests. It would thus be ironically counter-productive if a strike on Iran would prove to be an existential threat to America's greatest Asia-Pacific ally -- Japan.

At today's opening meeting of the German Marshall Fund's Trilateral (EU, U.S., Japan) conference in Tokyo, the question of the future of the Euro turned into a discussion of German mercantilism.

Top leaders and analysts from Europe, the United States, and Japan all seemed to agree that Germany is in the process of killing the EU as we have come to know it. The consensus view seems to be that Germany is not only enforcing an unsustainable austerity on the rest of Europe (especially the southern periphery states of Portugal, Spain, Italy, and Greece) but that it is also unwilling to expand its own consumption and reduce its trade surplus as a way of stimulating growth in the rest of the EU. Indeed, rather than buy more from its EU trading partners, it is said to be insisting that they expand their exports to non-EU destinations, or, in other words, that they become Germans too.

The term mercantilist was regularly applied to Germany in today's discussion with no denial from the Germans present or from any of the other participants. I found this interesting because Germany is always considered much more dedicated to free markets and less socialist than say the French, or Swedes, and certainly than the Italians. Yet, while mercantilism is not socialism, neither is it the laissez-faire that we associate with Anglo-American free market capitalism. Mercantilists don't really embrace free trade. For them, the market is a tool rather than an end in itself. If the market can assist in achieving their primary goal of trade surpluses and large reserve holdings, fine, but if not, mercantilists do not hesitate to reshape the market. Germany is considered mercantilist because it does accumulate chronic current account surpluses, and embraces an export led economic growth model.

But mercantilism typically entails protection of the domestic market and/or subsidization of domestic producers. Penetration of mercantilist markets by foreign producers is typically much less than foreign penetration of more open, laissez faire markets. So the question today was: what are the barriers to foreign producers in the German market? It doesn't have much in the way of tariffs, or quotas, or other formal trade barriers nor does it provide much in the way of export and production subsidies. So, in what does German mercantilism consist?

There seem to be two major and related factors. The first is the embrace of a philosophy of export led growth and of doing whatever is necessary to assure continuing trade surpluses. Thus, the German government coordinates constant discussions between labor, government, and industry to arrive at agreements on wages, investment, productivity gains, and prices that will assure continued competitiveness to producers based in Germany. Brutal austerity will be imposed on the German economy to keep it competitive. Moreover, this constant coordination and emphasis on competitiveness engenders a "Buy German" mentality that tends to hold down the share of the German market held by imports.  Of course, it is also true that enmeshing the German euro in a common currency with the euros of France, Italy, Spain, etc. also tends to keep the euro undervalued with regard to Germany. But in general we can say that German mercantilism is essentially a state of mind more than a collection of specific trade barriers or policies.  And this state of mind is fundamentally opposed to what countries generally think of as "free trade."

More important is the fact that this situation is not characteristic only of Germany. It is also true of Japan, Korea, China, Taiwan, Singapore, the Netherlands, Malaysia, Vietnam, and Brazil to name just a few. In other words,  the bulk of the global economy is more oriented toward mercantilism than it is toward free trade. That being the case, it suggests that continued calls for more Free Trade Agreements like the U.S.-South Korean FTA, or the Trans Pacific Partnership are unlikely to produce deals that will relieve current imbalances and tensions. Indeed, that may not even be their purpose at all. More on this later.