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Looming trade war pressures Germany’s Merz to keep export engine running

By Oscar Pandiello and Ansley Franco

February 24, 2025, 10:45 GMT | Comment
Based on Sunday’s election, Friedrich Merz will lead efforts to form a new government and tackle crucial trade challenges — from looming US tariffs to EU disputes over free trade and sustainability rules. While migration dominated the campaign, Germany’s economic future now depends on securing export markets, expanding trade deals and managing tensions with China and the US.
No EU country has more to lose in the looming trade war with the US than Germany.

As Europe’s economic powerhouse, Germany’s national election will shape the future of its export-driven economy — the engine of the bloc's trade and responsible for 28 percent of its exports.

The center-right bloc of the Christian Democratic Union and its Bavarian sister party the Christian Social Union won Sunday's election picking up 208 seats out of 630 in the parliament, according to official results. While the far-right AfD came in second with 152 seats, other parties refuse to work with it so likely won't be in a government. That leaves the center-left Social Democrats, which won 120 seats, and the Greens, which won 85 seats, as likely coalition partners. The pro-business FDP failed to reach the 5 percent threshold to qualify for the parliament. 

With rising energy costs and looming tariff hikes, the next chancellor will face a tough task: pushing the European Commission to stabilize trade ties with the US and China while advocating for new markets and reforms to boost competitiveness.

The country can’t determine its trade policy alone, as negotiating new partnerships falls under the EU executive's purview. The new leader, however, is expected to put Germany back at the forefront of the bloc’s free trade defenders.

“Germany is stuck in stagnation,” Economy Minister Robert Habeck of the Green Party said late last month after announcing that the German economy is expected to grow by only 0.3 percent in 2025, compared with a previous forecast of 1.1 percent.

According to Laura von Daniels, a trade and economics expert at the German Institute for International and Security Affairs, Germany’s four traditional parties — the center-right Union, the center-left Social Democratic Party, the classically liberal Free Democratic Party and the Greens — are “all interested in continuing this part of our growth model that relies very much on exports.” 

“But there's also a growing awareness among all of those parties that maybe this model cannot be continued,” Von Daniels told MLex prior to the election.

— US tariffs —

That awareness is being reinforced by external pressures, particularly the threat of US tariffs, which could soon deal a heavy blow to Germany’s export-driven economy.

US President Donald Trump criticized both “friend and foe” on TruthSocial earlier this month for imposing "unfair" tariffs on his country. He could be alluding to a riddle he’s been trying to solve since his first term: Why don’t Europeans buy American cars?

His response is that the EU's 10 percent tariffs on US carmakers like Chevrolet and Ford hamper sales.

Germany's trade surplus with the US grew to 70 billion euros ($73 billion) in 2024. The automotive sector and pharmaceutical goods are driving this gap, with a 2.2 percent increase in exports last year for a record 161.3 billion euros.

During a press conference at his estate in Florida, Trump warned countries of upcoming tariffs on automobile, semiconductor chips and pharmaceutical imports — expected to be “in the neighborhood” of 25 percent, with more information to be announced on April 2 (see here).

He also signed a directive on Feb. 13 focusing on developing a plan to restore “fairness in US trade relationships and countering non-reciprocal trading arrangements” through the use of reciprocal tariffs (see here).

The former head of the European Commission’s trade department, Jean-Luc Demarty, told MLex that cars, chemicals, ceramics and textiles are some products the EU could include in a deal to avoid those reciprocal tariffs (see here).

“We need a positive agenda with the US that benefits American and European consumers alike," Friedrich Merz, leader of the CDU and likely next chancellor, pending the completion of coalition talks following Sunday’s vote, said in early January. “A new European-American initiative for joint free trade could prevent a dangerous spiral of tariffs.”

Merz said the EU should not enter a trade war with the US, but noted “the more united Europe is in this situation, the better off we are — and the stronger we are with respect to Washington.”

In a pre-election debate with Merz, the outgoing Chancellor Olaf Scholz said Europe is prepared to respond “within an hour” if Trump levies tariffs against the EU.

Scholz, leader of the Social Democrats, told Bloomberg recently he is in favor of free trade, saying “it is better if we agree to something that helps all of us” as US tariffs loom.

— New partners —

Pushing the EU's trade agreements with Mexico and Mercosur — a trading bloc in South America — over the finish line will be a top priority for the new chancellor. Christian Democrats, Socialists and classically liberal parties see the adoption of these deals as low-hanging fruit for opening new markets and diversifying Germany’s supply chains (see here).

“The Mercosur deal is negotiated and must now come into force quickly,” the CDU program reads. Similarly, the Socialist party calls for the swift adoption of new deals to “establish robust alliances and partnerships,” which must align with “our security policy goals, strengthen social and human rights … and create long-term prospects for growth and prosperity for all contracting parties.”

Australia, India and southeast Asian nations are also stressed as top priorities.

But Germany’s new leader will need to negotiate with France, Poland and other EU countries aligned with the farming sector, which see free trade as an open door to unfair competition from cheaper imports that fail to meet EU environmental standards.

Von Daniels told MLex that the German-French dispute over two key trade debates — the EU-Mercosur deal (see here) and the imposition of anti-subsidy tariffs on Chinese electric vehicles — could resurface after the elections.

“The question is how the next German chancellor will react in a similar situation,” she said, adding that mounting pressure from China and the US will likely force Berlin and Paris to find common ground sooner rather than later.

— Deregulation ahead? —

The new German government is also expected to lead efforts to water down some of the EU’s Green Deal laws on sustainability reporting. These rules, which require mandatory supply-chain checks for the bloc’s largest companies, are seen as a hurdle to Germany’s competitiveness.

There’s a broad consensus among German parties to continue with this deregulation strategy, according to the CDU, FDP and AfD’s programs.

The Social Democrats won’t lobby to scrap those sustainability rules. However, the party’s program states that “it is important” that regulation “does not become a competitive disadvantage.”

“We support the Corporate Sustainability Due Diligence Directive, but call for a balanced and effective implementation,” its program reads.

Efforts to introduce structural changes to these laws will face opposition from countries such as Spain and Denmark.

Regardless of the political affiliation of the elected chancellor, Germany’s next government will have little choice but to push for new trade deals and defend its export model.

Yet Berlin's real challenge lies within the EU in convincing protectionist member states that expanding the bloc’s trade horizons is about more than growth — it is a matter of economic security.

Please email editors@mlex.com to contact the editorial staff regarding this story, or to submit the names of lawyers and advisers.

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