Germany and the US-China Trade War: Stuck in the Middle

ARTICLES - 22 May 2019

By Angela Stanzel

It seems that there are only losers in the U.S.-China trade war, and Germany could lose the most out of all European countries. Since last March, U.S. President Donald Trump has followed through on his threats to slap tariffs on Chinese products should China continue its alleged unfair trade practices. Neither the U.S. nor China have been willing to back down, which has resulted in both sides imposing even higher tariffs every couple of months. What are the implications for Germany? Two dilemmas seem to be emerging. Firstly, Germany, exporting around 9% of its products to the U.S. and 7% to China, relies heavily on exports to both markets-the U.S. and China. As a result, Germany faces economic consequences of Trump’s tariffs. Secondly and perhaps more importantly, Germany, as a world-class exporter and industrial investor in both China and the U.S., faces a likely choice if value chains are broken. Can Germany continue to remain a neutral third party, simultaneously maintaining its alliance with the U.S. and its business ties with China?

Economic expectations in Germany were raised at the beginning of the year due to the outlook of the U.S. and China reaching a deal soon after they launched negotiations in January. In March, Trump had postponed the tariff hike indefinitely citing progress made in the negotiations. However, more than one year into the dispute, Germans are nothing but worried about the negative impact the U.S.-China quarrel has had on Germany’s economy. For a country so heavily relying on exports and being an integral part of global supply chains, the new tariffs naturally impact German firms. Moreover, there is a very direct impact too.

For a country so heavily relying on exports and being an integral part of global supply chains, the new tariffs naturally impact German firms. Moreover, there is a very direct impact too.

Joachim Lang, Managing Director of Germany’s industry association (BDI),recently warned that the ongoing course of the U.S.-China confrontation is posing a massive threat to the world economy and that European companies with production centres in the U.S. and China will be directly impacted. This is true for German automobile firms in particular. There has already been a direct impact on the German car industry operating in China. Because the U.S. and China have raised import duties on cars, the number of cars sold in China is decreasing. Last August, this number decreased by 7.4% as compared to 2017. Car companies such as BMW and Daimler are also affected because they are producing cars in the U.S. in order to ship them to China.

Then there is the issue of the mood in Germany. Earlier this year, BDI President Dieter Kempf had expressed concern that the trade conflict between China and the U.S. is leading to great uncertainty in Germany. The Leibniz Centre for European Economic Research (ZEW) in Mannheim, an economic research institute, confirmed in its monthly survey in May 2019 the dampening mood among German investors. According to the survey, the ZEW Indicator of Economic Sentiment for Germany fell to -2.1 from 3.1 in April. Economists had expected an increase to 5.0.According to ZEW President Professor Achim Wambach, "Expectations for the German economy are discouraging above all due to the intensifying trade dispute between the U.S. and China. The resulting negative expectations on German exports are now beginning to show in the actual development of exports."

Large parts of the economic and political elite in Germany agree with the U.S. administration’s criticism towards China’s unfair trade practices, but strongly oppose the use of tariffs. Trump’s trade protectionism threatens Germany’s interests indirectly, through its China relationship. The German economy is already starting to suffer, as trade with China is becoming hostage to a conflict with the U.S. As a result, Trump’s path towards an escalating trade war is increasingly alienating many Germans. The feeling of insecurity and alienation would intensify should the Trump administration choose to introduce punitive tariffs on steel and aluminium imports on 1st June.

Even if Trump should decide not to target Germany next, the German industry may still be faced with an either-or situation. Both the U.S. and China may ask Germany whether it is with or against one of them, the most prominent example being the discussion on whether to use the Chinese firm Huawei to establish a 5G network in Germany. In particular, companies may end up being punished by the U.S. if their value chains remain in China.

It cannot be denied that plenty of German large-scale companies still view China as a gigantic market to profit from.

Meanwhile, it cannot be denied that plenty of German large-scale companies still view China as a gigantic market to profit from. Companies such as Siemens or Bosch are confident to be able to expand their business in China in the near future. Therefore, Germans might find themselves particularly divided on economic and trade issues, with some inclined to side with the U.S., their traditional ally, while others may want to continue to rely on economic interdependence with China to counter America’s mercantilism.

Germany and the U.S. both agree on the content of their criticism of China’s trade practices, and in fact, there has never been as much common ground between Germans and Americans on China as is today. This should provide ground to cooperate more on certain issues, for instance, improving consultation on the question of how to gain better market access in China or how to tackle increasing Chinese investment and influence. In parallel, Germany must push further for strengthening and reforming the WTO so as to employ it as a principal mechanism to reject the use of tariffs as protectionist measures and to promote free global markets.

Germany and the US-China Trade War: Stuck in the Middle

By Angela Stanzel

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