BGA Cable: US-German relations

The Situation

Chancellor Merkel’s forthcoming visit to Washington this week, on the heels of President Macron, will focus on enforcing a permanent suspension of steel tariffs for the EU. However, this trip will be challenging as the relationship between Trump and Merkel is not characterized by a lot of sympathy. The US President’s willingness to make concessions to Germany in particular is probably limited.

The French President has a visibly better personal rapport than Merkel with Trump. However, that relationship has yet to yield any tangible political benefits for the European side. While Germany and France may be united on the maintaining the Iran nuclear deal and avoiding tariffs, the US will try to capitalize on the division between France and Germany over euro area reforms. Germany is a much larger exporter than France, especially in cars, and, thus, is more vulnerable to an escalating trade war than the rest of Europe.

As if this issue were not difficult enough, there are other German-American disputes which need to be resolved:

Germany’s reluctance to meet the two percent of GDP in defense spending threshold agreed to within NATO until the year 2024 is not only met with fierce criticism from the Republicans. The agreements in the coalition paper of the German federal government also stand in the way. Any new attempt in this direction will be vehemently resisted by the Social Democrats as well as the opposition. At best, Mrs. Merkel can announce a longer-term declaration of intent to meet NATO expectations. With regards to the non-participation in the air strikes in Syria, Mrs. Merkel will also have to prepare herself for American criticism. France and the UK are in a better position, as they actively participated in the strikes.

Trump´s decision whether to terminate or extend the nuclear agreement with Iran is expected sometime in May. On behalf of all EU member states, Mrs. Merkel will urgently promote the continuation of the agreement and warn of the consequences of its termination. Only US Secretary of Defense Mattis and Chief of Staff Kelly understand the European position on Iran. Hardliners such as John Bolton and the future Foreign Minister Pompei have increasing influence on Trump and can influence the negative decision.

The continuing German trade surplus is causing further tension between Germany and the USA, as well as some European partners. Merkel can only continue to defend the nation’s economic policy by referring to the new stimulus package in Germany which include wage increases, infrastructure and social programs. But she must also state that she understands the apprehensions of our partners.

An attempt by the United States to divide the European Union, especially in the question on steel exports is unlikely to be successful. Trade issues are the sole responsibility of the EU Commission, which represents the same stance as Germany, France and other European countries. Steel will play an important role during Mrs. Merkel´s negotiations. She will refer to the consequences of new taxes and tariffs for the global economy – including the United States. The repeatedly expressed assumption that this issue is about more than just steel, namely the dissolution of hated trade instruments such as the WTO, cannot easily be dismissed.

Since joining, China, in the eyes of the US, has been very successful at interpreting WTO rules in its favor. Secretary of State Mike Pompeo and newly appointed National Security Advisor John Bolton are hardcore and reject all international organizations that are not controlled by the US. Both will support Trump`s policy of higher tariffs. This poses a dilemma for the EU’s transatlantic relations as it can neither be seen siding with China, which also wants to avoid a trade war, nor insist too much on the WTO process. The US government is already developing a long list of products and services that have nothing to do with steel or national security – a kind of blackmail mechanism.

The North Stream II pipeline is developing into an additional controversial issue. The circumvention of Ukraine and other eastern neighboring countries is seen by the Trump administration as an economic affront. In the meantime, Trump has also taken an almost hostile position towards Germany, under the motto that it is incomprehensible to pay so much money to Russia, instead of drawing on American gas reserves.

Again, a balancing act between the US and Russia. Meanwhile, Mrs. Merkel, who had previously regarded this as a private-sector issue, seems to have given in by referring to the legitimate interests of our eastern neighbors.

Impact for Investors

China will increasingly try to sell its steel and other goods in Europe. This inevitably will create tensions between the EU and China, possibly not an undesirable consequence for the Trump administration. Until now, China has shown remarkable self-restraint and has had no interest in further escalation beyond matching US tariffs. This stand-off will last for several months. With midterm elections looming, the US government can count on domestic support, except from those states affected by EU & Chinese countermeasures, especially on agriculture and car exports.

Meanwhile, other steel-producing countries will also try to sell their products in countries with lower tariffs. This could lead to trade diversions and endanger the WTO system. When states begin to invoke national security interests when levying tariffs, all dams will break and the current trading system will be lifted off the rails. According to European law, the American protective duties violate international rules. Nevertheless, the EU Commission, supported by Germany, is well advised to continue to focus on negotiations. But the Americans must not get the feeling that our patience is unlimited.

The US economy is likely to suffer more damage than the European one. It is heavily dependent on steel and aluminum imports. Their manufacturing industry is less developed than Europe’s. Cars and refrigerators, just to mention a few products, which are currently under discussion will be more expensive. New import taxes will lead to an increase in consumer prices and will threaten the existence of small and less competitive businesses. The Trump voters will be the first to suffer.

BGA Expert

Jürgen Chrobog

Jürgen Chrobog

Partner
Jürgen's Bio
Ambassador Chrobog is a BGA Partner and a former State Secretary at the German Foreign Office and was Germany’s Ambassador to the United States. As State Secretary of the German Foreign Service​, he was directly responsible for Asia, Africa, the Near and Middle East and Latin America and dealt with Foreign Trade and Economic matters comprising Export Control and Export Guarantees.

His experience spans countries such as Egypt, Libya, Algeria, Jordan, Yemen, Tunisia and the Gulf States, where he consulted with leading politicians for many years. After his diplomatic career, Ambassador Chrobog served as Chairman of the BMW Foundations Herbert Quandt from 2013 to 2015 and was a board member of MAN Ferro Stahl. ​

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