Trump’s bid to take on the EU could crush the German economy

USA & German flags

The EU’s Trade Commissioner held out an olive branch to Donald Trump last week as the bloc tries to prevent tariffs being put on the auto sector – but the move looks likely to fail. An escalating trade dispute between Brussels and Washington now appears inevitable – and Germany will feel most of the pain as Donald Trump gains political capital at home.

The US president is currently sitting on a report by Commerce Secretary Wilbur Ross into whether imported vehicles posed a “national-security risk”. Reports from Washington suggest that the study had provided President Trump with a “legal rationale” to impose heavy new tariffs on foreign cars.

In an interview with Foreign Policy magazine last week, Cecilia Malmström, EU Trade Commissioner, repeated the bloc’s offer to eliminate tariffs on vehicle imports completely. “We know that Trump has voiced concerns on our car tariffs, and we have said that we are willing to take away our tariffs on cars and car parts, and the whole motor vehicle sector, to include them in the industrial goods agreement,” she said.

Not good enough

The problem is that Donald Trump already said that an agreement on vehicles alone was “not good enough” when the offer was made last year. Indeed, many Europeans – rightly or wrongly – tend to view US vehicles as badly-made gas guzzlers and are unlikely to buy US-made vehicles in large numbers even if tariffs were scrapped. The President understands this. “Their consumer habits are to buy their cars, not to buy our cars,” he said. That’s why he insists any discussions with Europe will need to include agriculture, as this is where the biggest opportunity for the US lies.

“The European Union is almost as bad as China, just smaller,” the President has said and he even described it as “one of the biggest foes” of the US. Last month, he said that tariffs will be introduced unless the looming trade talks include agriculture. “They barely take our agricultural products, and yet they can sell Mercedes-Benz and they can sell anything they want in our country including their farm products, and it’s not fair,” President Trump grumbled at an event in Minnesota. So, the administration’s position is clear, but the EU appears to be ignoring the reality of the situation.

Ms Malmström once again categorically ruled out any discussions relating to farm products. “It was very clear from the European Union side that we were not going to do agriculture at this stage, and not in the foreseeable future as well, so that’s where we are. Agriculture is not in the mandate,” she said. The EU appears to be gambling that Donald Trump will eventually give in on the agriculture side of the equation. The EU is likely to be wrong.

Donald needs the farmers

Farmers matter to Donald Trump. In 2016, about 70pc of agricultural workers voted for the current incumbent of the White House, but their support has been waning since then. Trade policy antagonism with China has hit farmers hard – particularly soy bean growers. A poll from Farm Journal Research late last year showed that support for Donald Trump had been falling, although more than 50pc of respondents still said they would vote for the Republican incumbent. So, being seen to fight for farmers’ interests will be an important part of his re-election programme. Socking it to Europe, with their food snobbery and protectionism, is almost guaranteed to please his supporters.

All of this implies stalemate, with neither side willing to budge. It is likely that this dispute will escalate as the year progresses, with Trump making a big show of the issue to galvanise his “America First” strategy.

The German economy had the slowest growth of any Eurozone country except Italy at the end of 2018. Germany’s economy did not grow at all in the year’s final quarter, and it barely avoided sliding into recession. However, there has been a slight rebound in the first quarter which must have been a relief for Berlin. One reason for the German slowdown was conflict over trade. American tariffs are hurting German steelmakers’ sales and Ms Malmström has insisted that, before talks with the US can be successfully completed, “we expect the Americans to take away the steel and aluminium tariffs.” This doesn’t appear likely either.

Structural changes already pressure Germany

The German car industry is already in a state of flux. The ‘dieselgate’ scandal, uncertainty over future environmental regulations, the rise of ride-sharing services such as Uber and Lyft and the tightness of credit in some major economies, means tariffs will exacerbate these structural changes in the industry.

According to an analysis published by management consultant Ernst & Young, the German automotive industry barely grew last year. At the end of 2018, exports were even in the red. However, adding to industry costs, the number of employees employed in the German auto sector grew by 1.7pc to a new high of 834,000 individuals in 2018.

The EU is trying to negotiate a path through the current tumultuous trade situation. But intransigence on both sides is likely to be the defining part of any discussions – much more so than the discussion with China. With Donald Trump seeking re-election on 3 November next year, the EU has provided him with a perfect opportunity to grandstand before his base.

 


The above article was previously published by Charles Stanley on 8th May 2019

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.