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Germany's Angela Merkel warns of worldwide financial crisis

| Wednesday, July 4, 2018, 5:48 p.m.
German Chancellor Angela Merkel delivers a speech Wednesday, July 4, 2018, at the Bundestag, the lower house of parliament, in Berlin.
AFP/Getty Images
German Chancellor Angela Merkel delivers a speech Wednesday, July 4, 2018, at the Bundestag, the lower house of parliament, in Berlin.
German Chancellor Angela Merkel delivers a speech during a session on the budget at the Bundestag, the lower house of parliament, on July 4, 2018 in Berlin. / AFP PHOTO / Omer MESSINGEROMER MESSINGER/AFP/Getty Images
AFP/Getty Images
German Chancellor Angela Merkel delivers a speech during a session on the budget at the Bundestag, the lower house of parliament, on July 4, 2018 in Berlin. / AFP PHOTO / Omer MESSINGEROMER MESSINGER/AFP/Getty Images

BERLIN — German Chancellor Angela Merkel raised the specter of a new global financial crisis as she warned of the potential fallout from a trade war with the United States, saying tariffs on European cars would be “much more serious” than levies on steel and aluminum.

In an address to Germany's lower house of parliament Wednesday, Merkel cited President Trump's threat of targeting U.S. imports of cars from Europe, which risk hitting Germany the hardest. She backed efforts by the European Union and U.S. negotiators to reach a deal this month.

“The international financial crisis, which ensured that we now act in the framework of the (Group of 20), would never have been resolved so quickly, despite the pain, if we hadn't cooperated in a multilateral fashion in the spirit of comradeship,” Merkel said. “This has to happen.”

As the leader of Europe's biggest economy, Merkel underscored her resolve to fight for the survival of post-World War II global institutions under attack by the Trump administration. At the same time, she renewed her counterattack against U.S. criticism of German exports by saying that the United States has a trade surplus with the EU if services are included.

“This is taking on the contours of a trade conflict. I don't want to use words that go any further,” Merkel said in her speech. “It's worth every effort to try to defuse this so that this conflict doesn't become a war.”

European businesses are unsettled as they watch the United States and China collide over trade. And for good reason: the nascent global trade war could represent the biggest single threat to the economic upswing that has helped the region get past its financial crisis.

In theory, some European companies could benefit, jumping into market niches if Chinese businesses are kept out of the U.S. market. But that would be only a few companies or sectors.

When an economy is heavily dependent on trade, an overall slowdown in global commerce caused by tit-for-tat import taxes provokes fear and undermines confidence.

By one measure, business confidence has fallen in six of the past seven months in Germany, where exports are almost half of annual economic output.

The United States is due to put tariffs on $34 billion worth of Chinese goods Friday. The Chinese will respond with tariffs on an equivalent value of U.S. products such as soybeans, seafood and crude oil.

Amid all this, Europe has its own trade dispute with the United States. After the United States put tariffs on steel and aluminum from many allies, including the European Union, the 28-country bloc responded with import taxes on some $3.25 billion of U.S. goods. The Trump administration is studying the option of putting tariffs on cars, which would significantly escalate the confrontation.

The head of the EU's executive, Jean-Claude Juncker, will head to Washington in late July to try to persuade Trump against further measures targeting Europe.

The disputes over trade threaten to spoil the good times for Europe's economy.

Growth last year was the strongest in a decade, since before the global financial crisis. While that has eased in recent quarters, the economy is still strong enough to create jobs. The number of unemployed fell by 125,000 in May, leaving unemployment in the 19 countries that use the euro at 8.4 percent, the lowest since 2008 and down from a high of 12.1 percent in 2013.

“Trade tensions stoked by U.S. President Donald Trump are clouding the economic outlook in Europe,” wrote analysts at Berenberg bank in London. They rated the trade risk ahead of troubles from Italy's heavy debt load or faster than expected interest rate increases from the U.S. Federal Reserve.

Many European companies would suffer because they produce and sell goods in the United States and China, the world's biggest economies.

For example, tariffs that China is expected to impose Friday on U.S.-made autos would hit German carmakers Daimler and BMW since they both make vehicles in the United States and export them to China.

Daimler has lowered its outlook for profits, citing higher than expected costs from the new tariffs. BMW warned in a letter to Commerce Secretary Wilbur Ross on Friday that tariffs would make it harder for it to sell in China the vehicles it builds at its factory in Spartanburg, S.C., “potentially leading to a strongly reduced export volumes and negative effects on investment and employment in the United States.”

Last year, BMW exported 272,000 vehicles from the Spartanburg plant, more than half its total production. Of those, 81,000 — worth $2.37 billion — went to China. BMW says its exports reduced the U.S. trade deficit by around $1 billion.

By themselves, the tariffs that take effect Friday won't immediately have a dramatic impact on global trade. The fear is that retaliation will spiral, hitting the total amount of global commerce.

Even if the overall effect is to harm growth, there could be benefits for some European companies and sectors. Economists Alicia Garcia Herrero and Jianwei Xu at the French bank Natixis say that European makers of cars, aircraft, chemicals, computer chips and factory machinery could in theory snare market share by substituting for Chinese or American products in the two markets. But that's only if Europe's own trade dispute with the United States does not escalate.

Amid the brewing conflict, China has sought to get Europe on its side, putting on a diplomatic charm offensive during visits by Merkel and French Prime Minister Edouard Philippe. The EU and China agreed last month to deepen commercial ties and support trade rules. But the EU remains a close, longtime ally of the United States on a range of issues, despite the current tensions with the Trump administration.

One negative outcome for Europe, Herrero said, would be if Trump can push the Chinese into a trade agreement aimed at reducing the U.S. trade deficit. The additional U.S. goods to China could come at the expense of European competitors.

“If China concedes to the U.S. proposed agreement, the whole situation faced by the EU would be much tougher,” she and Xu wrote in a research note. “For China to massively reduce its trade surplus with the U.S., it has to in some way substitute its imports away from the EU to the U.S., which would have a significant negative impact on the EU producers.”

— The Associated Press and Bloomberg News contributed to this report.

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