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The German conservative leader Friedrich Merz, who is in pole position to become the country’s next chancellor, has said the EU should make a fresh attempt at a sweeping free trade deal with the US once Donald Trump becomes president.
“We need a positive agenda with the US, which would benefit both American and European consumers,” the Christian Democrat leader said in an interview with DPA news agency. “A new European-American joint free trade initiative could avert a dangerous tariff spiral.”
It is unclear what kind of reaction Merz will get in Washington. Trump halted negotiations on the Transatlantic Trade and Investment Partnership (TTIP), a planned trade agreement between the EU and US, shortly after becoming president in 2017 and went on to impose tariffs on European imports.
Merz was speaking less than two months before snap elections in Germany prompted by the collapse of Chancellor Olaf Scholz’s fragile three-party coalition in November. Polls suggest Merz’s centre-right CDU/CSU bloc is on course for victory.
Ahead of Trump’s re-entry into the White House on January 20, Germans are becoming increasingly apprehensive about the potential negative impact of his so-called Maga (“make America great again”) policies on the Eurozone’s largest economy.
In his first term Trump aggressively pursued an “America First” approach aimed at closing the US trade deficit and boosting homegrown production, which often entailed trade conflicts with some of the US’s closest allies.
In a sign of turbulence to come, he warned last month that the US would impose tariffs on EU goods such as cars and machinery unless the bloc stepped up its purchases of US oil and gas.
A study last year by the German Economic Institute in Cologne (IW) predicted the German economy would incur losses of up to €180bn over a second four-year Trump term as a result of a trade war between the US and Europe.
It said German carmakers and machine-building companies would be particularly hard hit by Trump’s plans to raise import tariffs to 10 or even 20 per cent. The US was Germany’s biggest trading partner in the first half of 2024.
Speaking to DPA, Merz said he expected tougher conditions for European business when Trump becomes president. “It will be challenging,” he said. The EU should, Merz added, expect the US to focus on safeguarding its own interests, including by imposing high import tariffs. “But our response to that shouldn’t be to start with our own tariffs,” he said.
Instead, the EU should concentrate on restoring its declining competitiveness, and then tell the Americans: “Yes, we are prepared to face this competition with you, too.” He added: “The right response is to react with innovation and good products.”
Merz has pledged to improve the competitiveness of the German economy, which is stuck in its first two-year slump since the early 2000s, if he becomes chancellor.
In its manifesto the CDU/CSU says it will reduce corporate taxation to 25 per cent from about 30 per cent currently, cut social security contributions, halve electricity network charges for industrial customers and slash bureaucracy.
Other parties, such as Scholz’s Social Democrats, and some economists have warned that many of Merz’s proposals are unfunded.
Merz said Germany must reduce corporate tax rates and become a more attractive place to do business in order to better compete with the US, where tax credits provided under President Joe Biden’s Inflation Reduction Act have prompted many German companies to consider moving production to the US.
He said Germany’s non-wage labour costs such as social security payments were also too high. “You can’t resolve that on a European level, you have to do it on a national basis.”
Indeed, the country’s non-wage labour costs are now at their highest level ever, according to figures released on Thursday, thanks to an increase in contributions to medical insurance, which came into effect at the start of the year. Some 42.3 per cent of gross wages go towards medical, social and unemployment insurance, according to calculations by the Augsburger Allgemeine newspaper.
