German Chancellor Angela Merkel. Picture: EPA/ WOLFGANG KUMM
German Chancellor Angela Merkel. Picture: EPA/ WOLFGANG KUMM

Berlin — On Wednesday, German Chancellor Angela Merkel warned US President Donald Trump against unleashing an all-out trade war after he threatened to impose steep tariffs on cars from the EU.

In a speech to the Bundestag federal parliament, Merkel said both sides were effectively locked in a "trade conflict" since Trump’s decision to slap punitive tariffs on steel and aluminium imports. "It is worthwhile to prevent this conflict from becoming a real war," she said, adding, however, that this "would require both sides" to take steps.

On Sunday, Trump charged that Europe is "possibly as bad as China" on trade, as he reiterated that he is mulling import taxes of 20% on EU cars. The EU has slapped tariffs on iconic US products, including bourbon, jeans and Harley-Davidson motorcycles, as a symbolic tit-for-tat response to the metals duties.

Taking aim at Trump over his complaint that the EU and, in particular, economic powerhouse Germany, is running a massive trade surplus against the US, Merkel said that his calculation is skewed as it is based only on goods, not services.

"If you include services such as the digital services, then you have a completely different trade balance sheet, with the US showing a surplus against the EU," she noted. "It is almost old-fashioned to only calculate goods and not include services."

Merkel has previously voiced backing for a "digital tax" that would target multinationals such as Amazon, Facebook and Google, which have come under fire for shifting earnings around Europe so as to pay lower taxes. But the EU is divided over the proposal, as countries, including Luxembourg and Ireland, are loathe to see US tech giants head for the exit.

With the US-EU trade row showing few signs of easing, European Commission president Jean-Claude Juncker is heading to Washington by the end of July to look for a way out of the conflict. Relations between the US and other industrialised powers have turned increasingly tense as Trump has pushed his "America First" stance with punishing consequences for trading partners, regardless of whether they are allies or adversaries.

Historically, strong ties between Berlin and Washington have taken a beating as Trump has repeatedly skewered Germany over its record trade surplus, as well as its relatively small defence spending. Merkel acknowledged that Berlin has not been investing enough on defence, but stressed that it will push outlays to 1.5% of GDP by 2025. Nevertheless, Berlin’s planned spending is still short of the Nato goal of 2% that Trump insists on.

Despite its 1.5% pledge, Germany’s latest budget forecast for the coming years shows the proportion actually falling to 1.23% in 2022 from 1.24% this year — something that could emerge as a point of contention when Nato leaders gather in Brussels on July 11 and 12.

Merkel stressed, "We are the second biggest provider of troops, we are participating in several missions, and Germany will remain a reliable partner of Nato," adding that "wars are raging on our front door", listing the Syrian war, Islamic State (IS) group militancy, unrest in Afghanistan, and the conflict in Ukraine. "To not be prepared for defence of the alliance would be negligent."