Trump’s trade war: Germany sides with China

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While US President Trump is increasing pressure on China, Chancellor Merkel appears to side with her Chinese counterpart Xi Jinping on on the issue of tariffs and trade imbalances. Merkel called Jinping, who was recently re-elected, and agreed to work together closely in matters of trade and international cooperation in order to avoid conflict.

This agreement can be seen as a direct reaction to the belligerent noises from Washington, where Trump announced additional punitive tariffs to be applied to Chines imports.  According to Reuters, these new tariffs are to come into effect as soon as Friday. The US Chamber of Commerce estimates that up to $60bn worth of Chinese products will be concerned by this.

Trump’s new trade advisor Larry Kudlow labelled the new initiative a “tough reaction” to Chinese protectionism and invited all US allies to participate in order to punish China for its high trade surplus. However, this new American protectionism is not without controversy, even in the US. The National Retail Federation warns that additional tariffs will make exactly those products more expensive that average income Americans purchase on a regular basis: “Make no mistake, this is a tax on American families. When costs of raw materials like steel and aluminum are artificially driven up, all Americans ultimately foot the bill in the form of higher prices for everything from canned goods to electronics and automobiles. The reality is that there is nothing this country will gain from such a one-sided policy. These tariffs threaten to destroy more U.S. jobs than they will create while sending an alarming signal to our trading partners and diminishing markets for American-made products overseas.”

However, Trump’s tough stance on China is not only seen critically. Some say China has unfairly protected its markets and devalued its currency for far too long already, thereby creating significant trade imbalances and flooding European and American markets with cheaper products.

Most important trade partners of Germany (Source: Statistisches Bundesamt)

While Germany is itself a trade surplus country and has maintained a significant flow of export goods to China, the US has accumulated a gigantic trade deficit with the second largest global economy. The overall US trade deficit amounted to $566 billion in 2017, $276 billion of which with China. In the meantime, Germany’s deficit with China equalled a mere $14 billion.

By ways of new tariffs, Trump intends to shift this imbalance, increase the prices of goods from low-wage countries, and thereby improve the competitiveness of the US manufacturing industry, a much neglected but highly popular project, particularly among his key demographic.

Germany for its part is siding with China. This seems to be the case not only because it stands by the post-war free trade paradigm, but also because it belongs to the group of trade surplus countries, which Trump is challenging with his new trade tariffs. However, the governement’s stance does seem to be contradictory to the increasing criticism and pressure from businesses to push back against Chinese protectionism. The downfall of the European solar industry can be studied as a tragic case in point for this ambiguity.

Whether Trump’s trade war will backfire on the US remains to be seen. It seems unlikely, however, that in absence of a negotiated solution, China in particular will not reciprocate additional trade barriers. Trump’s “easy win” may then turn into a classic lose-lose.

 

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