Trump's Tariff Policy - Recommendations for the German Economy
With the re-election of Donald Trump as President of the USA, the focus is placed on measures to strengthen the American economy as part of his "America First" strategy. First and foremost is the introduction of extensive tariffs on the import of goods into the USA. This has significant impacts on Germany as an export nation. However, there are also opportunities that German companies can utilize - we show which ones.
Trump and the Tariffs
Tariffs are used worldwide to protect one's own economy and to achieve political goals.
The resumption of Trump's tariff policy primarily serves as a negotiation tool. Germany and the EU can respond by imposing EU punitive tariffs on certain US goods.
Impacts on the German Export Economy
The US market has become increasingly important for the German economy over the last 20 years both in terms of imports and exports. It is expected that the introduction of US import tariffs will primarily affect the automotive industry and its suppliers, the pharmaceutical, chemical, and cosmetics industries, as well as mechanical engineering.
On March, 12, 2024, the exemptions for the import of steel and aluminum from certain countries (including Germany) were suspended, resulting in tariffs of 25% being due upon US import. It is currently unclear whether further tariffs will be imposed against the EU and thus also Germany, which is why the majority of medium-sized companies are still waiting and not making any preparations. However, German companies facing increased costs in this context should already take optimization measures due to the current geopolitical and economic situation.
New opportunities could arise, for example, from new alliances being formed by German or EU politics to open up new markets, as seen with the agreement with the MERCOSUR states (including Argentina, Brazil, Paraguay, and Uruguay). Economic relations with India are also to be expanded. In any case, for German companies, it is important to consider all potential production and sales countries.
It is generally advisable not to be dependent on a specific market, and German companies could benefit from adjusting their procurement strategy to new production countries.
Tariff Strategies for German Companies
German companies have several options available to respond to the USA's protectionist measures. Tariffs only apply to goods that remain in a country and enter its economic cycle. By skillfully handling tariffs, a company's profitability can be increased. The following tariff measures, among others, are possible:
Correct Tariff Classification:
Every product has a specific code number and an associated tariff rate. The US also regulates its new tariffs through this number. Insulated copper wire, for example, is treated differently than bare copper wire. If a product is incorrectly classified, this often leads to overpayment or subsequent collection of import duties. For some goods, such as spare parts or product assemblies, classification can be more complex. Companies that are uncertain can request binding tariff information from the authorities. However, entrepreneurs should seek advice beforehand to avoid being classified differently than intended.
Processing:
For goods that are only processed in Germany to be subsequently exported again, tariff duties are waived. A company that, for example, temporarily imports pharmaceutical active ingredients from the US into Germany to enrich them with carrier material and subsequently package them in different units (capsules, ampoules, etc.) and then sends them back to the country of origin or other markets can apply for a tariff exemption for "Active Processing." Conversely, German companies often have individual production steps carried out in third countries because labor costs are lower there or specialized knowledge exists. For example, body parts such as car doors are temporarily exported to third countries and painted or otherwise processed there. Upon re-importation, these parts can be exempted from tariff duties or only the added value must be taxed.
Optimization of Supply Chains Using Preferential Agreements:
Companies should examine their supply chain to avoid possible tariff duties in certain countries. When it comes to procurement, it can be worthwhile to consider early on from which countries goods, raw materials, and other materials should be sourced. Many countries and country groups have concluded so-called preferential agreements with each other, which, under certain conditions that the goods must meet, allow for mutual tariff exemptions. One of the most recent examples is the aforementioned agreement with the MERCOSUR states.
Customs Warehouse:
By establishing a customs warehouse, goods can be stored duty-free, tax-free, and indefinitely. Duties and taxes only apply from the moment of removal from the warehouse, offering a significant liquidity advantage. If, for example, a product is imported from India, stored, and further shipped to the US, it does not need to be taxed in the EU at any point. This is interesting for trading companies or companies with global supply chains. For medium-sized companies, warehouses maintained by a freight forwarder are often advantageous due to space reasons and increased administrative effort.
Conclusion
German companies are advised to engage with the topics of tariffs and foreign trade in a timely manner and provide internal resources for these areas. Often, corresponding measures can be implemented within two to six months.
It is expected that the US will impose further tariffs on goods originating from the EU. However, tariffs can be reduced or suspended by using certain customs procedures or optimally utilized supply chains. An examination of supply chains and customs processes by appropriate experts is recommended now and regularly.
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