In Face of a Global Trade War

No More Compensation

Whether the Trump administration will impose punitive tariffs on imports from Germany and the EU, is one of the key questions in the escalation of this global trade war still remaining to be answered. The US president has granted Berlin and Brussels a postponement until June 1, to avert punitive tariffs on steel and aluminum deliveries, but it is completely uncertain whether EU negotiators will have success. Trump's threat to react to possible EU counter-sanctions with an escalation and more punitive tariffs on car imports is still looming. This would particularly affect the German automobile industry because the United States is one of its most important foreign markets.[1] Washington's confrontational approach also seems to neutralize previous compensation models used in the context of western sanctions against Russia. When in 2014, western countries were prohibited, for the first time, from exporting certain goods to Russia, the German mechanical engineering sector, for example, could compensate its billions of losses with the billions in earnings through exports to the Unites States. The Trump administration cannot be expected to show such complaisance toward the export-oriented German industry.

Panic

On the contrary: Washington has ceased to coordinate its plans for sanctions against Russia with Berlin, but rather to impose them unilaterally. That is a hard blow for Germany's industry. Because the US is penalizing companies of other countries, that do not comply with US punitive measures by imposing so-called secondary sanctions on them, German companies must de facto comply with US directives, without having had any say in their formulations. This also applies to the April 6 sanctions against Russia, announced by Trump that are aimed at prohibiting business with a list of oligarchs and their companies. Insiders estimate that this affects nearly 60 percent of Germany's companies doing business in Russia. According to a German government advisor, German businessmen in Russia are "virtually panicking." "It has become common practice for German companies to dispatch their representatives to the US Office of Foreign Assets Control (OFAC), the 'watchdog' over compliance with the catalogue of US sanctions, to receive a green light for business with their Russian partners."[2] Most of the German companies can no longer take this risk; because of the key importance business in the US has for the German industry: The United States is its number one market and investment site.

Retraction Possible

In any case significant losses are looming. The US sanctions imposed April 6 have, for example, severely hit the Russian oligarch Oleg Deripaska and his aluminum company Rusal. Rusal, the world's second largest company in the branch and producer of six percent of the world's primary aluminum, supplies nearly 40 percent of the raw material processed in the EU. Accordingly, Washington's announcement of sanctions has set the EU aluminum processing companies in a state of panic - and they are not the only ones. The world market price of aluminum has skyrocketed by nearly 30 percent. This time, the German companies affected may get off lightly. The price hike will also affect US companies such as Boeing and US automobile manufacturers. That is why it does not seem impossible that Trump may retract on his sanctions against Rusal. Besides, last summer, Washington decided to punish companies involved in the financing and construction of the Nord Stream 2 gas pipeline. Even though Germany's Minister of the Economy Peter Altmaier has been busy over the past few days and weeks in travel diplomacy to achieve at least extended deadlines or exemptions for German companies, the Trump administration explicitly keeps open the option of imposing sanctions.[3]

Russia Defends Itself

For German companies, the situation has become more complicated, since Moscow began to apply its own initial countermeasures against the April 6 US sanctions, Any company supporting or abiding by US American or other foreign sanctions, may be penalized in Russia. Tuesday, a draft bill, to this effect, passed its first reading in the Russian Duma. If it becomes law, German companies doing business in Russia will inevitably be in an awkward position - between Moscow and Washington - and be forced to choose a side.[4]

Cancellation Probably Inevitable

The re-imposition of US sanctions on Iran is a supplementary pressure point. The German economy had hoped for double-digit billions in new intermediary business deals with Tehran following conclusion of the nuclear agreement. This is now in jeopardy. Because the majority of the German companies doing business in Iran are also active in the United States, and must therefore expect severe penalties, for violation of the unilaterally declared US sanctions, a cancellation of their business relations with Iran seem, for the time being, inevitable.

The "Blocking Statute"

Because the Trump administration is rapidly expanding its unilateral sanctions - including threats to China - and forcing, in effect, companies in Germany and the EU into submission by threatening exorbitant punitive measures for their violation, the EU finds itself compelled to engage a counteroffensive. The union announced yesterday, it will reactivate the 1996 "Blocking Statute." That law prohibits EU companies from abiding by unilaterally imposed US sanctions. For example, a company that closes its subsidiary or terminates it business relations with Tehran, out of fear of US sanctions, must expect legal consequences of the EU. At the same time, the EU Commission offers benefits, such as lower-interest loans from the European Investment Bank (EIB), to companies operating in Iran.[5] Berlin and Brussels are accompanying their EU's counteroffensive against Washington with the offer of stabilizing transatlantic business relations at more favorable conditions for the USA. At their Wednesday night meeting in Sofia, the EU's heads of states and governments decided to offer Trump an expansion of imports of liquefied US fracking gas to the EU, in exchange for abandoning tariffs on steel and aluminum.[6] This is worth good - and above all, profitable - relations with Washington for Germany and the EU.

[1] See also Glashäuser und Steine.

[2] Nikolaus Doll: Deutsche Firmen in Russland geraten in Panik. welt.de 16.05.2018.

[3] USA drohen mit Sanktionen. spiegel.de 17.05.2018.

[4] Förderern von US-Sanktionen droht Haft in Russland. dw.com 16.05.2018.

[5] Ruth Berschens: Geschlossen für Beibehaltung des Iran-Deals - EU droht mit "Blocking Statute". handelsblatt.com 16.05.2018.

[6] EU bietet USA im Handelsstreit Kompromiss an. handelsblatt.com 17.05.2018.