Trumps trade war steers Germany and China toward a united front

BERLIN — U.S. President Donald Trumps rapidly escalating trade war is pushing Berlin and Beijing into an uneasy economic alliance.

Both China and Germany found themselves squarely in Trumps sights this week. On Tuesday night, the president signaled a massive new offensive in his trade war against Beijing by publishing a list of some $200 billion-worth of Chinese goods that Washington could hit with new tariffs. Only hours later at a NATO summit breakfast in Brussels, the maverick real estate tycoon unleashed a tirade against Germany for under-spending on defense while pursuing billion-dollar energy deals with Russia.

Facing this open hostility, both countries are realizing that it makes sense to club together.

Earlier in the week, German Chancellor Angela Merkel and Chinese Premier Li Keqiang had met at the now defunct Tempelhof Airport in Berlin — a relic of Nazi architecture now reimagined as a hip park and events complex — to talk up cooperation in sectors ranging from chemicals to cars.

That two-day summit yielded deals and tie-ups worth a total of €20 billion involving German national champions such as the carmakers BMW, Volkswagen and Daimler, the chemicals company BASF and the engineering giant Siemens. In a highly significant step, Merkel announced that the Germans would be allowed to hold stakes of above 50 percent in key joint ventures in China.

“Over 30 years ago it was the brave Germans that came to China to collaborate in the automobile sector” — Chinese premier Li Keqiang

“As relations with the U.S. become increasingly difficult, the other economic giant will inevitably become more important to us,” said Volker Treier, deputy chief executive of Germanys Chambers of Industry and Commerce.

Still, Germany and China are hardly natural bedfellows. Berlin is suspicious of Chinas trade agenda and is at the forefront of trying to protect the EU from losing core intellectual property in buyouts in high-tech sectors such as robotics.

On Monday, Merkel also tried to play down any suggestion that the show of Chinese-German togetherness is an alternative to healing the bad blood with Trump. “From my point of view, I dont want to make such considerations,” she said. “We are interested in frictionless trade with the United States … [and] should try to come to an agreement.”

However, there are also clear signs that the charm offensive between Germany and China amounts to more than commercial expediency and is part of a broader political detente. The summit, for example, coincided with the arrival in Berlin of Liu Xia, the widow of Chinese dissident Liu Xiaobo, who was released after eight years under house arrest in Beijing.

The political theater of Tuesdays meeting at Tempelhof, which saw Merkel and Li ride a self-driving shuttle bus and banter with each other over a malfunctioning microphone, was clearly intended to highlight a new-found spirit of mutual cooperation.

Four wheels good

The key strategic dangers facing Trump is that a thaw in relations between Beijing and Berlin could help Germanys already world-beating car industry.

In the near term, the German car industry would be hit hard by Trumps threatened 20 percent tariffs on EU vehicles. Some 12 percent of German vehicle exports go to the U.S., its largest market.

But increased cooperation with China is seen as giving the Germans a potential longer-term leg-up globally in important sectors such as electric vehicles and self-driving cars.

The Germans have also gained some advantage over U.S. competitors through Chinese retaliations against Trumps tariffs. China has introduced additional retaliatory duties of 25 percent against U.S. cars. That move comes against a broader backdrop of Beijing slashing auto tariffs generally from 25 percent to 15 percent, which would benefit all other countries selling vehicles into China.

One in five cars registered in China is made by a German company but German-made cars are also caught in the cross fire of the U.S.-China spat as automakers like Daimler export around 150,000 vehicles built in America to China each year.

Max-Morten Borgman, spokesman for BMW, said the new tariffs pose a problem as the company makes vehicles in Spartanburg, South Carolina, which are hit by the general Chinese tariff of 15 percent plus the 25 percent additional duty. “This will certainly have an impact on our business … What is helping is that the X3 is no longer just produced in the United States but also locally in China.”

German Chancellor Angela Merkel (L) walks with Chinas Premier Li Keqiang during a welcome ceremony outside the Great Hall of the People on May 24, 2018 in Beijing, China | Lintao Zhang/Getty Images

Crucially, German carmakers producing in the U.S. and exporting from there to China could shift more facilities to other countries. “Trade barriers of course are always part of the calculation [whether to relocate production],” he added.

China is already Germanys largest trade partner outside the EU, and the three biggest German carmakers all have a long-running presence in the Chinese market.

“Over 30 years ago it was the brave Germans that came to China to collaborate in the automobile sector,” Chinese premier Li said at Tempelhof. “They woke up early, they were the first in China. So the first, they win.”

Battle for the battery

In addition to a market for their cars, Germanys auto players gain two things from ramping up cooperation with Beijing: access to battery cells, where Chinese companies dominate the market, and a significant research ecosystem for electromobility and autonomous driving.

Merkel said Monday that that it would be new step in the relations between the two countries “if a Chinese company comes with a [battery] technology that we dont possess in Europe at this moment.”

“The contracts we have concluded in the past two days underscore that we are taking the cooperation between China and Germany to a new level” — BMWs Chief Executive Harald Krüger

Deals reached in Berlin include a framework accord between Chinas Brilliance Group and BMW that will see an existing joint venture expanded with a heavy focus on electric vehicles. That deal would allow the German carmaker to hold 75 percent of the joint venture, which Li hailed as “a record.” Volkswagen also agreed to set up a research and development group with Chinas Anhui Jianghuai Automobile Group from 2020.

In yet another deal announced Tuesday, Audi will partner with Huawei on connected cars that can communicate with infrastructure like traffic lights in the city of Wuxi in eastern China. Back in Germany, such trials remain limited to the odd segment of autobahn and closed research circuits.

BMW also struck a €4 billion that will secure battery cells from the worlds largest producer CATL.

“The contracts we have concluded in the past two days underscore that we are taking the cooperation between China and Germany to a new level, ” BMWs Chief Executive Harald Krüger said at Tempelhof. The Munich-based carmaker has been one of Trumps key targets over recent months. The German magazine Wirtschaftswoche reported that Trump told French President Emmanuel Macron that he wants to drive BMW and Mercedes vehicles off New Yorks Fifth Avenue.

“We trust that the U.S. situation will clarify itself as it hurts them at least as much as it hurts anyone else,” an executive from another of Germanys big automakers told POLITICO at Tempelhof. “But China is our biggest market.”

Jakob Hanke contributed reporting.

Read this next: Why Trump has few friends in Europe

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