While the US threatens to raise tariffs, China is lowering them on cars. Germany, stuck in the middle, may have to rethink both relationships.

So many cars. And they're all about to get cheaper.

It doesn’t look good, according to EU trade commissioner Cecilia Malmström. On June 1, the United States seems increasingly likely to impose a 25 percent tariff on steel imports from Europe since Washington rejected an EU offer to lower tariffs on imports of American-made cars and other industrial products. “I think they don't think it's enough,” she said Tuesday. Then, on Wednesday, another slap: The Trump administration confirmed it was exploring whether imports of foreign cars constitute a threat to "national security."

Washington could be hoping its hard-ball tactics will force more concessions out of Europe and, above all, its export powerhouse Germany. But they might want to look more closely at what’s happening across the Pacific. China said Tuesday that it would lower tariffs on most cars imported into the country from 25 percent to 15 percent on July 1.

Door closed. Window opened.

They can use the money to have golden water taps installed. Ferdinand Dudenhöffer, University of Duisburg-Essen

China’s decision should ease some concerns over a widening trade relationship that, just a few weeks ago, had some Germans warning it should reduce its dependence on the Asian powerhouse. But the move isn’t specifically aimed at Germany or the EU. The announcement cuts costs for everyone, including US manufacturers. It could therefore just as easily be seen as an olive branch to the Trump administration.

Nor does China’s opening mean the EU will give up on trading with the United States, which has much lower tariffs on goods and (for the moment at least) still remains Germany's largest export destination. “We lose if we don't at least try,” German Economics Minister Peter Altmaier, who has led a push to reduce the EU's own import tariffs on cars, said of the ongoing talks with Washington.

And yet, China’s decision helps Europe more than most, and offers some much-needed breathing room for exporters worried about losing business in the United States. Chinese consumers bought 5.49 million cars by European brands in 2017, more than any other foreign region.

Within Europe, Germany is the big winner. About one-third of German luxury cars sold in China are produced abroad. That means German carmakers could save between €3 billion ($3.5 billion) and €4.5 billion, according to investment consultants Evercore ISI. Porsche alone could save €600 million, according to German car expert Ferdinand Dudenhöffer. They can use the money to “have golden water taps installed in Zuffenhausen,” their headquarters near Stuttgart, he quipped.

Some of those savings will go to consumers. Analysts at Swiss bank UBS predict the price of luxury foreign cars in China could fall by 8 percent. That in turn could give the likes of BMW and Daimler a chance to sell even more cars. Until now, domestic premium makers have had a 20 percent price edge on the Germans, but local authorities actually welcomed the new competition as a means of improving quality. Cui Dongshu of China’s passenger car association said he expects a wave of consolidation that will “separate the wheat from the chaff.”

23 p16 China's car market-01

Shares in Daimler, BMW and Volkswagen (which owns Porsche) rose more than 1 percent Tuesday, then promptly lost the gains again with the Trump administration's probe into foreign imports was announced. That, in a nutshell, highlights the dilemma facing Germany as it depends on both markets and faces a decision as to where it should focus more of its energies.

Tariffs and barriers to entry are still far higher in China than in the US. That's why, ironically, Germany’s savings in China will also help the United States. BMW, for example, last year exported about one-fifth of the cars it sells in China from the US, host of its biggest manufacturing plant in Spartanburg, South Carolina, but trade concerns have since prodded it to shift some of that production to other plants around the globe.

But the trend matters. China’s openness for talks could accelerate a shift in Germany’s focus away from the US. “A reduction in import tariffs would be a very effective step towards even stronger trading relationships between these countries,” wrote analysts at Evercore ISI. That would fit with a pattern of European policymakers warning they can no longer rely on the United States.

German politicians hope this is just the beginning. Joachim Pfeiffer, economic policy spokesperson of Angela Merkel’s Christian Democrats, welcomed China’s easing of trade barriers and pushed for concessions in other sectors – telecommunications and chemicals, for example – where German companies struggle for access. “There is still plenty to do,” he said.

Free marketers also expressed hope that this could help stop a global protectionist spiral. Michael Theurer, deputy parliamentary leader of the opposition Free Democrats, suggested Europe respond to China by lowering its own tariffs on foreign cars in a coordinated gesture with the United States. Donald Trump might want to think about that, instead of threatening to impose tariffs on BMW.

Christopher Cermak is an editor with Handelsblatt Global and adapted this story into English. Handelsblatt correspondents Sha Hua in Beijing, Franz Hubik in Düsseldorf and Dana Heide in Berlin contributed to this story. To contact the authors: [email protected]

This story was updated after publication with news of a probe into foreign car imports by the Trump administration.