A Vicious Cycle Berlin Worried about Losing Trump's Trade War

The U.S. has followed through with its threat to impose punitive tariffs on European steel and aluminum and the signs are pointing to a global trade war. The German government is doing what it can to prevent harm to its automobile industry. By DER SPIEGEL Staff

German Chancellor Angela Merkel and French President Emmanuel Macron
AFP

German Chancellor Angela Merkel and French President Emmanuel Macron


It was exactly 4 p.m. last Thursday when Peter Altmaier plopped into his seat. The pilot of the government plane quickly taxied to the runway and the German economics minister was happy to get out of Le Bourget business airport in Paris as quickly as possible.

Altmaier had spent two days in the French capital last week as part of efforts to prevent the United States from imposing punitive tariffs on steel and aluminum from the European Union. And just before taking off for home, he received official word that his efforts had been in vain.

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Now, the new challenge was to remain calm and make it seem as though everything was under control to prevent further unsettling the markets. "It has been clear since midday Tuesday what was coming," Altmaier said during the flight, somewhere between France and Germany.

Despite that clarity, Altmaier had flown to Paris for the annual conference of the Organization for Economic Cooperation and Development (OECD). At the conference, he said international economic policy was "in a critical state," and he met with U.S. Secretary of Commerce Wilbur Ross.

He spent nearly an hour speaking to Ross, a trim elderly man who is said to be a close confidante to President Trump. "We have established a friendly relationship over the past few months," said Altmaier. The images from Paris were important, demonstrating as they did that the minister left no stone unturned in his efforts to change American minds, even if the signs from the U.S. clearly indicated that Trump was determined to flex his muscles when it came to trade with Europe.

Merkel Denounces Move as 'Illegal'

The conversation at OECD headquarters on Wednesday failed to deliver the breakthrough that had been desired. And only 24 hours later, it was Ross who announced Trump's decision to impose the punitive tariffs on the Europeans. Since June 1, European companies exporting steel to the U.S. have been forced to pay a 25 percent duty on the import price, and 10 percent for aluminum. Chancellor Angela Merkel has denounced the move as "illegal."

Thehostile move by the Americans likely marks the start of a trade war that could cause lasting damage to both the American and European economies. This could be the beginning of a long-lasting feud consisting of punitive tariffs, tit-for-tat countermeasures and constantly evolving retaliatory strikes. The EU has threatened to slap levies on imports of whiskey and motorcycles from the U.S. in response. Trump, in turn, is reviewing whether he can impose higher tariffs on European car imports in the event of European retaliation.

Many jobs are at stake, particularly in Germany, and leading politicians are alarmed. "I warn against further escalation," said Lower Saxony Governor Stephan Weil of the center-left Social Democratic (SPD). The state is a shareholder in Volkswagen and Weil is also a member of the company's supervisory board. He said the "threatened punitive tariffs against the German car industry would lead to drastic countermeasures by the European Union. Both sides would suffer from this," he added. Researchers like Guntram Wolff, who heads the respected Brussels-based think tank Bruegel, hold similar views. "This second blow would be especially painful for Germany," he said.

But it's not just about trade balances and company profits. The speed with which the U.S. has been turning its back on the world order it has shaped since the end of World War II has been breathtaking. From global free trade, to common rules and a World Trade Organization (WTO) that mediates in cases of conflict, Trump is running roughshod over a system that seemed almost custom-built for the German economic model, which lives on exports.

'That's Not The Way You Treat Allies'

It has been clear for some time that the president is jettisoning anything that limits the U.S. from wielding its power as it likes. Almost a year ago, the U.S. said it would pull out of the Paris climate treaty, and just a few weeks ago, the Trump administration turned its back on the nuclear agreement with Iran. Now, Trump is trying to take the ax to European prosperity. Rising consumer prices could stifle the global economy. That's what has typically happened historically.

It was just a few years ago that the Europeans and Americans were negotiating the TTIP free trade agreement, but now the two regions are threatening to become ruthless adversaries. As luck would have it, European Commission President Jean-Claude Juncker was on stage in Brussels at an event entitled "Re-Energizing Europe - Now!" when he received news of Trump's decision. As he spoke about the EU's successes, one of his staffers slipped him a note.

U.S. President Donald Trump moved last week to impose tariffs on imports of steel and aluminum from Europe.
REUTERS

U.S. President Donald Trump moved last week to impose tariffs on imports of steel and aluminum from Europe.

Juncker looked at the slip of paper before tucking it away. "As expected," he said, looking at the audience. "Where was I?" He only mentioned the impending trade war at the end of his speech: "This is a bad day for world trade." He added that the EU would have no choice but to respond. "What they can do, we're able to do exactly the same," he said. The countermeasures prepared by the EU would be announced within hours, he said defiantly.

After all that Trump has lobbed at the Europeans from across the Atlantic, EU leaders are in a fighting mood. Juncker will see Trump at the G-7 meeting in Canada on Thursday and going by what the European Commission chief said on German television late last week, he's not going to be beating around the bush. "You don't listen, and you think you can talk down to the Europeans and belittle them. That's not going to happen," Juncker railed in the interview. "That's not how you treat allies, and Americans and Europeans are allies."

In contrast to traditional foreign or security policy, the EU actually does have real power in the arena of global trade. Measured in terms of the volume of traffic in goods and services, the economy of the European Union is larger than that of the U.S. And if the EU had a united front among its member states, it would be a powerful player in trade policy.

Germany Stands To Lose Most

But, once again, that's lacking. Although French President Emmanuel Macron is pushing for a tough line against Trump, the Germans are showing hesitation. That's not terribly surprising given that the U.S. is Germany's most important trading partner, with almost 10 percent of its exports going to America each year -- products ranging from cars and machinery to chemical products. No other EU country would stand to lose more in a trade war.

The first likely victims of Trump's tariffs will be manufacturers of steel, steel pipes and aluminum sheets in particular -- companies like Paderborn-based car parts supplier and steel pipe specialist Benteler. "We will have to raise prices to reflect the tariffs," says CEO Ralf Göttel. "Half of our customers will pay the surcharge because they otherwise won't get the desired products with the usual quality. The other half will buy steel in the U.S."

Machine tools company Trumpf in Baden-Württemberg could also be affected if its suppliers increase their prices and pass on the costs produced by the new tariffs. That would increase the price of the raw materials used in its machines, such as crude steel, and Trumpf would have to raise its own prices in response. Doing so, however, would dampen demand. And that's where things could get painful, especially given that the U.S. is the company's second most-important market after Germany.

Executives at Siemens, the global engineering giant, are still relatively relaxed at company headquarters in Munich. Siemens operates its own plants in the U.S. for products with high steel or aluminum content like trains, gas turbines and ultrasound equipment. In theory, at least, its subsidiaries could buy raw materials or semi-finished products locally to circumvent the punitive tariffs. But that does not apply to special alloys that are not produced in the U.S. They would have to be imported from Germany and would be slapped with the additional tariffs.

A steel plant in Duisburg, Germany: Trump's tariffs are hitting an industry that already has more than enough problems.
DPA

A steel plant in Duisburg, Germany: Trump's tariffs are hitting an industry that already has more than enough problems.

The worker wearing a union vest at Gate 1 of the ThyssenKrupp steelworks in Duisburg is anything but sanguine. Trump is a "madman," he says, "a psychopath" who is endangering German jobs. It's not difficult to sympathize with the man given the myriad problems already facing the steel industry even before the punitive tariffs. The OECD estimates there is a global overcapacity in steel production of 740 million tons. Predatory competition and price wars are so brutal that even global companies like ThyssenKrupp are no longer able to survive on their own. Management and employees recently agreed after arduous negotiations to combine their European steel operations in a 50-50 joint venture with the Indian steel giant Tata.

For German companies, the greatest fear is not the potential 1.3 million tons of U.S. steel orders they stand to lose each year through Trump's 25 percent levy on steel imports. That represents just under 4 percent of total German steel exports, a figure companies could withstand.

More dangerous is the possibility that Europe could be flooded with even more cheap steel as a result of the U.S. tariffs. A large part of the world's steel surpluses today goes to the U.S. A research paper recently released by the German Steel Federation (Stahl) shows that large quantities of that steel will likely be diverted to Europe as a result of the protective tariffs.

Imports of steel products into the EU have already risen significantly, by around 14 percent, since Trump's announcement of his intention to slap imports with punitive tariffs. The countries supplying the cheap steel that is now entering the EU market are the very ones that were not provided with provisional exemptions from the new U.S. tariffs earlier this year: Turkey, India and Russia.

If Trump maintains his tariffs policy, imports into the EU could increase by several million tons per year. That would present a "serious threat" to the European steel industry, the paper warns. Smaller steel producers like Georgsmarienhütte or Salzgitter in Germany would be threatened with heavy losses.

Carmakers Have Most To Fear

The German automotive industry would also be hard hit by a possible trade war with the U.S., where the most cars are sold in the world after China. German carmakers export around a half-million vehicles to the U.S. each year -- particularly the kinds of expensive sedans that have been a thorn in Trump's side for decades. If punitive tariffs are imposed, carmakers would likely have no choice but to react with higher prices and thus risk a decline in sales. VW subsidiary Porsche is especially at risk. Although the company sells almost a quarter of its vehicles in the country, it does not operate any factories of its own in the U.S.

VW CEO Herbert Diess has called on German politicians to defuse tensions with Trump. He says the company is interested in good relations with both the U.S. and China.

That, though, is easier said than done. After all, it was the German government that sought to find some form of compromise with the Americans against the will of France and others. The offer presented to the U.S. by the EU in mid-May came not least as a result of pressure from Germany. If Trump were to refrain from imposing punitive tariffs, the European leaders offered at the time, they would be prepared to talk about the purchase of American liquefied natural gas (in a European market dominated by Russian gas) and a reform of the WTO.

Now that the tariffs have been levied, the discussion as to how tough Europe should be with Washington is entering a second round.

French Finance Minister Bruno Le Maire wants to make things painful for the Americans. The retaliatory tariffs the EU intends to impose on Harley-Davidson motorcycles and jeans are deliberately aimed at symbols of the American Dream, just as Le Maire wanted.

Altmaier doesn't think much of such provocations and says he instead wants to avoid the "vicious cycle of punitive tariffs." And Ross also left the door cracked open for talks in his statement. The commerce secretary said he's looking forward to continuing negotiations with the European Commission -- a glimmer of hope that Altmaier attributes to his efforts over the course of several weeks to re-establish a dialogue with the Americans. But he also hopes that the World Trade Organization will step in to help. EU countermeasures, after all, don't come into force automatically.

The WTO, to be sure, has been notified of the planned counterattack. But WTO authorities in Geneva must first determine whether punitive duties on jeans and other imports are proportionate to the levies the Americans have imposed.

That will take until July and it will also buy a little time. And who knows, perhaps the WTO will tone down the EU response? At least that's Altmaier's thinking. His aim is to negotiate an agreement with the Americans on industrial tariffs, a kind mini-free trade agreement. He has already convinced EU Trade Commissioner Cecilia Malmström of the merits of doing so, but the French aren't buying in.

At times, Altmaier has difficulty determining who is more difficult to negotiate with these days -- the Americans or the French. His usual optimistic nature has been badly dented in recent days.

Even as he was heading to Paris last Wednesday afternoon, Altmaier had switched on the gallows humor. To prepare his staff for the new situation, he even sang a song by German songwriter Hans Hartz during the approach to Paris: "The white doves are tired," Altmaier sang against the roar of the engines, "but the hawks keep flying."

The hawks indeed appear to have won the first battle.

By Dinah Deckstein, Frank Dohmen, Simon Hage, Peter Müller and Gerald Traufetter

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