What Europe Thinks ...

Jan 04, 2023

What Europe Thinks ... About Trade

According to polls, Germans want the EU to shield their companies in similar ways the United States and China do. Transatlantic unity, however, offers a better chance for fundamentally rebuilding Germany’s economy.

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A graph showing German attitudes to the EU protection European companies the same way the US and China do
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In March, Tesla CEO Elon Musk opened the electric vehicle company's first European factory near Berlin. A jubilant Musk danced during the opening, which launched countless memes on social media. It was a landmark for the company, launching a beachhead in the European car market—slated to be all-electric by 2035—amid stiff competition from German automobile giants such as Volkswagen and BMW.

However, in September, The Wall Street Journal reported that the company was pausing its plans to make battery cells in Germany. The reason? Potential tax credits under the landmark US climate bill, known as the Inflation Reduction Act (IRA), passed by a Democratic Congress and signed into law by President Joe Biden over the summer. (Tesla didn't respond to requests for comment on the current status of battery cell production.)

The IRA has ratcheted up transatlantic tensions, precisely at the time that the United States and the European Union seek to project a united front against Russian leader Vladimir Putin over his invasion of Ukraine. French President Emmanuel Macron thinks that the IRA. tax credits amount to unfair competition, and that Europe should consider responding in kind. In an October interview with television channel France 2, Macron said, "We need a Buy European Act like the Americans, we need to reserve [our subsidies] for our European manufacturers.” He went on, “You have China that is protecting its industry, the US that is protecting its industry and Europe that is an open house." German Chancellor Olaf Scholz and him had a "real convergence” on the issue, he added. However, on December 14, Scholz urged closer trade cooperation with the United States and called for unity in the transatlantic relationship.

Biden, too, has sought to tamp down tensions. In early December, Macron visited Washington and the White House feted him at a lavish state dinner. At a press conference, Biden said there were "tweaks" that could be made and added that he "never intended" to "create manufacturing jobs in America…at the expense of Europe." However, questions remain over whether the "tweaks" will be enough to project a joint US-EU economic front against China on electric cars. While the EU-US Trade and Technology Council (TTC), which exists in part to coordinate policies, also met around the time of Macron's visit, further legislative changes to the law appear unlikely as the House of Representatives shifted to Republican control in the November midterm elections.

According to an INTERNATIONALE POLITIK-Forsa poll conducted in early December, Germans overwhelmingly agree with Macron's “Buy European” approach. Overall, 81 percent agree that the Europeans should give similar support to their own companies like the United States and China do for American and Chinese companies. Just 11 percent disagree. Support is widespread across the German political spectrum, with a low of 75 percent among far-right AfD supporters to above 90 percent among center-right and pro-business parties (CDU/CSU and FDP).

The Economic Shadow of Russia’s War

Public support for Macron's proposal comes amid widespread anxiety in Germany over the economic fallout from the war in Ukraine. Since the early 2000s, the German economy has been propelled by cheap Russian gas imports, open trade with China, and protection of the American nuclear umbrella in the form of NATO. Now, all of those things are either gone or at risk.

The war has caused Russian gas to slow to a trickle and energy costs have skyrocketed. That has hurt German manufacturing; for example, chemical giant BASF, whose main German plant consumes as much gas as all of Switzerland, announced in October it would be "permanently" downsizing its European operations. A Chinese invasion of Taiwan would likely bring an end to open trade with Beijing; and there is considerable worry in Berlin over this possibility. Over a million German jobs depend on China, and almost half of German manufacturing is dependent on inputs from China.

Scholz made a November visit to Chinese leader Xi Jinping in Beijing with the titans of Germany’s top companies coming with him—and against Macron's advice for a joint Berlin-Paris trip. Even if Donald Trump doesn't return to the US presidency in 2025 or doesn't succeed in pulling the United States out of NATO, many in Washington think it’s high time for Berlin to pay more for its defense. Yet, it has taken Germany almost 10 months to begin spending its special €100 billion defense fund.

A Transatlantic Opportunity

Although there is considerable consternation in Germany over its economy, there is less discussion that the IRA could be an opportunity for transatlantic unity. Writing in the IPQ Fall 2022 issue, Washington-based climate expert and IPQ columnist Noah J. Gordon argued that the US climate bill was "the best moment for transatlantic climate cooperation in years" because Democrats, long stymied by West Virginia Senator Joe Manchin who finally—and in secret—cut a deal with Senate Majority Leader Chuck Schumer, allowing the US to catch up to the Europeans on climate change.

That means that the first and third largest world economies are both heavily investing in electric cars, which will be one of the biggest areas for growth in the coming years, as Europe and California (the largest and most important auto market in the United States) are both scheduled to go all-electric in 2035. Having less of the electric battery supply chain in China and more in the United States, one of the goals of the IRA, makes Berlin less vulnerable for Beijing to have the type of leverage that Moscow had enjoyed with energy over Germany’s foreign policy. 

The German public, too, wants its economy to be less dependent on Russia and China. According to an October Körber Stiftung survey, two-thirds of Germans want to be less dependent on China, even if it means economic losses, and 60 percent said Europe wasn't doing enough to become less dependent on Russian gas.

Therefore, there is considerable desire among the German public to end the policy of "Wandel durch Handel" (“Change through trade”) that had predicted that trade with authoritarian countries would lead to their eventual democratization. It didn't. Germany has strong capital stock, as its manufacturing sector makes up much more of the economy than the United States and United Kingdom; it has strong human capital, which could be even stronger if the German coalition's immigration reform proposal passes, giving it the possibility of attracting the brightest global talent and the workers to ameliorate a labor shortage.

Germany has been capable of some pretty impressive economic restructuring before, notably, the Wirtschaftswunder (“economic miracle”) after World War II rebuilding the West German economy from rubble. This time, can it rise to the occasion?

Luke Johnson is a freelance reporter living in Berlin, frequently writing about Eastern Europe. 

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