What now for Germany's economic model? | Berlin Briefing Podcast

Key Concepts

• Lopsided Trade Deal: The EU faces 0% tariffs on goods entering from the US, while the US imposes 15% tariffs on most EU goods.
• Security Dependence: Europe's reliance on the US for security influences trade negotiations.
• China Shock: The threat to European industries from Chinese competition.
• De-risking: Europe's need to reduce dependence on both the US and China.
• Transatlantic Partnership: The relationship between Europe and the US, particularly in trade and defense.
• Green Steel: Steel produced with lower CO2 emissions, often using hydrogen.
• Section 232 Investigation: US investigation into whether pharmaceuticals threaten national security.
• Transfer Pricing: A practice used by multinational companies to shift profits to low-tax jurisdictions.

US-Europe Trade Deal: Impact on Germany

Initial Reactions and Overview

The new trade deal between the US and Europe under Donald Trump's administration has been met with widespread dissatisfaction in Germany. Business associations have labeled it a "fatal signal," while figures like Friedrich Merz have warned of "considerable damage" to the German economy. The core issue is the perceived unfairness of the deal, where the EU eliminates tariffs on US goods while the US imposes a 15% tariff on most EU exports, a significant increase from the previous 1-3% average.

Ursula von der Leyen's Perspective

European Commission President Ursula von der Leyen's demeanor after the negotiations suggested a sense of relief mixed with defeat. Thorsten Benner likened the situation to historical "unequal treaties" imposed on China, highlighting the EU's unfamiliarity with negotiating from a position of weakness.

Friedrich Merz's Assessment

Friedrich Merz acknowledged the deal as the "least bad of all possible deals," given Europe's security dependence on the US. He emphasized that the security relationship was a key factor in the negotiations, with Europe essentially "buying time" for US protection amid ongoing global conflicts.

Economic Impact and Uncertainty

The exact economic damage is difficult to assess due to uncertainties in the fine print and potential changes in US trade policies with other countries. While current estimates suggest a 0.1-0.2% reduction in GDP, the impact could worsen depending on future developments. The German steel industry faces particular challenges, despite a potential "metals alliance" aimed at countering unfair competition from China.

Sector-Specific Impacts

Automotive Industry

The automotive industry, a cornerstone of the German economy, faces significant challenges. While the deal averts the worst-case scenario of continued or increased tariffs (potentially up to 27.5% or 30%), the 15% tariff will necessitate price increases.

• Mercedes and BMW: These companies are better positioned due to their existing production facilities in the US, which avoid tariffs on complete vehicles. However, tariffs still apply to imported parts.
• Audi and Porsche: These manufacturers, lacking US production plants, will be more heavily impacted.
• Overall Impact: Despite some potential benefits from the EU's elimination of tariffs on US cars (many of which are German-made), the German car industry is expected to lose billions due to the tariffs.

Pharmaceuticals

The pharmaceutical sector faces uncertainty, with the possibility of even higher tariffs pending the outcome of a Section 232 investigation into whether pharmaceuticals threaten US national security. This could be a "game changer," as pharmaceuticals have traditionally been exempt from tariff politics.

• German Pharmaceutical Industry: While currently healthy, the industry is closely monitoring the situation due to the US being a major trade partner.
• Thorsten Benner's Perspective: Benner argues that Trump's concern about the pharmaceutical industry is valid, but the solution (tariffs) is misguided. He points to US tax code changes that incentivize pharmaceutical companies to shift production to Ireland, resulting in zero tax payments in the US.

Steel and Aluminum

These industries face high tariffs, with steel particularly affected by a 50% tariff. This is exacerbating existing problems in the German steel industry, including overproduction and high production costs.

• ThyssenKrupp: A major German steel producer, has announced significant job cuts.
• Green Steel: While Germany is focusing on producing green steel, it is currently more expensive, making it difficult to compete.

Geopolitical Considerations and China

US Demands and Enforceability

The US is claiming significant investment commitments from Europe, including $750 billion in arms purchases and $600 billion in investments in the US economy. However, these numbers are largely considered "fantasy land" and not enforceable.

China's Role

The deal implicitly addresses the challenge posed by China, with discussions of economic security and supply chain risks. However, the Trump administration's approach to China is inconsistent, making it an unreliable partner for the EU.

• Thorsten Benner's Perspective: Benner argues that Europe must "de-risk" from both the US and China, as Trump is not a reliable partner in addressing the China challenge.
• Marie Sina's Perspective: Sina emphasizes that China poses the biggest threat to German industries due to its competitive power.

German Business Strategy

German businesses face a "squeeze" from both the US and China. Marie Sina suggests that Germany needs a new strategy, becoming more independent in its production and focusing on domestic markets. She also suggests that Germany needs to identify new industries for the future, such as defense or aging-related products and services.

Competitiveness and Protectionism

Thorsten Benner argues that Germany needs to improve its competitiveness by reducing labor and energy costs, cutting bureaucracy, and spurring innovation. However, he also believes that protective measures, such as tariffs and regulations, are necessary to counter unfair competition from China.

Transatlantic Relationship and Future Outlook

Ursula von der Leyen's Perspective

Ursula von der Leyen frames the trade deal and increased defense spending as a "rebooting" of the transatlantic relationship under Trump.

Thorsten Benner's Perspective

Thorsten Benner acknowledges that trying to extend US protection is the only option for Europe, given its military weakness. However, he emphasizes the need to invest in European strengths, including military capabilities, technology, and the single market.

Conclusion

The US-Europe trade deal represents a complex and challenging situation for Germany. While the deal averts some worst-case scenarios, it also poses significant economic risks and highlights the need for Germany to adapt to a changing global landscape. The rise of China as a major economic power and the uncertainties surrounding the US-Europe relationship require Germany to develop a new strategy that prioritizes independence, innovation, and competitiveness.