Q&A after the US Election: The Future of Transatlantic Relations

How will the election outcome impact the German and European economies?

The decisive result of the US elections serves as a wake-up call for Germany and Europe: we need to accelerate efforts to enhance our own competitiveness, strengthen defense capabilities, and address challenges posed by China. Trump's first-term protectionist policies will likely continue in full force, as suggested by his numerous proposed tariffs mentioned during the campaign. His plans for new sweeping tariffs, as high as 10 or even 20 percent on all imports and 60 percent on imports from China, are a significant concern for German industry. Such tariffs would harm not only Germany and the EU but also the US economy.

Across party lines in the United States, a dominant view has taken root: globalization has contributed to the loss of industrial jobs. Both Republicans and Democrats agree on the necessity of revitalizing domestic industry and reshoring jobs. Trump's "America First" approach prioritizes American markets, often disregarding the interests of allies, including the EU.

Economic security remains a top concern in the US and may intensify under Trump. The US will maintain a hardline stance against China, increasingly pressuring Germany and the EU to support measures like export controls and investment restrictions.

Are new tariffs on German goods likely under Trump?

Trump and his campaign heavily emphasized new tariffs. He has proposed universal tariffs of ten or 20 percent on all imports from third countries, which would severely impact export-driven nations like Germany. Beyond that, Trump’s proposals include tariffs of 60 percent on imports from China, raising concerns about trade diversion. If the US market becomes increasingly closed, this could lead to an influx of Chinese products onto the European market. There is also talk of "reciprocal tariffs," which would adjust US tariffs to match those of trading partners. Higher tariffs would not only harm trading partners such as Germany or the EU, but also negatively impact the US itself by increasing inflation.

The Cologne Institute for Economic Research (IW Köln) estimates that Trump's tariff plans could cost the German economy up to 180 billion euros from 2025 to 2028. The Peterson Institute for International Economics, an independent think tank projects that the average middle-income US household could see costs increase by over $2,600 annually, with lower-income families bearing even higher burdens.

Trump could quickly reimpose the currently suspended Section 232 tariffs on steel and aluminum from the EU and may revisit tariffs on German and European car exports. During Trump's first term in office, an investigation into car imports under Section 232 of the Trade Expansion Act of 1962 concluded without implementing car tariffs.

Expanding tariffs on Chinese imports could also be expedited. Existing measures under Section 301 of the Trade Act of 1974, established during Trump’s first term and later expanded under Biden, may be intensified.A new investigation would also be possible – although this would take some time before new tariffs could be imposed. 

However, imposing broad tariffs on all imports from all trading partners would be more legally complex, requiring Trump to find creative legal justifications, possibly leading to court battles. The possibility of comprehensive tariffs on all imports should, nevertheless, by no means be ruled out.

What impact could Trump's approach to the Inflation Reduction Act have on German industry?

Trump plans to champion fossil fuel expansion and roll back environmental regulations. Within the first 100 days of his presidency, he would likely announce the US’s withdrawal from the Paris Climate Agreement once again.

Despite criticizing the Inflation Reduction Act (IRA) for favoring renewable energy over fossil fuels, Trump is unlikely to dismantle it completely. Any significant alterations to the IRA would require Congressional approval, and much of the IRA-driven investment has benefited Republican-leaning areas, which may resist changes.

More likely, Trump's administration would selectively withdraw certain provisions of the IRA or amend its implementation to ensure US companies gain more exclusively from the subsidies. Such measures would disadvantage German and European firms. Further, additional conditions could be imposed on tax credits, making it exceedingly difficult for non-US companies to qualify.

What are the defense policy implications of the election result?

The United States remains a critical pillar in the security framework of Germany and Europe. However, Trump’s threat to condition NATO’s collective defense obligations on member states’ defense spending has destabilized this foundation. Even if the US does not formally leave NATO, such rhetoric alone undermines the alliance's credibility. Moreover, continued US support for Ukraine and Taiwan under a future Trump administration is far from guaranteed.

A US withdrawal from NATO would pose a severe threat to Western security. To counter any weakening of NATO and safeguard Europe’s security, the EU and its member states must invest decisively in bolstering their military capabilities. Significant investments in defense are necessary. Expanding industrial capacities is also crucial to meet the growing demand for equipment and ammunition needed by the German Armed Forces, by NATO allies, and by Ukraine. In the medium term, this will require not only meeting the two percent of GDP target for defense spending but potentially increasing it to three percent or more.

What does Trump's second term mean for German industry’s approach to China?

In the United States, national security has become the foundation of economic policy and this trend is set to continue. For years, the US has placed “economic security” above traditional trade policy, while Europeans still grapple with establishing a cohesive understanding of the concept.

With this national security focus, the US is expected to maintain a strict stance against China’s unfair trade practices. Joe Biden retained and, in some cases, expanded the tariffs on Chinese imports originally imposed by Trump. Under the future Trump administration, further export controls, especially in high-tech sectors, are a distinct possibility. For example, new outbound investment screening rules for critical technologies are set to take effect in early 2025, unless a Trump-led government revokes Biden’s rules (eventually introducing its own) or the Congress steps in. As pressure mounts for Europe to align with US measures against China, German companies will face significant challenges in navigating these shifting dynamics.

How is German industry preparing for the new administration?

Flexibility will be crucial in maintaining dialogue with the Trump administration. The incoming US president may be open to continuing a format similar to the EU-US Trade and Technology Council (TTC), albeit under a new name and with distinct branding. However, collaboration could swiftly become more challenging if tariffs are introduced. German industry is in close communication with policymakers in Berlin and Brussels, ready to coordinate on potential countermeasures to U.S. tariffs while also exploring ways to make constructive offers to the United States.

In the summer of 2021, the BDI, together with three other major German economic associations – the DIHK, the BGA, and the BdB – established the Transatlantic Business Initiative (TBI). The TBI is dedicated to strengthening economic ties between Germany, the United States, and Canada, serving as the primary point of contact for economic policy matters, particularly for the German Federal Government, the U.S. and Canadian governments, and EU institutions. In recent years, we have made regular visits to Washington, D.C. with the TBI, engaging in numerous discussions, including meetings with Republican representatives. For more than 30 years, the BDI has maintained a presence through a joint liaison office with the DIHK, known as the Representative of German Industry and Trade (RGIT). We can now build on these established connections and networks.

How can the EU respond to Trump's plans for economic and trade policy?

The EU Commission has several options and tools to respond to potential new US tariffs. If necessary, it could initiate countermeasures. The exact measures would depend on the nature of the US actions and their legal basis. However, any effective EU response would require strong cohesion among member states.

If possible, preventing new tariffs should remain a priority. The EU should be flexible and willing to negotiate and propose mutually beneficial solutions to maintain economic stability. History has shown that agreements and deals with Trump are possible.

Opportunities for closer cooperation exist, especially in harmonizing technical standards, addressing regulatory affairs, and strengthening supply chain resilience. It would also be sensible for the EU and the US to work closely together on measures like export controls and investment reviews. They should strive to create a level playing field for both European and American companies, ensuring these measures are effective while minimizing unnecessary burdens on businesses. Despite claims to the contrary from the future US President, the USA benefits from strong economic ties with Germany and the EU.

Economic security is another key area for transatlantic cooperation. Its importance can be expected to increase under the future Trump administration. The EU and the US should align on measures such as export controls and investment screening. However, for this collaboration to succeed, Germany and Europe must develop a shared understanding of economic security and its geopolitical significance – something the US has focused on for years, and where Europe needs to catch up swiftly.

What is needed now to strengthen the transatlantic economic relations?

Transatlantic economic relations continue to be of immense significance. In the first half of 2024, the United States remained Germany's most crucial trading partner. For the ninth consecutive year, the U.S. was the largest importer of German goods, with top exports including pharmaceuticals, machinery, and automobiles. Furthermore, Germany has become the third-largest foreign investor in the United States, with foreign direct investment amounting to $658 billion. Imposing new tariffs on either side would inflict severe economic harm and must be avoided at all costs. It’s important to remember that the United States also derives considerable benefits from its economic ties with Germany. For instance, German companies currently provide employment for over 900,000 people across the United States.

The future of the EU-US Trade and Technology Council (TTC), established in 2021, is now uncertain. Although the TTC has not fully met business community expectations, it has been the most significant platform for transatlantic economic collaboration in recent years. Therefore, it would be prudent for the European Commission to propose to the Trump administration that the TTC either be extended or replaced with a similar forum. Nevertheless, enhancements are necessary, such as increased stakeholder involvement and more strategic prioritization. The EU and the U.S. should also agree on key focus areas and pursue them with determination.