Germany looks east

MerkelChina2018BERLIN – German Chancellor Angela Merkel set off for China this week with top German industrial leaders to talk business and attempt to blunt the impact that a budding trade war between China and the United States could have on German companies.

A trade war between the United States and China could have huge ripple effects for German companies reliant on the nation's export-driven economy – especially its auto industry.

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.

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).

At the same time, German companies have major investments in the US that export to China – like BMW’s massive manufacturing plant in Spartanburg, South Carolina. American-produced German vehicles comprise about one-quarter of all US 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 US. It's BMW," said Carsten Brzeski, chief economist at ING-DiBa in Frankfurt. “Germany could be hit much more by the US-China conflict than the US imposing direct tariffs on [German] aluminum and steel."

Earlier this week, American and Chinese trade negotiators appeared to reach a truce in their trade issues.

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 US discussed waving the threat of crippling tariffs and lifting a trade embargo on Chinese cellphone giant ZTE, which is reliant on American-made parts.

But the prospect of a deal disappeared when President Donald Trump later told reporters he was unsatisfied.
On Tuesday, President Trump demanded that China pledge to cut its trade deficit with the US by $200 billion by any means necessary or else no deal.

The following day, the Trump administration called for a national security investigation into automotive imports – a move that could eventually lead to tariffs on cars 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 Brzeski, a trade war between Europe and the US 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."

Increasingly wary of President Donald Trump’s unpredictability, Merkel's prime objective in China will be to strengthen economic ties and avert the risks to German firms newly posed by the American administration, said Ferdinand Dudenhöffer, 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 USA. The situation has already become more cautious in the interim."

That's not to say that Germans don't share some of Trump’s concerns about Chinese trade practices.

German leaders have long 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 comprise 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 Brzeski. "The risk is clearly there," he said.

Given the United States' and Germany's mutual interest in reining in China's dubious practices, America's go-it-alone strategy on global trade and the obvious 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 US administration if they'd have found allies, namely the Europeans, for such a strategy," said 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, said Dudenhöffer – it seems Germany has little choice but to be drawn closer into China’s orbit.

"When friends [in the US] 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.”

Photo: Chinese Premier Li Keqiang, left, and German Chancellor Angela Merke.
Credit: Courtesy of the CCTV Video News Agency YouTube channel (05/24/18)

Story/photo published date: 05/27/18

A version of this story was published in the Washington Times.
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