Germany ‘heading back to the 1930s’

Germany is heading “back to the 1930s”, a top economist warned on Thursday in response to the US tariff surge, as Olaf Scholz predicted there would “only be losers” from a trade war.

Some of Germany’s top economists have reacted with alarm to tariffs of at least 20 per cent announced overnight by Donald Trump on the European Union, which will have a particularly severe impact on German carmakers.

“The 1930s are back,” said Carsten Brzeski, an economist at ING Germany, comparing the wave of trade barriers imposed by the White House to 1930s-era protectionist trade rules.

Mr Scholz, the outgoing chancellor, described the tariffs as “fundamentally wrong” and warned that there “would only be losers” in terms of the global trade fallout.

“This is an attack on a trading system which has created prosperity all over the world,” added Mr Scholz, while Robert Habeck, his outgoing economy minister, complained of “US tariff mania”.

Germany is set to be one of the EU countries hit the hardest by the tariffs, along with France, the Netherlands and Belgium.

Beyond Europe, developing or crisis-stricken nations such as Myanmar and Madagascar could be the worst affected overall.

Britain has been spared some of Mr Trump’s wrath, receiving tariffs of only 10 per cent as a result of being outside the EU and able to negotiate its own trade policy. 

The US is Germany’s biggest trading partner for its juggernaut car industry, which is already struggling with increased competition from China and disappointing results in the electric car market.

The German car industry is worth an estimated half a trillion euros, with one German carmaker – BMW – selling one in five of its cars to the US market.

Mr Trump’s new trade barriers will impose a tariff of 25 per cent on German cars imported to the US, a cost that will likely be passed on to US consumers.

According to the Wall Street Journal, German carmakers responded to the tariffs by halting car shipments from Europe and Mexico, in what they described as a temporary measure.

Some manufacturers already have factories based in the US, but these may still be affected by tariffs if the cars assembled there require parts shipped from Europe.

Handelsblatt, a German financial newspaper, reported on Thursday that the tariffs could cost Germany’s three biggest carmakers – BMW, Volkswagen and Mercedes – an estimated €11 billion (£9 billion). 

“High trade barriers to the world’s largest economy are putting further pressure on the [German car] industry, especially as it is already suffering from falling profits in Europe and China, staff cuts and impending factory closures,” Harald Proff, a car industry expert at Deloitte, told Handelsblatt.

Some of Germany’s top economists have said the tariffs would increase the risk of recession in Germany and would likely drain around half a per cent of its GDP. 

Achim Wambach, president of the German Centre for Economic Research, said: “The economic consequences are grave, particularly for Americans. Prices and inflation will rise, and a recession will become more likely.”

“This is a dark day for German exports,” said Jorg Kramer, an economist at Commerzbank, who also warned that German GDP could fall by half a per cent over the next two years as a result of the tariffs.

As EU and German officials drew up their response to the tariffs on Thursday, German media reported a sharp drop in the share value of Adidas and Puma, two major German sportswear providers. 

The share price of Adidas has dropped by 10 per cent since the announcement, while Puma has fallen by 9 per cent, according to the Bild newspaper.

“This is not just a tariff hike – it’s a tariff revolution,” Tobias Gehrke, a senior analyst at the European Council on Foreign Relations, said. “Trump is taking the US back to protectionist levels not seen since the 1930s. Few expected the numbers to go this high.”

“The EU is hit with tariffs worth around €100 billion and could retaliate accordingly. But it shouldn’t rush to go it alone,” he added. “With so many countries targeted, the EU should lead in building retaliation coalitions to amplify the impact on the US and soften the blow at home.”