Trump tariffs
Germany is set for a rough ride
Germany has been a significant beneficiary of the world’s post-war prosperity, enjoying rapid industrial growth thanks to its world-class export industry. But the global order is changing rapidly, and Berlin has found itself caught in the crossfire of the trade war. With demand for new vehicles in structural decline as fewer young people sit driving tests, it appears that the German economy is heading for a period of significant turmoil – whatever the Brexit outcome.
This week, the German government slashed its growth forecast for 2019 once more, with GDP now expected to expand at a pedestrian 0.8pc over the year. This is a sharp haircut from its original projection of 1.8pc.
A substantial amount of the German success story is down to its car industry, which makes up around 16pc of total exports and employs more than 820,000 Germans directly. The car industry has been hit hard by a slowdown in the global economy and the “dieselgate” scandal where emissions data was falsified; but things could be about to get worse as tensions between Washington and Berlin deteriorate.
Donald Trump is unhappy about large imports of German vehicles into the US and, last month, Wilbur Ross, the commerce secretary, completed a report on whether imported vehicles posed a “national security risk”. President Trump has 90 days to respond, but he is unlikely to act until there is a resolution with China, as action on two fronts will further upset the markets. But once a deal with China is agreed, the Germans should be worried.
The EU estimated in June last year that a 25pc tariff would add about €10,000 (£8,503) to the price of a car made in the EU and sold in the US, and cut American purchases of vehicles and parts by half.
Against this backdrop, you would expect the Germans to act in a manner that would not antagonise the notoriously thin-skinned occupant of the Oval Office. After all, the US is Germany’s largest export market and vital to its economic health. However, China is the country’s third-largest export destination after France – and offers substantial long-term growth potential as it continues to develop.
The trade war is really about a clash of values between China and America, but Germany has been mostly deaf to American demands relating to Huawei. This week, Washington threatened Germany with a reduction in intelligence sharing if it allowed the Chinese company’s equipment to be installed in its 5G networks. Larshendrik Roller, Angela Merkel’s economic adviser, was recently sent to China to try to negotiate a “no-spying” agreement that would allow Huawei’s technology to be installed, but the value of such an agreement is moot. Nevertheless, Germany’s actions will be regarded by the Trump administration as a refusal to pick sides in what Washington hawks have dubbed the “new Cold War”.
Adding to the tensions between Washington and Berlin is Nord Stream 2, a gas pipeline between Russia and Germany under the Baltic Sea. It has become such an issue between the Trump administration and Germany that Washington hinted this week it could slap sanctions on companies involved in its construction. Reports suggest that “a tougher stance” is already being prepared by Washington ahead of the pipeline’s completion later this year.
Russia currently supplies around 40pc of the EU’S gas, just ahead of Norway. However, the pipeline will increase European reliance on Russia significantly and the project has been described as an “energy weapon” that could be used by Vladimir Putin to hold the EU to ransom. After all, the Russians have form on this front. Putin cut off all gas supplies through Ukraine in 2006 as part of a political and pricing dispute.
An additional reason for the Americans to be against the pipeline is president Trump’s energy-exporting ambition. The US is expected to overtake Saudi Arabia later this year as the world’s leading energy exporter, and Germany could have been a significant market for US liquefied gas if it wasn’t cosying up to Russia.
Critics of the project say the Germans have fallen into a Russian trap – and they are not necessarily wrong.
Yet another source of friction is agriculture. A food fight between the EU and US looks almost certain, despite a truce being declared last year after Jean-claude Juncker, the European Commission president held direct talks with president Trump. This détente could end very soon.
On Tuesday, Robert Lighthizer, the US trade representative, told Congress that discussions with the EU had reached a “complete stalemate” over intractable agricultural demands. “The United States can’t have a trade agreement with Europe that doesn’t deal with agriculture, and their view is that they can’t have one that does,” he told the Senate finance committee.
If agriculture becomes a sticking point – and it appears likely that it will, considering Mr Trump’s significant support from voters in the farming states – tariffs on German cars become almost inevitable.
Germany therefore looks quite vulnerable to US action later this year once a deal is agreed with China.
Mrs Merkel must be hoping that Mr Trump’s suggestions this week that he was in “no rush” to complete a trade pact with China are true rather than just a negotiating tactic. Unfortunately for her, I think they are the latter.
‘Things could be about to get worse as tensions between Washington and Berlin deteriorate’