The Art of der Deal

German Chancellor Fredrich Merz arrives in Washington, DC this week for a consequential meeting with US President Donald Trump. While the number of security items to discuss is significant—with Ukraine and the Middle East topping the list—Merz will most urgently need to address Trump’s economic and tariff policies. They are meant to rebalance and reindustrialize the United States, but they strike at the heart of Germany’s manufacturing and export prowess.

Merz, a self-declared transatlanticist, will find that the United States of today is not the country it was 25 years ago. The rise of China, technological changes, and shifting energy dependencies have altered the geopolitical structure of the global economy. Over that same quarter century, the United States has shouldered a disproportionate share of costs for global responsibilities contributing to its dizzyingly high national debt. 

The rise is due to a variety of factors. Defense spending, Biden-era infrastructure spending, stimulus spending by Trump and Biden during COVID-19, and lower tax collections after realigning US tax rates to be globally competitive are among the reasons. But overall, US national debt soared from $5.7 trillion in 2020 to nearly $36.2 trillion in 2024, or 121% of national GDP. Interest payments alone now comprise 13% of federal spending. American consumers also owe a lot. Household debt stands at $18.20 trillion, double that of 20 years ago. These crushing public and personal financial obligations have contributed to changing attitudes toward global responsibilities and the emergence of “America First” policies. Americans want to see other nations assume more of the cost for global public goods such as security and health.

Acknowledging a new security and geopolitical environment, Germany recently passed new rules that will expand spending on security and infrastructure, upending years of strict fiscal discipline. Berlin has historically adopted a cautious fiscal policy and, more recently, introduced a debt brake that has limited fiscal deficits to 0.35% of GDP. Germany was also a leading supporter of international development and “soft power”, but historical legacies left spending on hard military assets low. This irked Trump, who has long argued that other countries need to pay their fair share for the US security umbrella. He now uses tariffs as a strong tool to achieve this and other aims.

Overregulation, high energy costs, lower digitalization, and a ridged labor market have left Germany with GDP growth that lags that of the United States and China, as well as France, Italy, and the United Kingdom. Berlin’s new coalition government has agreed on revitalizing the German economy, and the EU overall is focusing on boosting competitiveness. But US tariffs create a headwind.

Unlike consumer goods from China, most European imports are parts and supplies used in US factories, key to international supply chains. Transatlantic companies, which are behind the world’s largest foreign investment relationship, maintain networks of subsidiaries on both sides of the ocean, revenues from which are more than three times the value of the bilateral trading relationship. On top of all that, around 1 million Americans are employed by German companies. A disruption to transatlantic trade will hit US jobs and consumers, and German corporate financial statements. Future changes to these supply chains will be costly and time-consuming to achieve.

The April 2 “reciprocal” tariffs gave an EU-wide tariff rate of 20%, but Trump suspended the levies on April 9, and all the bloc’s member states now face a flat 10% until July 9. Recent US court rulings, the first deeming the reciprocal tariffs illegal and the second overturning that decision, are mere speedbumps in Trump’s plans. He can and will use other trade laws to continue his tariff policies.

The reciprocal tariffs create unfavorable conditions, but more concerning for Germany are levies on specific sectors, such as automobiles, steel, semiconductors, aircraft, and pharmaceuticals. These Section 232 tariffs, unimpacted by the court rulings, are much higher and hit industries at the core of the German economy. In negotiations, the EU has been pressing for tariffs to go back to pre-January 20 levels or, ideally, for both sides to drop their tariffs to zero for all industrial segments (“zero for zero”). 

Merz can use his White House talks as an excuse to simplify Europe’s regulatory climate and to improve German competitiveness. Rationalizing regulations on sustainability reporting, for example, is a common US and German goal. The chancellor has also promised more use of economic security tools, such as export controls, investment screening, and information and communications technology (ICT) vendor security, to counter hostile foreign actors. This is another shared goal. An upcoming investment announcement, hinted by German carmaker VW, will also be important in any transatlantic deal. New German digital taxes of 10% and other regulation of US digital companies, however, will be a contentious issue that Trump is sure to raise. 

Washington is using its market power and geopolitical muscle to reset global structures as Merz begins to reform and restart the German economy. This is a tricky balance for any leader, but even more challenging with a mercurial American president. The chancellor will need to navigate these topics carefully in his Oval Office appearance if he is to use the meeting to stabilize the US-German relationship and establish a foundation for implementing domestic economic reform. Failure to do so will make his job, and that of the EU, much trickier.