Sitting Ducks

Germany relies on European support as trade war looms

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Strategizing from up high. Source: Handelsblatt

Germany, Europe’s largest economy, has more to lose from a trade war with Donald Trump than any other EU member state. The country is deeply bound to international trade networks, with exports of goods and services making up more than half of German GDP.

Germany’s export surplus totaled nearly €245 billion ($300 billion) last year, the largest of any nation on earth. The United States, by comparison, ran a deficit of €663.2 billion, of which €50 billion was with Germany. Those numbers rile Mr. Trump: He sees trade deficits as a swindle perpetrated on the American people, which makes Germany “enemy number 1” in trade policy, says Nobel Prize US economist Paul Krugman.

So it comes as little surprise then that Germany’s economists, executives and politicians feel like sitting ducks as they wait for the EU to respond to Mr. Trump’s aggressive behavior, which threatens Germany’s business model.

“Mr. Trump's policy is a lousy approach to fair trade. Not good for customers or business.”

Joe Kaeser, CEO, Siemens

Economists and executives are sounding the alarm on the devastating effects of a trade war with the US. “If it went that far, German prosperity would be under real threat,” said Clemens Fuest, president of the Munich-based Ifo Institute for Economic Research. Marcel Fratzscher, president of economic research institute DIW Berlin called Mr. Trump’s provocations “an attack on the German economic model,” while Christoph Schmidt, chair of the German Council of Economic Experts, called on Europe to “fight for free trade and the defense of the international trade system.”

The numbers tell the story: 10 percent of all German exports go the US, and that number increased by two-thirds over the last 10 years. Even Germany’s car industry is heavily dependent on the US market, where it sells around 10 percent of its entire production, or 1.35 million cars. Mr. Trump’s threatened 25 percent tariff on imported cars could have a devastating effect, including the loss of 2 million German jobs directly or indirectly dependent on the car industry.

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Even German CEOs, who usually shy away from explicit political comments, have called for action. “A trade war would be devastating,” Frank Appel, CEO of Deutsche Post, said recently, with consumers and businesses among the hardest hit. Deutsche Post employs half a million people worldwide, including at US delivery company DHL, which it owns outright.

“This conflict has the potential to turn into a global trade war, which will only have losers,” said Rudolf Staudigl, CEO at Munich-based Wacker Chemie. Heinrich Hiesinger, CEO of engineering giant Krupps, described Mr. Trump’s policy as “retrograde,” and Siemens boss Joe Kaeser called it a “lousy approach to fair trade. Not good for customers or business.”

And while everyone can agree on the negative consequences of a trade war, there is considerable disagreement in both Berlin and Brussels about what to do about it. Former economy minister Brigitte Zypries took a belligerent tone, while Angela Merkel has been more cautious, urging the EU to seek dialogue while preparing to react to American action.

“We are dependent on the solidarity of our European partners.”

German government representative

Although Germany will be hardest hit by any trade tensions, its room for independent action is limited. In trade policy, the European Union makes decisions on behalf of its 28 member states. European reaction to Mr. Trump’s provocations will be formulated in Brussels. Here too, it is a question of balance and finding a middle course. Brussels will be keen not to unnecessarily exacerbate tensions.

The German government hopes the emphasis will be on dialogue and de-escalation. But it must also bear another factor in mind. The impact of a trade war would play out very differently for each of the 28 EU member states. France, for example, has a trade deficit with the United States, so it would be far less hard hit than Germany. “We are dependent on the solidarity of our partners,” said a German government representative, referring to the EU’s decision.

The European response will be spearheaded by Cecilia Malmström, the EU’s Trade Commissioner. Ms. Malmström says the response will be “resolute but proportional. We don’t want a trade war, but we do have to protect the interests of our citizens and of employment.” Last weekend, Ms. Malmström held urgent talks with her US opposite, Robert Lighthizer, with no immediate breakthrough. In any case, Mr. Trump appears to make his own policy decisions in this area, quite frequently in an arbitrary manner.

If Washington goes ahead with plans for steel and aluminum tariffs, the immediate European response will take the form of a challenge to the World Trade Organisation, or WTO, along with selected counter-measures designed to hit the home districts of prominent Republican politicians.

The Americans also want Europe to impose voluntary restrictions on some exports to the US, including steel and aluminum, whereas the Europeans point out that self-imposed export limits are illegal under WTO rules. Some economists say concessions could be possible on the European side, since average European tariffs are higher than their American equivalents – a point often made by Mr. Trump.

But ultimately the American president may not want a deal. Some suspect his true aim may be to divide Europe, linking together trade and security issues in order to sow mistrust between EU partners. There’s an additional worry for German officials: the prospect of Mr. Trump stirring up existing European resentments against Germany’s massive trade and budget surpluses.

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European countries are worried. Britain, due to leave the European Union next year, sent its trade minister to Washington to seek a sweetheart deal.

Germany, meanwhile, is intensively wooing senior Republicans in Congress, hoping to persuade them to stop the protectionist wave. The German ambassador to Washington, for example, met with Paul Ryan, the Speaker of the House of Representatives, twice last week.

But even nominally free-trade Republicans seem reluctant to stand up to Mr. Trump. Economic nationalism plays well in Republican heartlands. With Congress unwilling to confront the president, and opposition within the White House largely eliminated, Mr. Trump effectively has a free hand.

Daniel Delhaes, Markus Fasse, Dieter Fockenbrock, Bert-Friedrich Fröndhoff, Joachim Hofer, Dana Heide, Axel Höpner, Till Hoppe, Kevin Knitterscheidt, Annett Meiritz, Stefan Menzel, Jens Münchrath, Donata Riedel and Klaus Stratmann all contributed to this story. To contact the author: delhaes@handelsblattgroup.com

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