German Chancellor Angela Merkel is to warn US President Donald Trump that a proposed tax overhaul could spark retaliatory measures, including higher tariffs for US companies, according to Der Spiegel magazine.
The German government is reviewing its responses to a border-adjustment tax, which would only tax US corporations’ imports and not their exports. Documents for Merkel’s upcoming meeting with Trump cited by Spiegel label the measure a “protective tariff” and say it violates WTO rules.
Responses from Europe’s largest economy could include incrementally higher duties on imports from the US and allow German companies to make their US import tax deductible, thus compensating their competitive disadvantage, according to the report.
Eventually, Germany could also lower corporate taxes and social contributions, making itself more attractive to international companies.
Trade is high on the agenda as Merkel flies to the US for her first meeting with Trump tomorrow.
She said on Thursday that she would fight to preserve free trade and a strong Europe, calling on the EU to pursue trade agreements with other nations in response to Trump’s protectionist rhetoric.
For Merkel, defending Germany’s export-based economic model is key as she seeks to boost her party’s poll numbers and win a fourth term in September. The country had a record trade surplus of more than 8 percent of GDP last year, while the US trade deficit widened in January to its biggest since March 2012.
Trump has still to explicitly endorse the border-adjustment tax proposed by US House Republicans as part of his plan to put “America first” and boost domestic production.
US Secretary of the Treasury Steven Mnuchin is reportedly planning to use his debut at a G20 meeting in Germany next week to drive home the message that the US would not tolerate countries that use currency devaluation to gain an edge in trade, people familiar with the matter said.
Finance ministers and central bank governors of the world’s 20 key economies are scheduled to meet from Friday in the spa resort of Baden-Baden in southern Germany.
US input to the drafting process has started late, though officials have now asked for the standard wording from previous meetings on competitive devaluation to be inserted, the people said.
If Mnuchin advances this argument further in Germany, he would find himself at odds with fellow Goldman Sachs alumnus and European Central Bank President Mario Draghi, who on Thursday rejected the Trump administration charge that Germany is manipulating its currency and defended the G20 status quo.
“It’s quite important that the G20 reaffirms this commitment,” Draghi said at a press conference in Frankfurt.
The consensus against protectionism and in favor of market-based exchange rates “have been pillars of world prosperity for many, many years,” he said.
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