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Analysis

When Merkel resumes office, Trump's tariffs and threats at the top of her in-tray

German Chancellor Angela Merkel pays tribute to the 55th anniversary of the Elysee Treaty in Berlin, Germany, on Jan. 22, 2018.

KAY NIETFELD/DPA/ABACA PRESS/TNS

By IAIN ROGERS, PIOTR SKOLIMOWSKI | Bloomberg | Published: March 13, 2018

Angela Merkel's most immediate challenge when she resumes office no longer looks to be refugees, Russia nor even rising populism: It's President Donald Trump's relentless focus on Germany.

Like an itch he's unable to stop scratching, Trump just can't seem to leave Germany alone. Whether tariffs on steel, a proposed "tax" on imported cars or threats to penalize countries that fail to meet NATO defense-spending targets, Germany is the European country with most to lose.

"It seems very strange to put pressure like that on allies," said Sebastian Dullien, a senior policy fellow at the European Council on Foreign Relations in Berlin. He cited Trump's link of trade and defense spending as adding a new dimension to the dispute, saying, "You don't need enemies anymore if your friends treat you like that."

With its yawning trade surplus with the U.S. -- at more than $60 billion in 2017, some four times Canada's -- Germany, and its export-reliant, blue-chip companies like Daimler and BMW, are painfully exposed to Trump's drive to clamp down on trade he calls "unfair."

That ensures the matter will rise to the top of the chancellor's in-tray when she is sworn in for a fourth term at the helm of Europe's biggest economy on Wednesday. Trump's actions, if they translate into measures, constitute a transatlantic threat she cannot afford to relegate behind a list of pressing challenges from Brexit to China and reform of the euro area.

As the European Union pledges to "stand up to the bullies," Merkel has signaled German support for EU-level retaliation against U.S. tariffs if necessary. But she prefers reviving talks on an EU-U.S. trade pact to defuse the conflict, warning "nobody will win" in a global trade war.

"When these unilateral actions cannot be avoided, then of course we have to think about how we can respond in kind," Merkel said at a news conference in Berlin on Monday. "I am counting first of all on talks and there will be ample opportunity for that."

Canada and Mexico have secured exemptions from tariffs of 25 percent on steel and 10 percent on aluminum, with Australia claiming an opt-out and the U.K. seeking to be excluded. Yet EU trade chief Cecilia Malmstrom said after talks Saturday with U.S. trade representative Robert Lighthizer she had "no immediate clarity" on whether the bloc would also be let off the hook.

Trump's comments over the weekend suggest not.

"All these countries now are calling up: 'We don't want the tariffs. What do we have to do?'" the president said Saturday at a campaign rally in Pennsylvania. "The European Union, they kill us," he said, citing a deficit of $100 billion.

"They say: we want those tariffs taken off. I say: 'Good. Open up the barriers and get rid of your tariffs and if you don't do that, we're going to tax Mercedes-Benz. We're going to tax BMW."

He amplified his message on Monday with another tweet saying Commerce Secretary Wilbur Ross would be meeting EU officials to discuss "eliminating the large Tariffs and Barriers they use against the U.S.A."

He has a point on the size of the U.S. trade deficit. Germany's January's trade and current account surpluses were each the highest on record for that month.

For Merkel, that's a sign of German manufacturing excellence; she says trade needn't be a zero sum game. Still, Trump has upped the stakes by linking trade deals to contributions to the North Atlantic Treaty Organization budget, accusing European countries, notably Germany, of reaping the benefits without paying enough towards security.

All the same, according to a model created by Bloomberg Economics, if the U.S. raises import costs across the board by 10 percent and the rest of the world retaliates, German output would shrink by 0.3 percent -- while the impact on U.S. GDP would be three times as great, leaving the economy 0.9 percent smaller in 2020.

Trump's actions may cause Merkel to push ahead with a more closely aligned EU, according to Carsten Brzeski, ING-Diba chief economist in Frankfurt, who said that protectionism could "argue in favor of European integration."

For now, the president's rhetoric will concern Merkel but it's unlikely to succeed in riling her yet. The nature of the threat is not new, with Trump targeting Germany since before his election.

Her strategy will probably involve defusing the immediate risks and encouraging talks on a solution between the U.S. and the EU, said Oliver Rakau, chief economist for Germany at Oxford Economics in Frankfurt.

"She will try to calm everybody down and in her usual way, bit by bit, try to take the fire out," Rakau said. Then she can "maybe get down to what Trump really wants."

With assistance from Piotr Skolimowski Samuel Dodge Jennifer Epstein and Paul Gordon

German Chancellor Angela Merkel and U.S. President Donald Trump walk to a news conference at the White House in Washington on March 17, 2017. The risk of a recession in Europe's biggest economy rose significantly between March and April amid the fallout over President Donald Trump's increasingly restrictive stance on global trade, researchers said Monday.
ANDREW HARRER/BLOOMBERG

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