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How Germany can reframe the US-China trade debate

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No longer coming to a store near you. Source: AP

The European Union and Germany have less than a month. May 1 is the deadline that Donald Trump has set for negotiations to make permanent the EU’s temporary exemptions from his tariffs on steel and aluminum imports. Mr. Trump, he of the “Art of the Deal,” loves such haggling under pressure. So the EU needs to respond with the right approach. That is most urgent for the new German government, because getting this deal right is more important for Berlin than for all other EU capitals.

The US-German relationship has been in trouble ever since Mr. Trump won the US presidential election. Chancellor Angela Merkel at the time sent a congratulatory message that seemed more like a lecture on liberal values than good wishes. The relationship went from bad to worse during her visit to Washington a year ago, when Mr. Trump lambasted Germany for its trade surplus with the US, which he considers unfair. Mr. Trump has kept up the trade drumbeat, more recently threatening to slap duties on German cars if the EU retaliates against Washington’s new tariffs on metals.

This background of problems makes the upcoming steel and aluminum talks a big opportunity for the Merkel government to reboot bilateral economic ties more generally. But this will be no easy task.

Trade policy can no longer be pursued in isolation from broader considerations of the national interest.

That is because Mr. Trump views trade as a win-lose proposition. He pulled the US out of the Trans-Pacific Partnership with 11 Asian and Latin American countries because the country supposedly couldn’t dominate multilateral trade talks the way it could a deal with just one (smaller) partner. He also seems uncomfortable with economic interdependence generally – even if, as in the case of NAFTA, it strengthens US commerce.

Mr. Trump also seeks short-term tactical advantages wherever he can, at the expense of long-term vision. Witness his threat to put the recently agreed update to the US-South Korea trade deal on hold until the outcome of the nuclear talks with North Korea is clear. South Korea is an important US ally, but its negotiating might cannot match that of a military and economic superpower.

But Germany has one big advantage that Korea and even the NAFTA partners Canada and Mexico do not: It is part of the European Union, a $17 trillion economic superpower that is the largest commercial partner of the US, and which negotiates on behalf of all its member states. Through its membership of the EU, Germany has enormous leverage.

Germany has to balance two competing concerns. First, it needs to win a permanent exemption to the steel and aluminum tariffs. Second, it needs to avoid making concessions that would reinforce the White House’s short-term, zero-sum view of trade policy. This mentality of quid-pro-quo undermines US-German attempts to build a common position on the longer-term challenges they both face, primarily the rise of China and its state-capitalist economic model.

Recall that Mr. Trump fired off his steel and aluminum duties under section 232 of the 1962 Trade Expansion Act, which gives the US president the authority to block trade on ground of national security. It should be self-evident that German metal exports pose no threat to US national interests at all. That’s why even the Pentagon argued that steel and aluminum imports from friendly countries should not be included in the 232 action.

So Germany would be smart to ask that the negotiations on the exemptions include not only the US Trade Representative but also all the other relevant agencies of the US government: the departments of state, defense and treasury. Their inclusion would affirm a bigger point that should be obvious by now. Trade policy can no longer be pursued in isolation from broader considerations of national interest.

These other departments are likely to take a much more benevolent approach to Germany and the EU in the upcoming negotiations. But involving them would not only help Germany and its EU partners to convince the US administration to make the steel and aluminum tariffs permanent; it would also refocus these negotiations toward the future of the international trading system. The United States cannot by itself convince China to open its markets, respect intellectual property rights and stop subsidizing state-owned enterprises. Germany should drive home the point that its cooperation will be needed in dealing with China.

Reframing the trade debate before May 1 is hard, but also necessary. “The owl of Minerva spreads its wings only with the falling of the dusk,”  the German philosopher Georg Wilhelm Friedrich Hegel famously observed. Washington and Berlin cannot afford to wait for night to find wisdom.

To contact the author: gastautor@handelsblatt.com

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