The Trade Warrior Donald Trump's Attack on German Prosperity

U.S. President Donald Trump seems intent on launching a trade war. He is ignoring appeals to common sense coming from Europe and Asia, but one country stands to lose more than any other: Germany. By DER SPIEGEL Staff

AFP

Green appears to be the color of the season. At the Geneva International Motor Show, Ford last week presented a limited-edition Mustang Bullitt in "Dark Highland Green" The M8 Gran Coupé from BMW showed up in lustrous "Salève Vert." And Porsche's new 911 looks a bit like a lacquered tree frog. Green like springtime. The color of hope.

Starting last Thursday, automobile manufacturers once again began presenting their newest attractions. But this year, the executives are having a more difficult time than usual in exuding confidence. It's not that their bottom lines are in bad shape; on the contrary. It's not that they are weighed down by the ongoing diesel scandal; they've more or less become used to that. Rather, their collective mood was crushed by just a few words pecked out on the screen of the mobile phone of the most powerful man in the world.

On March 3, U.S. President Donald Trump announced on Twitter that he would be slapping a punitive tariff on automobiles "which freely pour into the U.S.," as he complained. Prior to that, Trump had announced that he intended to introduce a 25-percent import tariff on steel and 10 percent on aluminum -- and signed the corresponding executive order last Thursday. It was a move that threw a significant share of the automobile and metal industries into turmoil.

If Trump also fulfills his threat against foreign carmakers, it would be a painful blow to German producers, particularly Porsche. The VW subsidiary is heavily dependent on sales in the United States, with every fourth vehicle sold in America. Were tariffs introduced, Porsche would likely be forced to raise its prices and risk taking a hit on sales.

Suddenly, automobile executives find themselves facing a challenge that they've only ever read about in history books: the dangers of protectionism of the kind that can lead to a global trade war. "For decades, we grew up with the certainty that free trade and free markets increase prosperity," says Matthias Müller, CEO of Volkswagen. "Suddenly, this certainty is being questioned."

'We Can Also Do Stupid'

Trump caused a bit of a ruckus with similar comments a year ago, shortly after his inauguration. In response, a delegation of German business leaders under the leadership of Chancellor Angela Merkel traveled to Washington to pay their respects to the new White House resident and make sure he understood that BMW, for example, produces more vehicles in the United States than it exports to the country from elsewhere. And it quickly seemed as though the threat had passed. Now, however, it has become clear that the mission wasn't successful after all. Trump is now ready to pull the trigger and appeals to logic are a waste of breath.

Europeans, Asians and quite a few Americans as well are now facing the stunning realization that the U.S. president adheres to a ludicrous set of beliefs. "Trade wars are good, and easy to win," Trump wrote on Twitter to a dumbfounded public. In the face of such voodoo economics, even the old Wall Street trope "greed is good" hardly seems objectionable.

The EU chose not to sit on its hands. In response to Trump's tariff plans, European Commission President Jean-Claude Juncker threatened retaliation, saying "we can also do stupid." His list of products that could be slapped with tariffs includes jeans, cosmetics, motorcycles, orange juice, whiskey and corn. The collective value of the products adds up to around 2.8 billion euros, with the tariff potentially being as high as 25 percent.

What will happen next? And what exactly might China's weekend threat to "defend the interests of our country and our people" mean in concrete terms? The country could, for example, cease importing soy beans from the United States, which would be a tough blow to farmers there. Or they could suspend exports of rare earths, elements that are vital in the production of many high-tech devices. It wasn't that long ago that China struck fear into the hearts of buyers by imposing a similar ban.

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The concern is that once the cycle of tariffs and reciprocal tariffs gets started, it is almost impossible to stop. Small skirmishes can quickly grow into a global trade war.

The looming conflict is a sign of the turning point at which the global economy finds itself. Recently, the economy in most corners of the globe has been healthy, with the world experiencing a rare phase of synchronous growth. But it looks as though that phase is now coming to an end.

Interest rates are rising and sovereign debt is growing, the result of which is that governments are beginning to lose their flexibility and it is likely that some countries will soon face difficulties borrowing money on the open market. Increasing financial market instability shows that insecurity is on the rise. And in this situation, protectionist policies pursued by populists and nationalists harm economic growth and endanger international prosperity.

'Everything Would Start Teetering'

It is something on which a majority of economists actually agree: tariff barriers slow growth, put jobs at risk and drive up inflation. Once a trade war is triggered, there is no winner, although Munich-based economist Gabriel Felbermayr says that Germany has the most to lose. "There is no other country in the world that would be hit as hard."

Felbermayr, 41, heads up the Center for International Economics at the Center for Economic Studies (CES). The shaved-headed economics professor, originally from Austria, has examined just how devastating Trump's economic policies could be for the German economy. Every fourth job in the country, he says, is dependent on exports. And in five key sectors -- automobiles, machinery, electrical engineering, pharmaceuticals and precision instruments -- fully three-quarters of all exports go to the United States. "If the U.S. were to cut itself off, it would threaten the German business model," Felbermayr says. "Everything would start teetering."

What can be done? What might constitute an adequate response to the provocations from across the Atlantic? On that question, opinions among economists are more divergent.

Felbermayr suggests showing a bit of severity. If there is no international reaction to his tariffs on steel and aluminum, the CES economist believes, then Trump will try to apply the same strategy in other sectors. "A clear signal must be sent that not everything will simply be accepted." Felbermayr says that is important "because quite a bit more could be on the way."

Michael Burda, an economist at Berlin's Humboldt University, has a different take. "I would advise the European Commission to adopt a conciliatory tone." Burda was born in New Orleans in 1959 and earned his Ph.D. at Harvard. He warns that a "tit for tat" approach could escalate the situation: "Then we would sink into protectionism."

So, should Berlin and Brussels back down? Or should America's trading partners take a hardline approach? The health of the global economy depends on the answer chosen, as does the future of many German companies.

Senden, a town near Ulm in southern Germany, is home to the headquarters of ESTA, a leader in the production of dust filter and ventilation systems. The family owned company, founded in 1972, builds machines that extract shavings, dust and warm air from workshops and factory floors. The company employs around 200 people in Senden and delivers its products to 30 countries around the world, with a large share of its sales sent to America. Two years ago, ESTA founded a subsidiary in North Carolina.

Not long later, Trump was elected president and ESTA CEO Peter Kulitz was one of the few who was able to find something positive to say. Kulitz thought at the time that Trump had proven himself as a businessman and that he would surely shift quickly out of campaign mode and into governing mode.

A Destructive Spiral

Kulitz now holds a different view. "I have become disillusioned by Trump's astounding mercurialness," he says. He is concerned about the coming trade conflict and is worried that it could set off a destructive spiral. Thus far, his company hasn't had to pay much in the way of customs on the machines it exports. But if Trump were to introduce substantial tariffs on his company's finished products, the extraction systems would necessarily become more expensive in the U.S., a horror scenario for Kulitz given the tough competition in the American market.

German exporters have a lot to lose in the U.S. The value of goods sent by companies in Germany to the U.S. has almost quintupled since 1990, with almost 10 percent of all products exported heading over the Atlantic. More than 1.5 million jobs are directly or indirectly dependent on business with America.

The export of automobiles alone makes up around a quarter of all German exports to the United States. German carmakers send around 500,000 vehicles a year to the U.S., but they produce far more than that -- around 800,000 -- in the United States for sale in America or third countries.

BMW alone has created around 10,000 jobs in Spartanburg, South Carolina, with an additional $600 million investment in the works. Last year, BMW CEO Harald Krüger pointed out to the U.S. president how involved his company was in the United States. Trump responded at the time by complimenting Krüger for the job he was doing. But what are such statements worth when he launches a new attack just a few months later?

"If our export model is restricted," Krüger recently said, then BMW will have to "take a different approach" in the future. In other words, his patience is not unlimited.

BMW is already making preparations for a possible trade war, having boosted its staff of tax and customs experts. Furthermore, the Munich-based company is in constant contact with U.S. Senator Lindsay Graham, the Republican from South Carolina. Graham has publicly positioned himself in opposition to Trump's punitive tariff plan.

Furthermore, the company is exploring a step that had been unthinkable just a short time ago. Currently, the BMW X5 is produced exclusively in the Spartanburg plant, but that privilege could be withdrawn in favor of producing some of the SUVs in China. That would give the company an important foothold in the growing Asian market for SUVs should China respond to the United States with tariffs of its own. In other words, the U.S. would become a victim of its own protectionism.

Dangerous Side Effects

The introduction of tariffs in the steel industry could likely produce unforeseen consequences. German heavy industry isn't particularly concerned about the direct consequences of a 25 percent tariff on steel exports to America. Such exports aren't terribly vital to companies like ThyssenKrupp and Salzgitter.

The side effects, though, could be much more dangerous: The U.S. duties could divert the flow of goods in the steel trade. The global steel market has been imbalanced for years, with producers manufacturing 1.6 billion tons of crude steel each year against an annual demand of just 900 million tons. China is primarily to blame for this lopsidedness. Inexpensive energy and low wages enable the country's steel producers to sell their products cheaply around the world. If the U.S. were to make moves to protect its domestic steel producers, even more cheap steel would flow into the European Union than is already the case. Were that to happen, says Wolfgang Eder, head of the Austrian steel concern Voestalpine, "Europe would threaten to become the world's garbage pail."

Last Tuesday, industry representatives joined executives from ThyssenKrupp, ArcelorMittal and the steel plant Georgsmarienhütte for a visit to Matthias Machnig, state secretary in the Economics Ministry. Machnig is something like the trade commissioner for Merkel's caretaker government. The steel lobbyists had drafted a position paper in which they warned that EU steel imports could spike by 40 percent within just a few months. "This would immediately lead to a renewed escalation of the import crisis in Europe," they warned.

The steel representatives are also calling on the EU to file a complaint with the World Trade Organization (WTO) against the measures introduced by Washington, even though they are also aware that such a move isn't likely to be successful. It can take years until the appeals process is exhausted and the U.S. is also blocking appointments to the WTO's Appellate Body, essentially sabotaging its ability to function. As a result, it may soon no longer be in a position to make rulings at all.

Machnig views the talk of punitive tariffs from Washington as an attack on world economic peace and says that such a thing cannot be taken lying down. "It is prudent for the EU to be discussing reactions," he says. "We don't want a trade war, but if the U.S. takes measures, there has to be a joint European response." At the recent conference of EU trade ministers in Sofia, Bulgaria, at which Machnig represented the German government, an atmosphere of fierce determination prevailed. Should American tariffs become a reality, the EU, said Machnig, "needs to take appropriate measures."

Trump's Worst Proclivities

Machnig has made frequent trips to Washington and he knows those involved in economic policymaking well. "A battle is raging in the White House between competing schools of thought," he says, pitting free-trade advocates against those preferring protectionism. Unfortunately, those responsible for trade in the Trump administration happen to be among the most prominent proponents of protectionism: Commerce Secretary Wilbur Ross and U.S. Trade Representative George Lighthizer.

More moderate voices in Washington, by contrast, are currently on the retreat. Trump's senior economic advisor, Gary Cohn, for example, indicated last Tuesday that he was stepping down. And Speaker of the House Paul Ryan, an enthusiastic Trump supporter thus far, urged Trump last week to "reconsider the idea of broad tariffs to avoid unintended negative consequences to the U.S. economy and its workers." Beyond those two, there aren't many left who might be able to tame Trump's worst proclivities.

Graphic: Unequal Trade Flows
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Graphic: Unequal Trade Flows

The trade war that Trump has now announced was far from a complete surprise. For decades, Trump has been a vocal critic of U.S. trade policies that he believes benefit everybody except the United States. He is convinced that China, Canada, Mexico and the European Union intentionally hurt the U.S. by profiting to a greater degree from international trade agreements.

Arms crossed, Trump sat in the Cabinet Room of the White House on Thursday and said, "The WTO has been a disaster for this country." The heads of the biggest steel and aluminum companies in the U.S. had taken seats around him, including representatives of US Steel, Nucor and United Aluminum, and they all nodded their heads. Trump said the WTO was good for China and others, but not for the U.S. He then uttered his threat of punitive tariffs.

The fact that Trump has chosen this particular moment to make his announcement is no coincidence. His government is currently in the middle of negotiations to make changes to the North American Free Trade Agreement (NAFTA), the free trade agreement with neighboring Canada and Mexico, which are both steel suppliers to the U.S. Several days ago, negotiators for the three countries met in Mexico City to explore whether and how improvements could be made to NAFTA.

So far, the parties have failed to come to an agreement, with Mexico and Canada refusing to renegotiate the entire deal. Trump has said that if the U.S. can reach an agreement with them, that Mexico and Canada would be excluded from the tariffs.

A Zero-Sum Game

Domestically, the president is hoping that the threat of a trade war will give his party a boost as mid-term elections approach in early November. So long as he can position himself as a man of the 1950s and 1960s, the era when the steel and aluminum industry in the U.S. flourished, he can be assured of support from Rust Belt voters. "IF YOU DON'T HAVE STEEL," Trump tweeted, "YOU DON'T HAVE A COUNTRY!" He has repeatedly described U.S. trade policy a "disgrace."

It's the complaint of a man who feels he is surrounded by resentful and mean-spirited competitors who are all out to enrich themselves to his disadvantage. Trump views politics as a zero-sum game. When others get more, he gets less -- that's his dogma. Behind this is a fear of winding up the loser. America "has been ripped off by virtually every country in the world," he complains.

Such a broad formulation is surely inaccurate, though it does contain a kernel of truth. When it comes to imported automobiles, for example, the Americans only demand a 2.5 percent tariff. The Europeans, meanwhile, levy a 10 percent tariff on all vehicles imported from the U.S. That deal has been in place since the Uruguay Round of multilateral trade talks and was agreed to in 1994. So, is Trump right?

If you compare the tariff profiles of the U.S. and the EU, no clear picture emerges. There are a number of products for which the Americans apply very low tariffs, including dairy products and cars. In other areas, like oil products or textiles, however, the Americans apply higher tariffs.

But if you look at industrial goods across the board, the tariff levels are similar. The U.S. levies 3.2 percent on average, whereas the Europeans apply tariffs of 3.9 percent. Such a difference is insignificant, says Rolf Langhammer, an economist with the Kiel Institute for the World Economy, "because even a small shift in the exchange rate can offset it."

Trump's allegation that Germany is flooding the world with goods without importing enough from others also seems questionable upon closer inspection. There may be a gap in the exchange of goods, but in the trade of services, there is equilibrium. And digital services don't even make an appearance in the trade balance. Yet this is precisely the domain of American high-tech companies like Google or Facebook.

"We're touching an elephant while wearing a blindfold," says economist Langhammer, complaining about the lack of clarity provided by official statistics. Only a small part of the services sector shows up, but the bigger picture cannot be discerned.

Trump isn't particularly interested in such details, instead preferring to see massive criticism as affirmation. Trump knows that his friends within the Republican Party oppose the tariffs, but he also knows that he is most effective when he whips up his followers against the Washington establishment and stands against elites in both parties. Among the constituencies offering the greatest support for Trump's policies right now are members of the steelworker's union, who tended to vote for the Democrats in the past. That, too, is something Trump is counting on in the run-up to the mid-terms in November.

More Damage than Advantages

One would think that the Americans might have learned their lesson. History is peppered with examples of protectionist initiatives -- and they show that protectionism generally does more damage than not.

The Smoot-Hawley Act of 1930, named after two politicians from Utah and Oregon, respectively, slapped huge tariffs of up to 60 percent on around 20,000 foreign goods, with the intention of protecting American agricultural products. More than 1,000 economists signed a petition against the law, but economic nationalism won out. And the consequences were disastrous, with foreign governments also increasing their tariffs. In the following years, the volume of U.S. foreign trade fell by two-thirds.

Many decades later, in March 2002, then-U.S. President George W. Bush imposed tariffs of up to 30 percent on steel. Other countries responded with retaliatory measures. Again, costs far outweighed the benefits and the president lifted the tariffs only 20 months after introducing them.

Bush's successor Barack Obama also imposed an import tax of 35 percent on tires imported from China. The move did create around 1,200 new jobs in the U.S. tire industry, but each new job came at the extremely high price of around $900,000 per job, a study by the Washington think tank Peterson Institute found.

Trump, in other words, is by no means the first American president who has sought to deploy these instruments. But no other president has behaved so immoderately or been as unpredictable in both their words and actions.

The international community is alarmed, perhaps China most of all. The People's Republic has been the world's largest trading nation for the past five years, exporting goods valued at more than $2 trillion a year and importing roughly the same amount. A global trade war would hit the country hard: Around 18 percent of China's exports go to the U.S.

During his presidential campaign, there was no other country that Trump attacked as frequently as China. He accused Beijing of stealing American jobs, manipulating its currency and, yes, "raping" the U.S., calling it "the greatest theft in the history of the world." If he won the election, he said, he would slap Chinese products with punitive tariffs as high as 45 percent.

Trump won the election and Beijing began gathering its troops for a trade war, using the state media to present its weapons: the world's largest market for cars, the fastest growing aviation sector, millions of Apple, Starbucks and McDonald's customers and even the 330,000 Chinese students studying at American universities.

But the world trade battle was initially delayed. Trump invited Chinese President Xi Jinping to Florida and then he himself flew to Beijing and appeared to have been impressed by his host. He said he didn't blame Beijing for the gaping hole in the trade balance between the U.S. and China. "After all, who can blame a country for taking advantage of another country for the benefit of its own citizens?"

Washington is now starting another attack, even if Trump has only mentioned China in passing. The weekend before last, Xi's top economic adviser, Liu He, made a special trip to Washington in an effort to assuage tensions. The Chinese press has also shown more reserve than it did a year ago, a sign of the degree of concern in Beijing with Trump's political course.

Rhetorically, China has begun posing as a defender of free trade. "Pursuing protectionism is like locking oneself in a dark room," Xi said in 2017 speech at the World Economic Forum in Davos. "While wind and rain may be kept outside, that dark room will also block light and air."

But China itself engages in protectionist behavior, and Western companies have been complaining more strongly than ever of a lack of access to Chinese markets. In most industries, the Beijing government requires that companies enter into joint ventures with Chinese partners. In lucrative sectors, in particular, foreigners are often only allowed to bid for contracts on small projects, like the new Fuxing high-speed train, which is to be based on German and Japanese technology. German students also have a difficulty even just landing an internship at Chinese companies.

Countries and companies around the world are increasingly using those kinds of subtle barriers to trade around the world. And they, too, present a form of protectionism. Classic tariff policies, on the other hand, have become less important in recent decades -- with the percentages steadily sinking to a current average of just under 8 percent worldwide. That's around half of mid-1990s levels and one-third of that which was demanded in customs levies in 1947. Back then, tariffs averaged 22 percent.

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And until Trump's recent Twitter tirades, it had appeared that such tariffs would remain in the past. But are we about to see a redux?

Three Scenarios

Several scenarios are imagineable. The first is that Trump's statements will prove to be nothing more than talk. But even if that were to turn out to be the case, it's difficult to imagine that governments around the world would simply return to business as usual after such attacks.

The second is that the U.S. will isolate itself and Europe and Asia will pull closer together. There are hints at such a development, such as the free trade agreement the EU reached with Japan last year. At the same time, however, it would be hard for the U.S. to completely extract itself from the global arena. It's too important for that. A quarter of all global commodity demand comes from the United States.

The third scenario is the bleak prospect of a trade war. It's a confrontation that would mark the end of an era -- the era of liberal global trade that has developed since World War II. And it would mark the start of a new, post-global order.

A great deal is at stake and the tension in Brussels are palpable. Indeed, a trade war with the U.S. is the last thing the internally divided EU needs right now.

On the 12th floor of the European Parliament building, Bernd Lange hunches over the list of all the possible retaliatory measures. Lange, a member of the European Parliament with the center-left Social Democratic Party (SPD), is chairman of the parliament's International Trade Committee. Last week, the committee met several times to discuss Trump's announcement.

Trade expert Lange looks at what are called the "tariff lines" in the document, the listing of products the EU could slap with tariffs. It includes several tariff lines for whiskey, depending on the variety, and could cost the U.S. around a half-billion euros.

Further entries would affect pleasure boats in categories both over and under 7.5 meters long (25 feet). And there are also two categories for motorcycles: those that are below 800 cubic centimeters and those which are more powerful. Lange takes an especially close look at this tariff line: He owns a BMW R 1200 RS.

The EU trade expert would actually prefer to see the list disappear back into the filing cabinet. But Lange hasn't yet given up hope of resolving the conflict. "We'll just have to see if we are forced to implement" these measures, he says.

Ultimately, that decision will be made in Washington rather than Brussels. Donald Trump has the smartphone in his hand.

By Frank Dohmen, Simon Hage, Alexander Jung, Peter Müller, Christian Reiermann, Christoph Scheuermann, Gerald Traufetter, Marco Wedig and Bernhard Zand

Article...


Comments
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russblog 03/12/2018
1. Donald Trump's Attack on German Prosperity
I do have to laugh at this comment: " There may be a gap in the exchange of goods, but in the trade of services, there is equilibrium." Hang on, isn't it precisely the opposite of this "equilibrium" that the EU, led by Germany and German industrial interests are offering the UK in the Brexit negotiations? People in glass houses. you cannot endlessly demand the rules be followed, when the rules are so clearly in your own interests. Eventually, people and countries will become angry and demand the rules are changed. It's just that here, Germany and France can't rely on 25 other countries to bully a much smaller country than the USA.
haloguy628 03/13/2018
2. Germany has been dominating...
Germany has been economically dominating Europe by having tremendous export surpluss and import deficits. Germany supplanted this hegemony by financing these exports by German banks providing ridiculous loans that many of the countries who were offered these loans to "buy German" would not be able to pay back. Enter the EU and Germany's demand that EU collectively takes responsibility for these German banks issued and defaulted loans. So you tell me who's endangering whose economic wellbeing. Take your medicine Germany.
nazerene88 03/13/2018
3. Tariffs
Why not discuss 25% import tariffs compared to 10% into the USA? The car manufacturers understand this completely, you might in time.
ptl88 03/21/2018
4. Trump Trade War with the world
Trump support base appears to start holding across the board. He monetizes economy one sided and without deep understanding of how the largest economy functions & influences the whole world. The the Wall Street index hit over 26,000, he proclaimed that he had shrunk or eliminated U.S. trade deficit. That comments proves to the world that all countries have to deal with a person who has no understanding of anything important. Worst, he would not listen to experts. He wants the world to accept what he said is the truth. He does not believe that there is no winner in a trade war. In a real war, he also thinks there will be winner in a nuclear war and he can win nuclear war. Need I say more?
huguenot1566 03/21/2018
5. Donald Trump's Attack on German Prosperity
Donald Trump's Attack on German Prosperity? Really? The U.S. has very little tariffs on certain goods coming in from the EU, and everywhere else in the world, and in return the EU has a much higher tariff on those same goods going into the EU. Exactly who is being protectionist and attacking whose prosperity here? The U.S. is demanding "fair and reciprocal" trade but some German and EU leaders seem to think that it not fair? I fail to see how the EU is a victim here when they are being asked to be fair. When they aren't being fair everything is great, for them anyway, but God forbid they are asked to treat their ally fairly on trade, or in the NATO alliance, well that just isn't right. Or is it? I know Trump has one of the worst personalities ever for a world leader. HIs own parents shipped him off to military school at 13. I would prefer if he just did his job and didn't speak most of the time. That doesn't make him wrong on the issue though. Trump isn't wrong on trade or NATO.
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