A worker on the assembly line at a Volkswagen's plant in Wolfsburg, Germany, on April 27, 2020.POOL New
European leaders rushed to congratulate Donald Trump’s election victory even before his second term in the White House was officially confirmed. The charm offensives, which ranged from praising the “strategic bonds” between America and Europe to applauding “the biggest comeback in U.S. political history,” barely hid the anxiety, perhaps outright fear, that the Trump White House could be utterly miserable for some countries on the far side of the pond. And doubly so if a Trump administration is braced by both Republican control of the Senate and the House of Representatives, which looks likely.
The term “game-changer” is tediously overused. In this case, it is apt.
Mr. Trump has vowed to hit the European Union with blanket tariffs up to 20 per cent on EU imports, perhaps more if he wakes up in a bad mood (he has mused about slapping tariffs of 200 per cent on imports of Mexican-made cars). He has threatened to stop aid to Ukraine and withdraw support for NATO unless all of its members, Canada included, stop using the United States as a military crutch and ramp up their defence spending. He is a climate skeptic whose “drill, baby, drill” fossil-fuels strategy could take momentum out of the EU’s relatively robust carbon-reduction agenda. He could pay scant attention to, or outright disdain for, G7 and G20 summits and other international events, as he did in his first presidency.
It is the tariffs that could do the most damage to the 27 EU countries, especially Germany. They could easily push Germany and other big exporters into recession, stoke inflation, piling pressure on consumers who can use votes as a weapon, prevent interest rates from falling and hurt the euro, reducing relative buying power. The postelection surge in the U.S. dollar, the spike in yields on U.S. Treasury bond and the 2-per-cent fall in the euro said as much.
The EU countries are generally small, open economies who take free, or mostly free, trade for granted, and have done so for decades as borders and many trade barriers vanished. America is the leading destination for their wealth-creating exports, ranging from cars and chemicals to pharmaceuticals and passenger planes. Tariffs imposed by the Trump administration could wreck this economic Elysium virtually overnight.
Germany, the economic engine of Europe and the world’s fourth-largest manufacturer, is particularly exposed. Even before the U.S. election, Germany was almost certainly in recession, with economists predicting a back-to-back yearly downturn, though a mild one so far. The country’s energy costs have been crushingly high since Russia invaded Ukraine in February, 2022, and eliminated almost all natural gas exports to Europe. Imports of more expensive American liquefied natural gas (LNG) have kept most of the industrial lights on in Germany.
At the same time, Germany’s leading industry – autos – is in crisis. For all of the industry’s might, talent and global brand value, the top German car makers’ hubris managed to hand the electric-vehicle revolution to China, which produces better and far cheaper EVs than Volkswagen, BMW and Mercedes (China’s BYD has displaced Tesla as the world’s top EV maker). The German automakers are in retrenchment mode and VW announced last week that it will kill off three factories in Germany, fire thousands of workers and cut the pay of the survivors by 10 per cent.
Imagine what extra damage 20-per-cent tariffs on German cars could inflict? Americans last year bought almost US$37-billion of cars from Germany, making the United States the leading export market for the German auto industry. Double-digit tariffs could cripple those exports, and the only defence may be to shut more plants and endure the horrendous expense of building replacement ones in America. “I want German car companies to become American car companies,” Mr. Trump said at a pre-election rally in Michigan. “I want them to build their plants here.”
On Wednesday, with a Republican surge under way, shares of VW, BMW and Mercedes fell by as much as 5 per cent in European trading. Investors are on the run and the rout may have only begun.
European cars will not be the only victims. Germany last year reported a record trade surplus – the value of exports minus imports – of more than €63-billion with the United States last year. That surplus acts as a red flag to Mr. Trump. German Chancellor Olaf Scholz is in a probable panic today. His three-party coalition, nearly torn apart by infighting, was in trouble even before Mr. Trump’s victory. Today, his effort to plug an expected 2025 budget shortfall of about €8-billion and invent a strategy to end the economy’s prolonged downturn is even more fraught. He and his Social Democrats face defeat in the September, 2025, election.
European businesses and industries have every right to be worried. Mr. Trump returns to the White House with sweeping powers, an entourage of yes-men and yes-women, and an uninhibited desire to take revenge on his enemies. Those enemies include any country that does not play by his trade rules. There will be tariffs, there will be blood.