US-EU trade war: Berlin fearful of the second round

Press conference by Cecilia Malmström, Member of the European Commission, on the US restrictions and tariffs on steel and aluminum imports, affecting the EU. Date: 01/06/2018. Location: Brussels, Belgium. © European Union, 2018/ Source: EC – Audiovisual Service.

Finally, Trump did it. He declared war against his country’s closest and more loyal allies Canada, the European Union and Mexico. In the case of the EU though, things may be more complicated than the super tariffs on steel and aluminum products of 25% and 10% respectively, imposed as from 1 June by the US on the relevant imports.

The importance of the products penalized per se is minimal. They barely represent half a percentage unit of the club’s GDP. Nevertheless, Europe expects the American tariffs to divert the excessive flows of steel exports from overcapacity countries like Turkey, Brazil and of course China to be directed towards the EU market. There is more to it. The US tariffs expose some hidden disparities between the club’s members.

France and Germany divided

This newspaper has extensively reported on the differentiation of the German and French approach, regarding the retaliation after the steel and aluminum tariffs imposed by the Americans. On 10 May the European Sting leader said “The EU response to the American attack, has seriously divided the Brussels bureaucracy because of the completely different lines adopted by France and Germany. Paris is favoring an all out counterattack …While Berlin begs for moderation and bargaining about tariffs on cars and other engineering manufactures…In this way, France blocks a possible EU-US compromise about tariffs that Germany can tolerate”.

This is quite understandable. Germany is by far the largest exporter to the US, so Berlin would go for a compromise albeit painful as long as car exports are less touched. For Germany Mercedes-Benz, BMW and VW car exports to America must be saved at all costs, given their exceptional weight in the country’s economy and foreign account. More so, because there are alarming news coming from across the Atlantic Ocean. The White House has asked the American administration to search, if car and track imports are threatening the national security of the US. It’s exactly the same 1962 legislation, which the US used to impose the 25% and 10% tariffs of steel and aluminum imports.

Furious Trump

Last week, more clouds gathered over the North Atlantic. The prestigious German weekly business news magazine ‘Wirtschaftswoche’ reported that, more than one American unnamed sources said Trump is furious with German cars. He reportedly said he will hunt the luxury German car imports in the US, “until there are no Mercedes-Benz rolling down New York’s Fifth Avenue“. According to Reuters in relation to this report “a United States Embassy spokesman in Berlin referred questions to Washington”. The refusal of the embassy to refute the allegation may mean a lot.

What ‘Wirtschaftswoche’ wrote about Trump’s fury with Germany is not at all secret. When the German Chancellor Angela Merkel first visited Washington on 17 March 2017 after Trump’s inauguration, she was taken aback hearing her host say in reference to the existing trade deals, “Germany had done a much better job than the negotiators for the US and we have to even that out, not to win just want fairness”. On the same occasion – their joint Press conference in the White House- Trump went as far as to ask Germany to pay hundreds of billions to NATO and the US. He thus calculated the theoretical arrears Germany’s owes because of her failure to spend 2% of GDP on defense.

Penalizing Germany

The US is systematically discriminates against Germany. Take the case of Deutsche Bank, which has been hit hard by the US authorities. They reduced it to a more or less bankrupt small bank, from the global investment banking leader it was. Actually, Deutsche is currently abandoning its high flying investment banking altogether, laying off more than ten percent of personnel and closing down important outlets in order to survive. According to German financial reports, the bank is thinking of returning to retailing and other standard banking activities.

Given that Brussels has already prepared the package of retaliation penalizing the imports of some American products, it will be very interesting to see how Washington is to reply to that. Surely, there will be a second round in this catastrophic trade war exchange. This is what makes Berlin quite anxious.

A moderate EU response

In detail, as from July, the EU is planning to levy super tariffs on the imports of a number of US products, ranging from bourbon whisky, orange juice and dried fruits to Harley Davidson bikes of a total value of €2.8 billion. This sum is quite trivial compared to the value of goods the two sides trade every year, reaching hundreds of billions of euros and dollars. The EU’s response is obviously planned to be restricted, in the hope things to end there. But there is no doubt there will be a second round in this affair. Trump has promised it.

So the value, and most importantly, the selection of the European products to be punished, in the highly possible secondary US salvo will be characteristic of the American intentions. If they target the automotive sector, then Germany should expect more troubles with Trump’s White House.

Already, Washington is searching for the ‘threats’, the imports of Mercedes, BMWs, VWs and Audis represent, for the national security of the US. Very few think the results will ‘acquit’ the German cars.