Diary

A European Trade War and Their Weakness

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Promoted from the diaries by streiff. Promotion does not imply endorsement.
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On June 1st, President Trump announced a 25% tariff on European steel and 10% on European aluminum.  In the lead up to the action, European leaders, especially Peter Altmaier, met with Commerce Secretary Wilbur Ross at an OECD meeting in Paris.  He tried to convince Trump to change his mind and settle the European markets.  Those efforts failed and since Angela Merkel has denounced the tariffs as illegal.

European leaders fear this will be a long-lasting feud of continuous tit-for-tat punitive measures and retaliatory strikes.  The EU threatened to slap levies on American whiskey, motorcycles, and jeans.  In turn, Trump is looking into whether he will impose tariffs on European automobiles.  This latest threat from Trump has the Germans in particular worried.

Lower Saxony governor Stephan Weil has warned against further EU action against the United States and the reasons are simple.  Lower Saxony is a shareholder in Volkswagen and Weil sits on the company’s advisory board.  Economists throughout Europe have noted that a tariff against European car imports into the United States would be a serious blow to the economies of Europe, more so Germany than any other country.

The German economy thrives on exports.  The “new world order” forged after World War II, mainly by American elites, is custom-made for Germany.  In Germany and other power centers throughout Europe, they view President Trump as running roughshod over that order be it through the UN, multilateral agreements, the WTO or NATO.  To them, Trump is taking an ax to European prosperity.

One publication, Der Spiegel, described the situation thus:

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 volume of traffic in goods and services, the economy of the European Union is larger than that of the United States.  And if the EU had a united front among its member states, it would be a powerful player in trade policy. [Emphasis mine]

There lies the problem for the EU- they cannot forge a united front and Trump knows this.  French president Macron is pushing for strong action against the tariffs imposed by Trump.  However, there is a power play for EU dominance between Macron and Germany’s Angela Merkel.  Merkel and the German government is fully aware that they stand to lose the most in any trade dispute with the United States.  The US is Germany’s largest trading partner in the world with close to 10% of ALL German exports headed to the United States.

The first likely victims of the current steel and aluminum tariffs are German-based manufacturers like Benteler which makes car parts and steel pipes.  They already said half their customers will face increased prices with the other half likely to opt for US steel and aluminum.  After Germany, machine tool company Trumpf’s biggest customer is the United States.  Other companies like Siemens have US subsidiaries that could circumvent the tariffs.  Workers at ThyssenKrupp are already feeling the economic pinch and it has nothing to do with Trump, although he’s being blamed.  The OECD says there is an international overcapacity in steel production on the order of 740 million tons.  Fierce competition and threats of American tariffs forced ThyssenKrupp into a 50/50 joint venture with Indian steel giant Tata.

What really has the Germans worried is that glut of steel.  After all, about only 4% of German steel exports are bound for the US.  German companies can withstand that loss.  What they cannot withstand is that glut of steel on the international market flooding Europe.  Since a large part of the glut currently goes to the US, German markets have noted that it will now likely be diverted to Europe.  In fact, since Trump first floated the idea of tariffs, imports of steel into Europe has increased 14%.  The countries supplying Europe with the steel are based in Turkey, Russia and India.  As researchers note, the first German companies to likely feel the financial pinch and complain would be smaller and midsize companies.

After China, the biggest importer of German autos is the United States.  About 500,000 German cars are imported into the United States annually, especially expensive sedans.  Car makers would have to respond by raising prices thus decreasing demand.  Porsche- a subsidiary of VW- is especially at risk since 25% of their market is in the United States and they have no US factories that can circumvent a tariff.  VW CEO Herbert Diess has already asked Merkel to defuse the situation.

Prior to the imposition of tariffs, Germany offered the US a compromise: reform of the WTO and consideration of US-produced liquefied natural gas, a market dominated by Russia.  In other words, to avoid tariffs, Germany offered the United States talk.  However, the dynamics have now changed that the tariffs are in place.

And here European political dynamics enter the scene.  There is a behind-the-scenes power struggle between Macron of France and Merkel of Germany.  France is insisting on punitive tariffs against symbols of the American Dream, notably whiskey and jeans.  For his part when announcing the tariffs, Wilbur Ross left the door cracked open for further negotiations.  He did this fully aware that EU countermeasures do not go into effect automatically.  The WTO has been notified of proposed EU countermeasures, but they must first determine whether those measures are proportionate to the US tariffs.  That will take until at least mid-August which gives the OECD’s Altmaier time to negotiate with the US over industrial tariffs and forge a sort of mini-trade agreement.  EU trade commissioner Cecelia Malmstrom gave her blessing to the effort.

However, the French are not buying into these efforts.  Altmaier himself has expressed frustration stating he did not know who it was more difficult to negotiate with- the French or the Americans.

The dynamics are quite obvious.  While France is facing headwinds in forging a consensus in Europe against American tariffs, the Germans are dealing in realpolitik.  Whether they are talking about the Paris Climate Change Accords, the Iran deal, or trade, Germany has become convinced that Trump will play hardball with Europe.  While France attempts to hold the European coalition together, they are ignorant of the self interests of the member nations of the European Union.  Germany is dealing in reality; France in principle.  But the principles that France claims to be defending are showing serious cracks be it in Italy, Austria, Hungary or the Czech Republic.  Already one major EU member has decided that the EU experiment was not worth it.  The wedge between France and Germany, already there before Trump announced any tariffs, is becoming a chasm.  If the EU cannot develop and enforce an answer to Trump’s moves, a scenario increasingly unlikely, it becomes obvious that Trump holds most of the cards here.