Fallen in the trap
Trump repeats his tariff threats. While Canada is discussing tough countermeasures, Germany and the EU squirm for a compromise: Germany is now dependent on business with the US. Berlin is trapped.
WASHINGTON/BERLIN (own report) - In his video address to the World Economic Forum in Davos, newly incumbent US President Donald Trump reiterated his threat to impose painful tariffs on imports into the United States. Indeed, he now declares that businesses from other countries should invest in the US. Anyone who refuses to do so but wants to sell products manufactured outside the US will, he declares, have to face high tariffs. While Canada, for example, is discussing serous retaliation, including an oil embargo, German politicians and business representatives along with the EU leaders have been arguing for concessions to Washington. The reason for this stance is that German industry is highly dependent on doing business with the US. The major alternative would be to ramp up trade relations with China. But this path has been closed by the EU on political grounds. Several economic think-tanks have been predicting serious damage to German industry if the tariffs are indeed imposed and warning that a tariff scenario should be avoided at all cost. European Commission President Ursula von der Leyen is particularly keen to appease Trump. She wants to avoid confrontation by welcoming even greater imports of US liquefied natural gas. This coincides with the new US administration’s goal to achieve a massive hike in LNG output as part of a strategy aimed, in the words of Secretary of State Marco Rubio, at “energy dominance”.
Dependent on US business
Germany’s economic dependence on the United States has increased significantly in recent years. The US has been the largest market for the German export industry since 2015. The US returned in 2024 to its status as Germany’s largest trading partner, having been outperformed on trade by China from 2015. The is due to German withdrawal from business opportunities in China as a consequence of the American economic war against the People’s Republic – a war into which Germany and the EU have been increasingly drawn. While trade with the United States rose to a volume of 255 billion euros in 2024 [1], trade with China fell for the second time in a row due to rising tensions with Beijing and the associated risks to business. In terms of German investment abroad, the US is now far and away in the lead. Statistics released by the German Bundesbank show that Germany’s overall foreign direct investment in the United States totalled 448 billion euros in 2022, while German direct investment in China only reached 122 billion euros. In fact, Germany earns more from trade with the US than from trade with all its other trading partners. In 2023, the surplus of German exports over imports from the US came to more than 63 billion euros.
Damaging tariffs
A strong economic dependency on business with the US means that new US tariffs would hit Germany particularly hard. France, for example, would be in a better position. In the ranking of its foreign trade partners, the United States is only in fifth place behind Germany, China, Italy and Spain.[2] In an analysis last autumn, the private Cologne-based German Economic Institute (IW), a think-tank close to the business community, presented its estimate of the damage from a tariff battle with the US. The potential losses to the German economy could be as high as EUR 180 billion by 2028, with German GDP reductions of 1.5 percent in both 2027 and 2028.[3] According to the Munich-based ifo Institute, the tariffs announced by US President Donald Trump could cause German exports to plummet by up to 15 per cent. This would be a major disaster for Germany’s highly export-focused economy.[4] Looking at employment, the Macroeconomic Policy Institute (IMK) points out that any US tariffs could, depending on the scenario, cost Germany between 200,000 and 300,000 jobs. The reason is that at least 1.2 million jobs depend on the huge volume of German exports to the United States. The crash in exports to the US would therefore hit hard.[5]
Threatened by rapid decline
Trump is threatening to impose tariffs on goods imported from Mexico. The proposal to set duties at 25 per cent would have serious consequences for German companies, too. After all, many German companies take advantage of the North American free trade agreement USMCA (United States-Mexico-Canada Agreement) by having products for the US market manufactured in Mexico by workers on low wages. German automotive companies, in particular, operate in this way. For example, almost 60 per cent of the vehicles sold by Volkswagen in the United States are produced by VW de México in Puebla.[6] And 29 per cent of Audi vehicles newly registered in the US in 2024 were also manufactured in Mexico.[7] If a 25 per cent tariff had to be paid at the US-Mexico border, profit margins would be drastically reduced, possibly even completely wiped out. Some market analysts, like the S&P Global Ratings consultancy, argue that carmakers from Germany and the EU might, in principle, find ways to absorb such losses. But they also point out that lost business in China and a tight market situation in Europe have already weakened these companies considerably.[8] So if a collapse of their US market follows on the heels of their failures in China, the German automotive industry would likely face the prospect of decline from a global to just a European player.[9]
‘With an outstretched hand’
Fixated as it is on exports, German industry would have to reckon with severe losses not only at home and but also in foreign production locations such as Mexico if the Trump administration were to actually impose the tariff wall. This is pushing German politicians and business leaders into a defensive stance. The structure of bilateral economic relations makes it unrealistic for them to threaten the US with losses of comparable severity through counter-tariffs. Unlike Germany, Canada is currently discussing this option, with a halt to oil supplies to the US being considered as a last resort tactic. The situation in Germany looks rather different. “We shouldn’t,” says Federal Economics Minister Robert Habeck, “crawl and grovel” but respond by offering “an outstretched hand”.[10] At the beginning of the year, the CDU leader and candidate for the chancellorship in the upcoming election, Friedrich Merz, was already arguing for a “positive agenda that benefits American and European consumers alike”.[11] “The EU should be presenting the US with offers of economic cooperation,” demanded Wolfgang Niedermark, board member of the Federation of German Industries (BDI), yesterday, Thursday.[12] And European Commission President Ursula von der Leyen had previously called for “good relations with the new administration” in Washington and for a “positive transatlantic agenda”. To smooth this path she spoke in favour of buying more American LNG.[13]
Energy dominance
This move would indeed be in line with US interests. President Trump has already set in motion the deregulation of the entire US energy industry with some of his first decrees, announced on Monday. Specifically, he has lifted restrictions on oil and gas production off the US coast, including Alaska, and has cancelled any current limits on the export of LNG. There is already talk in the energy sector of natural gas production rising to double the current volume, perhaps even more. This is facilitated by Trump’s immediate decision to withdraw from the Paris Climate Agreement. Climate concerns will no longer be taken into account in the US. It would be advantageous for the sale of gas, mainly from fracking, if Germany and the EU were to commit to purchasing fixed volumes. Washington’s measures are aimed at more than boosting corporate profits of US companies in the fracking sector. Rather, as Secretary of State Marco Rubio reminded the world on Tuesday, the explicit political goal is to re-establish “energy dominance”.[14] A scenario that would make Germany and the EU even more dependent on the United States.
[1] USA überholen China als wichtigsten deutschen Handelspartner. handelsblatt.com 19.01.2025.
[2] La France et ses partenaires économiques, pays par pays. diplomatie.gouv.fr.
[3] See: Die transatlantische Rivalität.
[4], [5] Trumps Zollpläne bedrohen deutsche Arbeitsplätze. tagesschau.de 15.01.2025.
[6] Alexander Demling: Wie sich Volkswagen, BMW und Mercedes gegen Trumps Zölle wappnen. spiegel.de 21.01.2025.
[7], [8] Jordyn Dahl: Trump’s US-Mexico tariffs threaten to hammer European carmakers. politico.eu 20.01.2025.
[9] Alexander Demling: Wie sich Volkswagen, BMW und Mercedes gegen Trumps Zölle wappnen. spiegel.de 21.01.2025.
[10] Leonidas Exuzidis, Silke Kersting, Martin Knobbe: „Wir müssen uns nicht rumschubsen lassen“. handelsblatt.com 21.01.2025.
[11] Merz verlangt neuen Anlauf zu Freihandel mit den USA. faz.net 02.01.2025.
[12] Klaus Weber: Wie sich Europas Wirtschaft behaupten kann. zdf.de 23.01.2025.
[13] Thomas Gutschker: Wie die EU beschwichtigt. Frankfurter Allgemeine Zeitung 21.01.2025.
[14] Edward Wong: Rubio Oversees Halt to Foreign Aid and Meets With Asian Diplomats on Day 1. nytimes.com 21.01.2025.
