Can (or should) Germany accommodate the US on the steel dispute (and what could Germany lose)?
On 23 March, US President Trump imposed sweeping tariffs on steel and aluminum, the highest tariffs in all product categories since 1971. Although these tariffs are mainly directed towards China, they also affect long-term US allies such as EU member states, including Germany. And while China accounted for just 2 percent of total US steel imports last year, Germany has increased its exports to the US by 40 per cent since 2011 and has become the eighth largest source of steel imports. Today, the US is the largest export market for German steel producers outside of the EU. According to the European Steel Association (Eurofer), US tariffs would cut European and German steel exports to the US by half. In addition, German companies fear that the introduction of US tariffs will lead to trade-diversion of excess steel from China and Russia to the European market, which would further increase competition. German Minister for Economic Affairs, Peter Altmaier, also expressed the fear that the trade war with the US could escalate to other products such as cars or textiles as well.
Once Trump imposes the steel tariffs, Germany supports the European Commission in its goal to challenge these tariffs at the WTO. However, Berlin also wants to offer the US a new and modified trade deal – a so called "TTIP light", which would basically deal with industrial tariffs. Peter Altmaier called for this kind of narrow transatlantic trade agreement, which – according to him - would be in Europe’s as well as in America’s interest.
US President Trump has repeatedly criticized Germany for its large trade surplus and its car exports to the US (BMW, Mercedes). He also threatened to impose taxes on European (German) cars, if the EU retaliated against the steel tariffs. Germany is very sensitive towards these threats and the German offer to negotiate a smaller trade deal is a way to accommodate US criticism – particularly in light of its large trade surplus with the US.
However, France, the other large trading partner in Europe, does not share the German position. In the present trade environment, it is important that the EU has a unified position and speaks with one voice. At an informal meeting of EU leaders in Sofia in mid-May, the European Commission was ready (in line with the German position) to propose a scoping exercise on reciprocal market access for tariffs and public procurement with the US, based on an unconditioned exemption from US tariffs. In general, it is in the best interest of the EU to engage in long-term trade talks with the US. However, this should not be done under pressure and European unity is key. Therefore, the unilateral German proposal was not the right way forward.
How would Germany be affected by a potential trade war (and what could Germany lose)?
The United States and China belong to the largest export markets for German companies outside Europe. A potential trade war between these two large trading partners would therefore directly hurt the German economy. Even if there was no deal and the announced tariffs by the US and China were implemented, the immediate economic effect would probably only be modest. However, there are larger risks involved relating to an escalation of trade tensions (other countries might follow suit) and increased global protectionism. This in turn leads to uncertainty in world trade, which might dampen future investment and global trade growth. A trade war between the two large trading powers would therefore severely affect the export-oriented German economy. In a recent survey (FAZ-Capital-Elite-Panel) with German decision-makers in politics, business and administration, a looming trade war was seen as the third largest risk for the stability in the world; even before climate change.
In addition, the potential bilateral trade war between China and the US also threatens the credibility of the World Trade Organization (WTO). Germany has a degree of openness in trade (exports plus imports in relation to the GDP) of 85 per cent, which is one of the highest numbers for developed countries. Because of this high interdependence into the global economy is highly dependent on the transparent and rules-based multilateral trading system of the WTO. Therefore, a return to bilateralism, protectionism and global uncertainty in trade would hit Germany hard.
How should Germany and the EU react?
First, Germany and Europe need to do their homework. For Germany, this means trying to reduce its export-dependency and promote domestic growth and investment even further. A first step would be to increase investment in public infrastructure.
Second, Germany must support the European Commission in its reforms for an effective trade policy. It should therefore not pursue any unilateral activities. It is also in Germany’s interest to foster EU trade relations with third countries. The European Commission wants to finish and ratify trade deals with individual ASE.AN countries, Japan, Mexico, and Mercosur. These strategic relations are important for the German and European economy and lessens the dependency on the US and China.
Third, Germany and the EU should collaborate with partners around the world in defense of the WTO. They should try to find a constructive trade agenda at the WTO and in other global fora to address legitimate (US) concerns in world trade. Looking at the steel conflict, a constructive way forward would be to work actively to resolve the issue in the G20/OECD Global Forum on Steel Excess Capacity.