Germany, the US and non-free trade

A week has passed since US President Donald Trump signed a decree that raises tariffs on steel imports to 25 percent and on inbound aluminum shipments to 10 percent.

Some nations have meanwhile been exempted from the tariffs, but not the European Union. On the contrary, the US president has threatened to also impose higher tariffs on imports of German cars made by BMW, Daimler and others.

According to the European Commission, the EU exported steel and aluminum products worth €14 billion ($17.2 billion) to the US last year, accounting for 14 percent of total US imports of such goods. It's fair to say that the planned US tariffs would not hit all products from the sector, but would nevertheless affect steel products worth €5.3 billion and aluminum products to the tune of €1.1 billion.

Germany is Europe's No.1 exporter, followed by the Netherlands, Italy, Spain, the UK and Sweden.

Berlin still hoping

Small wonder that alarm bells are ringing in Berlin. "Had we completed the TTIP trade deal, Trump would not have been in a position to impose higher tariffs," said Christian Lindner, head of Germany's pro-business Liberal Democrats (FDP), referring to the stalled trade accord between the EU and the United States. "As a last resort, some moderate countermeasures which are currently being considered by the EU are thinkable."

"I think what's on the table right now is justified, but cannot replace a greater effort to change the US president's mind."

His words are echoed by German Chancellor Angela Merkel. "We will try to do just that, but I have no way of knowing whether we'll succeed," she told German public broadcaster ARD. "We have always said we want to have fair trade relations on the basis of WTO rules."

But Donald Trump seems less interested in WTO regulations. Gabriel Felbermayr, a foreign trade pundit from the ifo economic think tank, says one shouldn't have any illusions. He argues that Trump is reported to be of the opinion that trade cannot be a win-win situation, but rather a gamble that can help the US achieve its objectives.

Leaving only losers

Felbermayr fears that Trump is resolved to make his announcement a reality, but he says EU-US trade is more complicated than conveyed by the US president, pointing to the fact that if Americans produce cars, they need a lot of components from Europe. So if Trump is to slap tariffs on these components, it would impact the competitiveness of US carmakers, leaving only losers in the end.

But could there be a last-minute deal to avoid head-on confrontation? At least, the US seems willing to negotiate behind the scenes. Of course, negotiators make a deal dependent on the EU's willingness to meet a number of conditions. Sources close to the EU executive say US Trade Representative Robert Lightizer wants to see five criteria fulfilled before any exemption from tariffs can be debated.

It's unclear exactly which criteria he is talking about. But there's pressure on the EU to help reduce overcapacities in the global market by tackling "the Chinese problem." China has a record of price dumping and circumventing existing limitations by pushing its products into markets through third countries. Chinese direct steel exports to the US only amounted to 468,000 tons in 2017, marking an 80-percent drop from 2014 levels.

China not complying with rules

The trade practices of the Chinese have also been identified as a big problem in Brussels. "They want to sell their steel, no matter where," said an insider. "They are viewed differently now, and there's agreement that we need to protect ourselves as the Chinese are not sticking to common rules."

Should there be no last-minute deal between the EU and the US, the European Commission has 90 days to decide countermeasures with a view to rebalancing trade relations. That way, US exports to the EU could be made a lot more expensive, making up for the losses to be incurred by higher US duties.

Brussels has indicated such countermeasures would involve political reasoning as possible tariffs on whiskey, Harley Davidson motorcycles and jeans are produced in Republican-governed states. Their governors are then expected to talk the US president out of the duties again.

Ifo's Gabriel Felbermayr concedes that huge trade imbalances between the EU and the US cannot simply be brushed aside, saying that the EU is by no means the paradise for free trade enthusiasts it claims it is.

In 2015, the EU slapped $5.7 billion in duties on US exports to the 28-member bloc. For the far bigger EU exports, the US only collected some $7.1 billion in duties, suggesting there's a real need to negotiate trade flows.

What about looking elsewhere?

The EU is now also looking to reach free trade agreements with other nations, with the EU executive saying that with the recent US withdrawal there's more opportunity in the Asia Pacific region. "Where Trump pulls out, the EU moves in," FDP chief Christian Lindner said, adding that while no one questioned the importance of trade with the US, other partners were crucial, too.

He argued that Germany as an export-oriented nation had to spearhead global efforts to promote free trade through bilateral or multilateral agreements. "That would be the clearest signal yet to Trump that we're not going to be intimidated, but are looking for alternatives.