U.S. President Makes Life Tough for German Companies
Donald Trump recently said that he no longer wants to see the sight of a Mercedes on Fifth Avenue in New York. It was a right hook aimed squarely at the chin of Daimler and the German economy. And the timing could not have been better. The American president knows how vulnerable Germany automobile manufacturers are in the wake of the diesel scandal and also how important the American market is to them. The Department of Justice is currently investigating Daimler and the Trump administration is also considering whether to impose higher import tariffs on German carmakers. Trump views both measures as an opportunity to protect the domestic car industry while at the same time weakening its German competitors.
But beyond Volkswagen, Daimler and the others, Deutsche Bank, Bayer and numerous other German companies both small and large are beginning to realize just how skillful the Trump administration can be when it comes to applying pressure on foreign firms. Washington, it would seem, is pursuing its "America First" doctrine at all levels -- in the form of tariffs, taxes and fines, but also on the level of individual companies.
Irritation is growing within both the European business community and the German government over the Trump administration's ruthless approach. During a trip to Beijing last week, Joe Kaeser, CEO of global engineering giant Siemens, lamented an American policy of "tariffs and tweets." The statement represented something of a reversal of course for the executive. At the World Economic Forum in Davos earlier this year, he and other German executives were fawning over Trump.
With his attacks, Trump has succeeded repeatedly in dividing Europe and playing French and German interests against each other as well as driving a wedge between Eastern and Western Europe. And when the European Union is divided, its companies also become easier prey for Trump.
There is nothing novel about the U.S. exploiting its dominant position in the global economy to advance its interests. The American market is vital to companies in Europe and Asia, both due to its size and its consumerist philosophy. But that importance leads to dependencies.
America derives its greatest power through the dollar. More than four-fifths of global trade is processed using the American currency, and those using it must abide by American rules. Trump's predecessors have repeatedly reminded the rest of the world of that obligation in the past.
'Trump Has Turned the Dollar into a Weapon'
But rarely has anyone exploited the power of the currency to the degree Trump is doing. "Donald Trump has turned the dollar into a weapon," says Davide Serra, CEO of Algebris Asset Management. The Italian, who holds a British passport, knows what he's talking about -- his company invests in banks and corporations all over Europe. He says Trump is using the dollar to assert America's influence on the corporate world far beyond its own borders.
The U.S. president recently unilaterally withdrew from the nuclear agreement with Iran and took steps toward the implementation of new sanctions banning dollar-denominated transactions with the country. Even if they comply with European Union law, European companies and banks could face massive sanctions in the U.S. if they conduct business with Iran once those sanctions are in place.
Consistent with the same logic, the new sanctions recently imposed by the U.S. on Russian oligarchs are especially painful for European companies.
And it's not only the dollar that Trump is using to enforce economic interests. He's taking advantage of any instrument available that can be used to target foreign companies. These include banking supervision rules, cartel laws and even something as seemingly arcane as the Committee on Foreign Investment in the United States (CFIUS), the interagency body that reviews all transactions that could result in a foreign company gaining control of a U.S. entity. The body's mandate is to monitor U.S. national security interests in the course of acquisitions of American companies by foreign investors. Under Trump, however, the committee has been given considerable leeway in interpreting its mandate.
"CFIUS's influence on German companies is underestimated," says Rainer Langel, the head of Germany operations at Australian bank Macquarie. Increasingly frequently, he says, owners of German companies are only able to sell their company at a price that is significantly lower than what interested Chinese parties would have offered. The reason: The sellers fear that CFIUS will prohibit the takeover by a Chinese company, even though the German companies in question only generate a small portion of their revenues in the U.S.
Under Trump, the extent to which the Americans are exploiting German firms' exposure in the U.S. has become conspicuous. Companies like Deutsche Bank, which has become a greater challenge to U.S. banks than any other foreign financial institution. Under former CEO Josef Ackermann, the company made major inroads in the U.S., right up until the 2008 global financial crisis. In doings so, the Germans riled both their competitors and the U.S. government. At the same time, Deutsche Bank made itself vulnerable through its involvement in numerous scandals, becoming the focus of numerous investigations and fines by U.S. investigators.
The fact that Deutsche Bank's dubious business practices resulted in expensive settlements is appropriate. But it seems fair to say that investigations into other banks were not subject to nearly as many leaks as those into Germany's leading financial institution. In fall 2016, when the Justice Department forced Deutsche into a multibillion dollar settlement for dubious mortgage-backed securities, leaks about the possible size of the fine led to a collapse in the company's share price and pushed the bank to the edge of the abyss. To this day, leaks continue to weaken the unloved competitor from Germany.
On June 1, the websites of the Wall Street Journal and the Financial Times both posted bad news for Deutsche Bank at almost exactly the same time. They reported that the Federal Reserve (Fed) and the deposit protection fund Federal Deposit Insurance Corp (FDIC). had deemed Deutsche Bank's U.S. operations to be in "troubled condition." The astounding thing, though, is that the Fed made its decision a year ago and the FDIC at the beginning of 2018, but it was only months later, and then on the same day, that these damaging assessments of Deutsche Bank's operations came to light.
Coming as it did just before Trump declared trade war on the Europeans in the form of punitive tariffs on steel and aluminum, it came across as being a coordinated effort.
A Deliberate and Targeted Manner?
Insiders at the Bundesbank, Germany's central bank, and at the Finance Ministry assume the crisis reports on Deutsche Bank were the result of a targeted leak intended to put pressure on the company and Germany. The bank's American competitors have generally gotten off relatively lightly, these sources claim, suggesting that the U.S. authorities may have been sparing their institutions to provide them with a competitive edge. Given the amount of latitude the Justice Department has, the possible unequal treatment can't be proven. Deutsche Bank did not want to comment on the matter.
Whereas American banks remain the undisputed leaders not only in the U.S., but also well beyond, the balance of power in the global automotive industry is markedly different. Here, German manufacturers from VW to Daimler to BMW dominate. That's why the U.S. government has been ratcheting up pressure on German carmakers since Trump took office.
Their preferred target has been Volkswagen. The Wolfsburg-based company reached a settlement with the Justice Department at the beginning of 2017. In total, the fines the company had to pay along with the compensation to American owners of its diesel vehicles amounted to more than $20 billion. There is no question that the company deserved the punishment. It's growth in the U.S. market had been based on the myth of clean diesel, a lie the company perpetuated by installing cheat devices in its diesel vehicles allowing VW to claim far lower emissions than was actually the case.
But the longer the scandal drags on, the more critically industry insiders are asking what is happening with other manufacturers with deeper roots in the U.S. -- car companies that are also believed to have manipulated emissions readings. In May 2017, for example, the Justice Department accused Fiat-Chrysler of deploying cheat software in close to 104,000 of its diesel vehicles. But the proceedings have been slow and a decision over a possible penalty still hasn't been made.
Increasing Pressure on Daimler
Instead, the U.S. authorities appear to be increasing pressure on Daimler. Representatives of the Stuttgart company were recently summoned to appear before the Environmental Protection Agency (EPA). It's already a foregone conclusion that Daimler is going to have to pay a considerable sum, and at this point negotiations are focusing on how high the settlement will be, say sources within the U.S. justice system. Officials at Daimler say they won't comment on speculation over ongoing legal proceedings.
For VW, too, the scandal in the U.S. isn't over yet. At the beginning of May, the U.S. District Court in Detroit confirmed charges against former VW CEO Martin Winterkorn on the very day that new VW head Herbert Diess called for a cultural shift at the company during its annual shareholder meeting.
The Trump administration hasn't been quite as audacious in targeting companies in other economic sectors. The week before last, for example, U.S. antitrust authorities approved Bayer's takeover of the agricultural biotechnology company Monsanto. But what first appears to be evidence of the openness of the U.S. market could ultimately prove to be a pyrrhic victory for Bayer.
After approving the deal, the Justice Department boasted that no other company had ever had to make greater concessions during an acquisition in the U.S. Bayer is being forced to divest itself of $9 billion in company assets, including most of its own seed business, in exchange for regulatory approval. And even if the name Monsanto disappears completely and only the Bayer name survives, as planned, the Americans will still have enormous influence on the new company due to the sheer power of the American Food and Drug Administration (FDA). Bayer's success will depend heavily on the goodwill of American politicians.
But the field in which the United States showcases its economic imperialism more unabashedly than anywhere else is energy policy -- particularly when it comes to the Russian natural gas pipeline Nord Stream 2.
The project has been in planning stages for close to two years. Under the leadership of energy giant Gazprom, Russia plans to lay two more undersea pipes to join the Nord Stream 1 Baltic Sea pipeline, which was laid several years ago. The project, in which the German companies Wintershall and Uniper are also investors, is expected to cost around 9.1 billion euros.
The pipeline has long been the subject of controversy. It is opposed by many Eastern European countries, including Poland and Ukraine, because they fear Russia will bypass them and cease pumping natural gas through overland lines, from which they earn billions of euros in transit fees. Others in the European Union, meanwhile, fear the second pipeline could result in an overdependence on Russian gas.
Ultimately, though, it is the Americans who have been most vocal in their objections. They view an energy partnership between Germany and Russia critically for geopolitical reasons. More importantly, though, they also want to supply Europe with liquified natural gas extracted through fracking in the United States. But that liquified gas is a lot more expensive than the Russian pipeline gas and Nord Stream 2 would make natural gas from the U.S. uncompetitive.
The Trump administration doesn't appear to be prepared to accept such a state of affairs and is now using all means at its disposal to fight the energy project, including measures that are at the very limits of what is legally allowed, as Economics Minister Altmaier recently experienced.
Each year, the city of Aachen, Germany, awards the Charlemagne Prize for services rendered to the cause of European unification. On the sidelines of this year's award ceremony, Altmaier, a member of Chancellor Merkel's conservative Christian Democratic Union, spoke with Ukrainian President Petro Poroshenko, whose country is one of the project's leading opponents. Altmaier wanted to know under what conditions Poroshenko would be prepared to abandon his resistance to Nord Stream 2 and whether he, Altmaier, could mediate during in his planned visit to Russia.
Surprisingly, Poroshenko yielded. He said he needed a commitment that gas would continue to be pumped overland through Ukraine, despite the Baltic Sea pipeline. When Altmaier met a few days later with Russian Prime Minister Dmitry Medvedev in Moscow, he was able to secure precisely that promise from the Russians. But it still didn't move the pipeline forward: Poroshenko is said to have demanded further guarantees and concessions on the issue of Crimea.
Diplomatic Pressure, Intimidation, Sanctions
The Russians believe that the U.S. government was responsible behind the scenes for the shift in sentiment. Washington, after all, intensified its campaign against Nord Stream at the exact same time that Altmaier was in Russia. Sandra Oudkirk, U.S. deputy assistant secretary of state for energy diplomacy, first traveled to Ukraine to bring the government in Kiev into line, and then on to Berlin to harshly criticize Germany's efforts to broker a solution. Oudkirk said the U.S. would oppose any German-Russian deal. She said the pipeline presents an acute danger for the U.S. and for Europe.
Newly appointed U.S. Ambassador to Germany Richard Grenell also got involved. He is even said to have raised his voice when speaking to Altmaier on the issue. The U.S., he is said to have blustered, will not accept Germany's pipeline policy and the pipeline won't be built.
The Americans have already indicated what they might do to prevent its construction. In addition to Wintershall and Uniper, the British-Dutch oil company Shell, the French utility company Engie and Austria's OMV have also invested in the planned construction of the multi-billion-euro project. The Trump administration is threatening to impose tough sanctions on the companies if they don't abandon the gas pipeline project. This would be a heavy blow for the firms, which are active internationally.
The Russians suspect that diplomatic pressure, intimidation and sanctions aren't the only means being deployed by the Americans to prevent the pipeline's construction. It's also possible that compliant partners are being generously rewarded. In Denmark, for example, a country which accepted the construction of the Nord Stream 1 pipes through areas along the Danish coast in 2011 without opposition, project partners have observed a strange development.
In November, the Danish Parliament passed a rather surprising law which could prohibit the construction of Nord Stream 2 through Danish territorial waters. Since the passage of that legislation, the Danish government has postponed approval on a week by week basis. People inside the Nord Stream consortium believe they have identified the culprit for the change of heart. They argue that it isn't based on the pretense that the pipeline will lead to a European overreliance on Russian gas. One internal email indicates that it has much more to do with tangible economic interests.
Quid Pro Quo?
The email notes that there has been a conspicuous and unusually strong increase in energy deals between Denmark and the U.S. since 2017. It is difficult to avoid the conclusion, the email says, that one hand is washing the other.
Specifically, the cooperation is focused on lucrative renewable energy deals. Danish Energy and Climate Minister Lars Lilleholt traveled to the U.S. in October together with representatives of Danish energy companies including Orsted and Danfoss. He met with the U.S. deputy secretary of energy, and with member of Congress. The official purpose of the trip was to expand cooperation with the U.S. in the field of renewable energies, and both sides reaffirmed there is great potential for offshore wind farms in particular.
It was a few weeks after that trip that Denmark passed the law that would make it possible to ban Nord Stream from their territorial waters. They then began expanding their energy partnership with the U.S. Cooperation agreements and orders for various wind parks followed at short intervals. Officials in Denmark and the U.S. claim there is no link between the law and the contracts, but the Russians believe the Americans have bought Denmark's support.
The Trump administration has also reportedly signaled to the German government that abandoning the pipeline plans could be one way of preventing new tariffs on German goods. And this is how Trump's industrial and trade policy dovetails: the pinpricks against foreign competitors, the undermining of major projects, the threats of tariffs against key industries and, ultimately, deals that link one with the other.
In the case of the Baltic Sea pipeline, the German government has made clear that a deal is out of the question. Still, the German government isn't always that consistent in standing up against Trump. In the dispute over steel and aluminum tariffs, Altmaier sought to negotiate an exception right up to the very end, to the displeasure of the French, who had wanted to see a more combative European front against the Trump administration. It is only after Berlin's attempts to curry favor with Washington failed that the EU has moved to impose punitive duties on bourbon whiskey and other American products, which are due to enter into force on July 1.
"Europe too seldom unites to defend its economic interests, so there is little to counter Trump," criticizes fund manager Serra. "It's mainly up to Germany to change that."
By Tim Bartz, Frank Dohmen, Martin Hesse, Christian Reiermann and Gerald Traufetter