BERLIN — Two of the world’s biggest exporters held talks on trade and investment last week, and there wasn’t a U.S. official in sight.
As the Trump administration weighs trade wars with China and the European Union to reverse what President Trump calls decades of unfair trading practices at the expense of the U.S., Germany Chancellor Angela Merkel led a delegation of Germany business leaders to China to talk business and share ideas on how to counter the new approach coming out of Washington.
China is the world’s largest exporter and Germany just trails the United States for second place, so a trade war between the United States and China could have huge ripple effects for German companies who anchor the nation’s export-driven economy — especially its auto industry. At a time when the U.S. is weighing tariffs on both EU and Chinese goods, Ms. Merkel heard a very different message on her trip.
“I welcome German businessmen to come to invest in China,” Premier Li Keqiang told the visiting Germans on Thursday. “China’s door is open and will be open wider.”
China has been Germany’s biggest trading partner for the past two years. German companies are also the largest European investors in China, where specialized wares like cars and high-tech machinery are in high demand. The prospect of the two coordinating — formally or informally — against the Trump trade agenda could prove a formidable adversary for Washington.
Increasingly wary of what Germans see as Mr. Trump’s unpredictability, Ms. Merkel’s prime objective in China was to strengthen economic ties and avert the risks to German firms newly posed by the American administration, said Ferdinand Dudenhoeffer, an economist and transportation analyst with the University of Duisburg-Essen.
“Germany and German companies will turn in the direction of China,” he said. “Cooperation and understanding between Germany and China will only get better — and my assessment is that it will lead to a gradual isolation of the U.S.”
Both Germany and China ran major trade surpluses with the U.S., putting them squarely in Mr. Trump’s sights. And the two countries are closer on some other major issues, continuing to support the Paris climate accord and the Iran nuclear deal that the Trump administration has quit.
Every fifth car registered in China rolled off a German assembly line. More than 90 percent of premium vehicles in China are German-made, according to the German Association of the Automotive Industry (VDA).
But both Beijing and Berlin has extensive interests in the American market that could complicate any anti-U.S. alliance.
German companies have major investments in the U.S. that export to China — such as BMW’s massive manufacturing plant in Spartanburg, South Carolina. American-produced German vehicles make up about a quarter of all U.S. passenger vehicle exports. The United States is the second biggest buyer of German cars — after China, according to the VDA.
“There’s a small anecdote about who actually is the largest car exporting manufacturer in the U.S. It’s BMW,” said Carsten Brzeski, chief economist at ING-DiBa in Frankfurt. “Germany could be hit much more by the U.S.-China conflict than the U.S. imposing direct tariffs on [German] aluminum and steel.”
Shaky ’truce’
Last week, American and Chinese trade negotiators put their escalating trade war “on hold,” in the words of Treasury Secretary Steven T. Mnuchin, in part because the Trump administration is trying to retain China’s support for its diplomatic push against North Korea.
China agreed to open its markets to more American agricultural imports and announced it would lower tariffs on foreign-made cars to 15 percent from 25 percent, an attempt to take a chunk out of America’s massive $375 billion trade deficit with the world’s most populous country.
In exchange, the U.S. discussed waving the threat of crippling tariffs and lifting a trade embargo on Chinese cellphone manufacturing company ZTE, which relies on American-made parts.
But the prospect of a deal disappeared when President Trump later told reporters he was unsatisfied.
On Tuesday, Mr. Trump demanded that China pledge to cut its trade deficit with the U.S. by $200 billion by any means necessary or else there would be no deal.
The following day, the Trump administration called for a preliminary investigation that could lead to higher tariffs on foreign cars — a move would target major automakers from Europe, Japan and South Korea, exacerbating already shaky international trade relationships.
While the steel and aluminum tariffs on Germany and others currently set to take hold June 1 are merely a “small needle in the flesh of Germany,” said Mr. Brzeski, an outright trade war between Europe and the U.S. that involved cars or other big items could cost both sides dearly.
German automakers have already staked a position against tariffs or any other measures that slowed down world trade.
“The German automotive industry is watching the current development closely and with concern,” VDA President Bernhard Mattes said in a statement. “An increase in customs barriers should be avoided. The German automotive industry has always advocated the mutual reduction of tariffs and free trade agreements worldwide.”
That’s not to say that Germans don’t share some of Mr. Trump’s concerns about Chinese trade practices.
German leaders are worried about China’s growing influence over the country’s small and medium-sized businesses, long the backbone of the German economy. Known locally as the Mittelstand, they constitute 99 percent of German enterprises and 56 percent of the country’s economic output, according to Germany’s Ministry for Economic Affairs and Energy.
Chinese investors have started gobbling up these firms, gaining ownership of their research, engineering and intellectual property. While the trend has not yet made a palpable impact on the economy, that could change quickly, said Mr. Brzeski. “The risk is clearly there,” he said.
Given the United States’ and Germany’s mutual interest in reining in China’s dubious practices, Mr. Trump’s “America first” strategy on global trade and the negative impact of a tariff war on its traditional allies has left many in Germany and Europe scratching their heads.
“It would have been smarter for the U.S. administration if they’d have found allies, namely the Europeans, for such a strategy,” said Mr. Brzeski. “Now, it looks more or less like they’re coming in with a big swinging hammer.”
With China spending some $1 trillion on its One Belt One Road infrastructure initiative to open markets between Asia and the Europe and conceding to lower tariffs on imported cars, the Trump administration is taking an increasingly hostile stance on global trade, Germany has little choice but to be drawn closer into China’s orbit, Mr. Dudenhoeffer argued.
“When friends [in the U.S.] become worse than enemies, than one has to analyze the relationship more closely,” he said. “The USA will become increasingly isolated, because all signs point to connections in the future being strengthened between Europe and China. China’s bolstering of trade now fits perfectly into this pattern.”
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