BGA Cable: Transatlantic Tensions Continue

The Situation

In the footsteps of French President Macron, Chancellor Merkel travelled to Washington last week for her second working visit to President Trump. Both had the same message in their luggage, but neither Macron’s charm campaign nor Mrs. Merkel’s rational persuasion was successful. Trump has not agreed to the desired permanent suspension of the punitive duties on steel and aluminium for the EU, but only extended them for a month to June 1st. No agreement was reached either on the future of the nuclear deal with Iran. The relationship between the German Chancellor and the American President remains subdued. However, in contrast to Merkel’s last visit, Trump showed a friendlier side. Regarding Germany, there will be little willingness to make concessions. The pressure on Germany will increase.

Currently, customs duties on American cars in the EU are 10%, while those on European cars in the US are only 2.5%. The problem will remain focused on how these differences can be adjusted: Germany could live with a rate of 2.5% because German automakers as quality suppliers are not afraid of competition from American suppliers in the EU. The situation might be different in France or Italy, where producers are in direct competition with Asian companies that would also benefit under the WTO’s most favored nations rules.  This will lead to a particularly intensive discussion within the EU. Trump knows this very well. During her Washington visit, Merkel warned of the consequences of new taxes and tariffs for the global economy – including the United States. But as Macron before her, she failed.

By setting a new deadline of June 1, the US is increasing the pressure. The European Commission has always called for an indefinite derogation for the EU. It rejects the quotas on export volumes that the Trump administration calls for, as a violation of the principle of free trade enshrined in the WTO. The customs agreement proposed by Germany is being met with resistance from the French, who insist on high tariff barriers for agricultural products. Trump also has little interest in such an agreement with the EU. He prefers bilateral treaties, though these are a non-starter under the EU’s single-market rules. A success of negotiations within one month is not foreseeable.

With regards to the non-participation in the air strikes in Syria, Mrs. Merkel, not surprisingly, faced American criticism. France and the UK are in a better position, as they actively participated in the strikes.

Israel is increasing the pressure on the US to withdraw from the nuclear agreement with Iran. The latest Israeli findings presented by Netanyahu, which are not yet proven, that Iran is violating the nuclear agreement, have been met with open ears by Trump. It is now expected that he will terminate the agreement as planned on May 12th. On behalf of all EU members, Mrs. Merkel strongly advocated the continuation of the agreement and warned of the consequences of its termination. Hardliners like US National Security Adviser John Bolton and US Secretary of State Mike Pompeo have increasing influence on Trump and encourage him in his policy. Only US Secretary of Defense Jim Mattis and Chief of Staff John Kelly understand the European position on Iran. But their influence is waning.

President Trump will attend the 70th birthday of the foundation of Israel and the official inauguration of the new American Embassy in Jerusalem in mid-May. For Prime Minister Netanyahu, there is no better birthday present than the annulment of the nuclear agreement. There will be more unrest and uncertainty in the region.

Impact for Investors

The visible deterioration of transatlantic relations has already resulted in a cooling of economic sentiment in the highly export sensitive EU economies, albeit from a cyclical high. The prospect of accelerating global trade war and the effective dissolution of the WTO remains a major concern for markets, though there is still hope that the US will eventually cave in after extracting concessions. The pending renegotiation of NAFTA just ahead of the US mid-term elections will give a clue how far the US is willing to push its interest. Meanwhile, the Chinese response to US trade threats has been robust, and those negotiations are likely to drag on for some time with no quick wins in sight for the US.

As far as Iran is concerned, it will take some time after the cancellation of the nuclear agreement and a new political decision before the United States can reintroduce sanctions on Iran. If that happens, the US government will put pressure on other countries to comply. This will lead to major distortions in international trade and widen the gap between Europe and the United States and their respective economies.

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. ​