Above page content

    Site map  Cookie policy

Features

Why Germany is playing a dangerous game antagonising America on three fronts

Once a trade deal is agreed between Washington and Beijing, Donald Trump is likely to train his trade guns on Germany.

Why Germany is playing a dangerous game antagonising America on Three Fronts
Garry white employee

by
Garry White

in Features

18.03.2019

Germany has been a significant beneficiary of the world’s post-war prosperity, enjoying rapid industrial growth via its world-class export industry. But the global order is changing rapidly and Berlin has found itself caught in the crossfire of the trade war. With demand for new vehicles in structural decline as fewer young people sit driving tests, it appears that the German economy is heading for a period of significant turmoil – whatever the Brexit outcome.

Last week, the Federal German government slashed its growth forecast for 2019 once more, with GDP now expected to expand a pedestrian 0.8pc over the year.  This is a steep haircut from its original projection of 1.8pc. A substantial amount of the German success story is down to its car industry, which makes up around 16pc of total exports and employs more than 820,000 Germans directly. The car industry had been hit hard by a slowdown in the global economy and the “dieselgate” scandal where emissions data was falsified; but things could be about to get worse as tensions between Washington and Berlin deteriorate.

Last week, the Federal German government slashed its growth forecast for 2019 once more, with GDP now expected to expand a pedestrian 0.8pc over the year.  This is a steep haircut from its original projection of 1.8pc. A substantial amount of the German success story is down to its car industry, which makes up around 16pc of total exports and employs more than 820,000 Germans directly. The car industry had been hit hard by a slowdown in the global economy and the “dieselgate” scandal where emissions data was falsified. But things could be about to get worse as tensions between Washington and Berlin deteriorate.

Donald Trump is unhappy about large imports of German vehicles into the US and, last month, Commerce Secretary Wilbur Ross completed a report on whether imported vehicles posed a “national-security risk”. President Trump has 90 days to respond, but he is unlikely to act until there is a resolution with China, as action on two fronts will upset markets significantly. But once a deal with China is agreed, the Germans should be worried. The EU estimated in June last year that a 25pc tariff would add about €10,000 (£8,503) to the price of a car made in the EU and sold in the US, and it would cut American purchases of vehicles and parts by half.

Because of this backdrop, you would expect that the Germans to act in a manner that would not antagonise the thin-skinned occupant of the Oval Office.  After all, the US is Germany’s largest export market and vital to its economic health. However, China is the country’s third largest export destination after France – and offers substantial long-term growth potential as it continues to develop.

The trade war is really about a clash of values between China and America, but Germany has been unyielding to American demands relating to Huawei. Last week, Washington threatened Germany with a reduction in intelligence sharing if it allowed the Chinese company’s equipment to be installed in its 5G networks. Angela Merkel’s economic advisor Lars-Hendrik Roller was recently sent to China to try and negotiate a “no-spying” agreement that would allow Huawei’s technology to be installed, but the value of such an agreement is moot. Nevertheless, Germany’s actions will be regarded by the Trump administration as a refusal to pick sides in what Washington hawks have dubbed the “new cold war”.

Adding to the tensions between Washington and Berlin is Nord Stream 2, a gas pipeline between Russia and Germany under the Baltic Sea. It has become so much of an issue between the Trump administration and Germany that Washington hinted this week it could slap sanctions on companies involved in its construction. Reports suggest that “a tougher stance” is already being prepared by Washington ahead of the pipeline’s completion later this year. Russia currently supplies around 40pc of the EU's gas supplies, just ahead of Norway. However, the pipeline will increase European reliance on Russia significantly and the project has been described as an “energy weapon” that could be used by Vladimir Putin to hold the EU to ransom. After all, the Russians have form on this front. Mr Putin cut off all gas flowing through its pipelines through Ukraine in 2006 as part of a political and pricing dispute. An additional reason for the Americans to be against the pipeline is President Trump’s ambitions on energy exports. The US is expected to overtake Saudi Arabia later this year as the world’s leading energy exporter and Germany could have been a significant market for US liquefied natural gas if it wasn’t cosying up to Russia. Critics of the project argue that the Germans have fallen into a Russian “trap” – and they are not necessarily wrong.

Yet another source of friction is agriculture. A food fight between the EU and US looks almost certain, despite a truce being declared last year after European Commission President Jean-Claude Juncker held direct talks with President Trump. But this détente could end very soon. On Tuesday, US Trade Representative Robert Lighthizer told Congress that discussions with the EU had reached a “complete stalemate” with over intractable agricultural demands. “The United States can't have a trade agreement with Europe that doesn't deal with agriculture, and their view is that they can't have one that does,” Mr Lighthizer told the Senate Finance Committee. If agriculture becomes a major sticking point – and it appears likely that it will considering Donald Trump’s significant support in the farming states, tariffs on German cars seem almost inevitable.

Germany therefore looks quite vulnerable to US action later this year once a deal is agreed with China. Mrs Merkel must be hoping that Donald Trump’s comments on Wednesday that he was in “no rush” to complete a trade pact with China are true rather than a negotiating tactic. Unfortunately for her, I think they are the latter.

A version of this article originally appeared in the Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Get in touch

Find out more

Our focus on clients has endured since the foundation of Charles Stanley in 1792 and has helped make us one of the UK's leading wealth management firms. Your interests give shape to everything we do.

Please call us to talk about your circumstances or complete the enquiry form.

020 3797 1783

Make an enquiry

£

We store your data in accordance with data protection legislation and our privacy notice. You can unsubscribe at any time by clicking the link in our emails or emailing us

Local Office

Your local office

Your local Charles Stanley office can help advise you on a wide range of investment management services.

Select an office

Share

Newsletter banner signup