Germany is among the countries that have much to lose in case of an escalation of the current trade dispute with the U.S. Therefore, despite President Donald Trump’s administration imposing tariffs on steel and aluminium from the EU, Germany favours continuing talks and seeking compromise. Germany’s caution is beneficial: it reduces the risk of a political crisis in transatlantic relations, protects economic interests, and creates an opportunity to block the construction of the Russia-backed Nord Stream 2 gas pipeline.

The U.S. and Europe are entering into open economic conflict and escalation cannot be ruled out. Germany is undoubtedly among the EU Member States most concerned with this possibility.

Costs of the Conflict.

The least problem seems to be the direct effect of the U.S. tariffs on the steel sector itself. Producers, among which the largest are Salzgitter from Lower Saxony, Dillinger Hütte in Saarland, and Thyssenkrupp, expect a drop in the order book, but certainly not on a scale threatening the 85,000 jobs in the industry. The Germans also take solace in the fact that U.S. companies are highly dependent on the import of specialised steel products from Germany; therefore, after the introduction of duties, they will probably apply for an exemption from the new regulations. However, the concerns increase if the indirect effects on competition on the global market are considered. Trump’s decision does not concern only the EU but also producers from Asia and Russia who are already trying to cushion the effects of duties by increasing sales in other markets. As a consequence, there may be a long-lasting drop in prices, which will complicate the situation of the European, including the German, producers. Escalation of the trade conflict is even more worrying.

 If the EU retaliates, the probability of the U.S. introducing customs duties on other products, like cars, increases significantly. German automakers sold 1.35 million vehicles in the United States in 2017, about 8% of total US car sales. Of those, only 494,000 were exported from Germany to the United States, but they produce far more, around 800,000 in the U.S. for sale in America or third countries. In addition 200,000 jobs are dependent on the US market. German producers would have to adapt their delivery and supply networks, which would certainly entail huge costs. German automakers would most likely scale back investment in the United States if their products were targeted with increased tariffs. And the European Union would almost certainly respond by increasing tariffs on US autos.

The escalation scenario is connected to a fear about the stability of the entire international trade system, to which Germany owes its good economic condition to a considerable degree. The country’s exports outside the EU amounted to €529.3 billion in 2017 (slightly more than 40% of total exports) and was responsible for the dominant part of its €244 billion trade surplus.

The U.S. actions may encourage other countries to become more protectionist, too, which would put into question the current, export-dependent, economic growth model in Germany. Additionally, turbulence in trade may translate into political problems. It cannot be ruled out that the conflict on tariffs—especially if long-term—can weaken transatlantic ties and hinder cooperation within NATO.

Germany’s Dilemma.

The European Commission, which is responsible for EU trade policy, has been striving in recent months to maintain the unity of the Member States in the face of the approaching tariffs. In the early spring it was possible to agree that if the U.S. imposed tariffs, the EU should launch procedures in the World Trade Organisation (WTO) and prepare to introduce measures that target imports of products significant to the U.S. economy worth a total of €2.8 billion (including soybeans, whiskey, textiles, and even Harley-Davidson motorcycles). At the same time, the EU was to offer talks on facilitating access to the European market, provided it was unconditionally and permanently exempted from protective duties on steel and aluminium. The government in Berlin had assumed that the EU’s position would mainly be a demonstration of strength and the talks would lead to an agreement. The calculation turned out to be wrong and Germany has found itself in a very uncomfortable situation. The EU’s tough response instead may have speeded up the introduction of U.S. customs duties on cars and started a trade war that may have lasting political consequences for transatlantic relations. On the other hand, the lack of or weaker-than-expected reaction could be viewed by Trump as an incentive to push for more protectionist tools.

The attempt to escape this dilemma for Germany is to support, on the one hand, the introduction of retaliation measures against the U.S. and, on the other hand, signal to the Americans its readiness to talk and make concessions. The U.S. could be offered joint reform of the WTO, a new trade agreement containing, for example, a reduction of duties on industrial or agricultural goods or support for the sale of U.S. liquefied natural gas (LNG) on the European market. Another concession to the U.S. could be a faster-than-expected increase in defence spending. Admittedly, German Chancellor Angela Merkel has ruled out such a move, but it is obvious that it would reduce the imbalance in trade with the U.S. (e.g., through the purchase of American weapons) and silence the Americans’ allegations of ignoring Allied commitments in NATO.

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