If implemented, US President Donald Trump’s chauvinist provocations against Mexico could become an existential threat to that country. Preceding US administrations had already sealed off the borders between the two countries with highly militarized border fortifications – comparable to the razor wire barrier around the EU exclaves Ceuta and Melilla. In spite of this fact, constructing a wall along the full length of the border and demanding Mexico to pay the costs, shows nothing but contempt for the neighboring country. The chicanery that will most likely accompany the construction of a wall, will affect “the busiest border worldwide,” with 50 million pedestrians, as well as 74 million cars and 5 million trucks crossing annually, notes the German Institute for International and Security Affairs (SWP). This would provoke immense social damage, compounded by an unpredictable extent of economic devastation, should the US government impose punitive tariffs on imports from its southern neighbor. With its participation in the North American Free Trade Agreement, NAFTA, Mexico was forced into a nearly complete dependence upon the United States. Over 80 percent of its exports are to the United States. This is all the more serious because exports make up one third of its GDP, which is unusually high for countries in Latin America. The expected dramatic slump in exports, resulting from the new tariffs would have catastrophic consequences. The automobile sector alone – which would be particularly threatened – accounts for more than one-third of Mexico’s total exports.
The Mexican government is reacting to this threat with a dual strategy. On the one hand, in preparation for a possible reformulation of NAFTA, Mexico began to systematically assess its economic interests and announced that it will be ready for negotiations in June. Minister of Foreign Affairs, Luis Videgaray, and Minister of the Economy, Ildefonso Guajardo, arrived yesterday in Canada to explore a common strategy in the power struggle with Washington. On the other hand, the government in Mexico City has begun to explore alternatives. According to Foreign Minister Videgaray, the government has already opened “formal talks” to initiate “trade agreements with Brazil and Argentina,” while striving to modernize the free trade agreement with the EU “already this year.” Videgaray leaves no doubt that Berlin would play an exclusive role. “Germany has always been a strategic partner for Mexico,” he declared. “Germany and Mexico currently have a close affinity in our policies confronting protectionist threats. … Without a doubt, this will draw us closer together.” Following his first talks with his German counterpart Sigmar Gabriel, Videgaray said, “this is a relationship of trust, which we want to reinforce.”
On the Verge of New Investments
Mexico’s enticements are being quite positively received in German business circles. According to a poll taken by the German Foreign Chambers of Commerce (AHK), 83 percent of the 1,900 German enterprises active in Mexico, part from the premise that the new US administration’s trade policies will backfire. However, a clear majority does not expect losses, which, in principle, would threaten their activities in Mexico. Germany’s Trade and Invest (gtai) foreign trade agency assumes that Trump can not allow the situation to escalate excessively. NAFTA forbids customs tariffs, which the free trade-oriented Congress would, in any case, be called upon to pass. Even if the USA should withdraw from NAFTA, it would still be bound by the rules of the World Trade Organization (WTO), which limit import tariffs on automobiles to a maximum of 2.5 percent. Import tariffs would furthermore seriously affect many powerful US companies, and Mexico’s countermeasures would mainly affect the rural areas of the USA, “with a particularly large share of Trump’s supporters.” The AHK reports that German enterprises in Mexico are hopeful that there will be no earth-shattering changes. According to the report, even 62 percent of the German enterprises in the country plan new investments this year; 43 percent seek to maintain their current staff, while 46 percent intend to increase it.
Recently, Siemens ostentatiously announced an expansion of its business in Mexico. The company is in an advantageous position. On the one hand, with more than 60 factories in the United States, with over 50,000 employees, it has a strong stand. On the other, its production in Mexico is hardly for the US market, and therefore would suffer much less than other enterprises from punitive tariffs. At the same time, as its CEO for Mexico, Louise Goeser, declared, the company sees Mexico as “one of the most interesting markets ever.” In 2015 and 2016, Siemens-Mexico – with around 6,200 employees in nine factories, two logistical and three research centers – was able to achieve a 41 and 32 percent growth in business, respectively, to approximately €1.5 billion. Last week, at a very prominent appearance in Mexico, Siemens Director Joe Kaeser and the country’s Minister of the Economy, Guajardo signed a declaration of intent, stipulating that both sides want to engage in major projects for the development of Mexico’s infrastructure and its core industries – with a volume of up to US $36 billion in the course of the next ten years. It remains unclear how large Siemens’ share will be, even though, as a preliminary step, Siemens Group CEO Kaeser has announced US $200 million in concrete investments in the course of the next ten years. A thousand jobs will be created. Economics Minister Guajardo was quoted, “we are very grateful for this visit at this time.”
Year of Germany
Kaeser’s appearance in Mexico made a particular splash in the aftermath of Washington’s change of government. However, the step had been planned much earlier. The German government has also been making efforts to support the German companies’ upsurge in Mexico, long before the US elections. One example is the “Year of Germany in Mexico,” an element of German cultural PR, inaugurated June 6, 2016, by Germany’s Foreign Minister at the time, Frank-Walter Steinmeier. As the foreign ministry explains, Germany was showcased to the Mexican public, in more than 120 projects, with around 1,000 events, “in all its aspects” to intensify bilateral contacts at all levels. Of course, at the time of the inauguration of the “Year of Germany in Mexico,” it could not have been anticipated that a future US president would drive Mexico into the arms of other countries, with his rude threats, and unintentionally promote the rapid expansion of German-Mexican relations.
A Quarter Trillion in Surplus
The development of trade flowing between Germany and the USA over the past few years, illustrates the main reason behind the looming transatlantic trade war. German exports to the United States valued at 65.5 billion euros in 2010, reached 114 billion euros in 2015, an increase from 7.5 to 9.5 percent of Germany’s total booming exports. Since then the United States has become the most important sales market for German companies. Simultaneously, Germany’s trade surplus with the USA has risen from 20.5 billion euros in 2010 to nearly 54.5 billion euros in 2015. For German companies, this is highest surplus, in comparison to those accumulated through trade with any other country – an outflow of 225 billion euros to Germany from the USA. In just six years, the USA has contributed nearly a quarter trillion euros to German prosperity.
For years, Germany’s persistent export offensive has been provoking Washington’s hefty criticism. Already during his first year in office in 2009, President Obama demanded that Berlin take action against Germany’s excessive trade surplus, which, since 2006, has continuously been just above the six percent threshold of the GDP, which is considered a threat to stability in the EU. In 2015, it had climbed to 8.8 percent of the GDP. Berlin has constantly rebuffed Washington’s complaints. In early 2014, when US Treasury Secretary Jack Lew complained about the German surplus to his German counterpart Wolfgang Schäuble, who admonished, “we do not engage in talks for mutual evaluations, but for better mutual comprehension.” US President Donald Trump has now made it clear that he will not continuously accept the outflow of two to three digit billions. He has already openly threatened Mexico and China with punitive tariffs, two countries, which are also accumulating a high trade surplus with the USA. Even punitive measures against Germany are not ruled out.
Punitive Tariffs because of Currency Manipulation
US punitive measures against Germany could even be based on a long-standing US law. The Bundesbank recently shed light on the reason: The Bundesbank had investigated the foreign exchange markets’ reactions to the ECB’s lax monetary policy, for the three years – 2014 to 2016. In its struggle against the euro crisis, particularly the ECB’s extensive eurozone bond purchases had led to a sharp devaluation of the euro, by 6.5 percent in relationship to the US dollar during that period. This has considerably contributed to the overall – approx. five percent undervaluation of the euro, reiterated the Bundesbank. Even though the ECB is officially not allowed to pursue an exchange rate policy, in practice, the declining euro rate, which is driving eurozone exports, and thereby improving Europe’s economy is to its advantage, observers note. This procedure, however, gives Trump the possibility “to accuse the ECB of currency manipulation and apply sanctions to eurozone countries,” according to the Bundesbank’s report on its investigations. The author points to a 1977 US law allowing him to levy, “by executive authority, trade tariffs against individual industries or the entire eurozone countries at short notice.”
On Tuesday, Trump’s top trade advisor Peter Navarro gave his opinion on the trade deficit with the EU, and particularly Germany. The euro is “grossly undervalued,” he observed. Most experts agree with him on this conclusion. Since some time, Germany has been using a grossly undervalued euro to “exploit” the US and its EU partners with export offensives, continued Navarro. For example, Great Britain, with its enormous trade deficit with Germany (196 billion Euros from 2010 to 2015), is also propping up German prosperity. Mr. Navarro’s comments highlight a growing willingness by the Trump administration to antagonize EU leaders and particularly the German chancellor by launching an export offensive.
Now, Berlin and the EU are retaliating. As was reported, this week, the European Union will write to American tax authorities, asking for “clarification” on areas of taxation policy. Brussels is currently compiling a blacklist of “countries with uncooperative tax policies,” accused of tax evasion or even facilitating money laundering. The USA could be added to this list, it is warned. Some US states – Delaware and Nevada, are explicitly mentioned – attract companies and high-net worth individuals with special tax arrangements. Some US states even allow the holders of escrow accounts to remain anonymous – a perfect recipe for financial crimes. For many years, the European Union looked the other way, unwilling to annoy their most important ally. However, with Donald Trump’s inauguration these times are over. If the USA does not provide satisfactory responses to the EU, the EU could officially add the US to a black list of tax havens, an affront, until now hardly imaginable.
Designating the Enemy
The looming trade war between Germany and the EU on the one hand and the USA on the other is flanked by a growing wave of propaganda exploiting the racist and chauvinist policies of the new US administration to designate it as an enemy. Members of the German government have repeatedly denounced the targeted discrimination of Muslims, with the notorious US immigration ban. In an Open Letter published on Tuesday, European Council President Donald Tusk named the Trump administration a “threat” to the EU alongside China, Russia and the “terror in the Middle East.” These verbal attacks against Trump’s aggressions are in stark contrast to the EU’s generous silence about the more than 5000 refugees, who drowned in the Mediterranean last year attempting to flee to Europe, or the nearly 800 civilians killed by drones in the Middle East and Central Asia under the responsibility of the Obama administration. However, those attacks against Trump are helping to mobilize the German population for the looming first major power struggle against the USA since 1945.