Tuesday, January 17, 2017

Merkel and Trump

Last week, no urgency with Chancellor Merkel meeting Trump.

This week, lots of urgency to meet Trump.

What happened?  Well....Bild went out and scored an interview with Donald Trump.  It should be noted it was a combined interview with the London Times and German Bild (an odd couple of journalists to put into a small office area at the New York apartment, but life is that way).

So, they went and asked numerous questions, and Trump laid things out.  One of the topics.....BMW is going to build a car plant in Mexico, and ship cars across the border into the US.  The question was asked if this tariff that Trump is talking about with Mexico....to help pay for the wall among other things....would affect BMW.  Trump, well....yes of course was the answer.  Thirty-five-percent tariff.

Oh, my...said the BMW officials back in Germany.  Quiet unfair. Germans are very angry over this BMW slam.

So, Merkel will now have to make a quick trip to the US and iron this out.  Why not wait for Trump's visit to Germany?  That's a good question.  If you remember the first thirty days of Barrack Obama, Germany was on his 'must-visit' list.  I'm only guessing here, but I suspect that Berlin called up the Trump team and learned that Germany is NOT on the visit list for the first thirty days.  In fact, they might have learned that it might be between a hundred and two-hundred days before he visits.  So, the urgency factor is maxed out for Merkel now.

What of this meeting between Merkel (the professor-type) and Trump (the business-type)?

You can imagine this meeting.  Merkel will be ushered in and readily speak English...conveying the big world and how things need to fit into a certain path/pattern.  Trump will give her five minutes, and kindly note that he's on a different path....to correct past problems.

So Merkel will then get to the BMW issue.  It's quiet unfair to force BMW into this thirty-five percent tariff deal, and then try to lecture Trump on economics.

After the 'professor' has wrapped up her economics lecture....Trump will lecture her on actual business.

Why would BMW build cars in Mexico?  Well....to avoid the big union costs of manufacturing.  The BMW X-1 costs $33,000 (base model) in the US.  The BMW 2 will run from $33,000 to $55,000.  The BMW X-3 runs from $33,000 to $47,000.  The BMW M2 will run around $52,000.  The BMW 4 runs at $61,000 or more.

Trump will get down into cost per location.  For example....if you made the BMW X-1 in Germany....it'd cost this much to make each model.  If you did the same car in the US....you could trim off 10-percent (cost of living and such).  If you did the same car in Mexico....you could probably carve off 20-to-25 percent of what it costs compared to the German situation. Trump will say that BMW picked Mexico for a reason....to slide manufacturing cost down, while selling at the same cost.

The tariff hurting BMW?  Trump will likely point out that it's not exactly a regular car that typical Americans buy.  On this, he's right.  If you go and look at the client list of some BMW operation in Dallas or Vegas....it's mostly doctors, lawyers, and business owners.  Throwing the tariff on a X-1 would mean the $33,000 asking price will slide up to $44,000.  Will the same folks buy the car?  Some will....some will compare against other cars and state the value isn't the same.

But Trump will then go back to the wall business.  You see....someone will pay for the wall, and it'll come from folks beyond the US.  Trump will suggest that Merkel might want to chat with the Mexican president and get him to cooperate with the wall business.  Merkel will be frustrated because this whole conversation is about business.....not the standard economics lecture that she'd deliver.

The amusing thing, which Trump might point out....is that BMW can still manufacture these cars, and sell them in Canada, Mexico and throughout all of Latin America for the pricing scheme that they were intent upon....with no tariff effect.  In fact, they can even manufacture and ship these cheaper made cars back into Germany and sell them there.  Oh my....that will freak out the German car manufacturing folks that BMWs would come back into Germany....cheaper-made.

The profits?  Trump might drag this out.....where exactly do the profits of BMW-Mexico go?  They will pay Mexican taxes there, and what profit that does exist and makes it to Germany....goes to BMW share-holders....NOT the German government (except when the share-holders declare their taxes).

This meeting will end with Merkel grasping the realization that the whole tariff thing is mostly about a cheaper-made BMW....selling at the same price....and BMW was attempting to walk away with more money in their pocket.  Trump might even go and suggest that if they'd put their plant in Honduras, or Panama, or Venezuela.....they'd avoid the tariff.  This wall business is the driving factor, which isn't something you'd want to bring up with someone who grew up in DDR (Merkel).

Trump might not be this international affairs geek, or political hack....but he knows business and how all these models work or pretend to work.  On this....Merkel cannot argue.

Upon returning to Germany, I imagine the path will be clear....the US and Germany are going separate paths and Trump will be the chief topic of the election period.  Snowden being brought into Germany?  I think it's virtually guaranteed to happen by this fall, and he'll give testimony to the 'truth commission on the NSA business'.  All of this will play out for a Germany-versus-US opera.

The problem with this?  The French President and legislative elections are coming up....with a right-wing win in both expected.  There's talk of Le Pen maybe winning....and she'd like to stage a Franc-comeback and push the EU back a step.  Same deal in the Netherlands.  Same deal in Austria.

This European community standing behind Merkel and against Trump?  I don't see this occurring anymore.  England, France, and the Netherlands will lean against Germany by this fall, and it'll be obvious that the EU-mechanism that Germany so gracefully pushed and manipulated is now mired in the mud and can't move ahead.  NATO will shift to a lesser landscape, with US troops on some move back to the states or into England. The center of this Merkel-constructed universe is gone.

Merkel might still win the election but the landscape in 2018 is greatly different from today.  And the future meetings of Trump and Merkel?  They might bump into each other at various G-meetings but I doubt if Trump stops off in Germany more than once over the next four years.  Oddly, the US and Russia, and the US with England/France.....will end up for the next four years being better relationships than with Germany.

My humble analysis at this.  It's not that pretty of a picture.  Oddly, you might go back to that fateful day in the late 1800s when Grandfather Trump tried to come back and settle back into the Pfalz and find the locals weren't that pleased with him.  So he left a second time, never to come back.  A hundred years later....the German locals still aren't pleased.  And the grandson isn't looking back.

Footnote: I should add....BMW isn't the only German company on this Mexico angle...Audi and Mercedes were both on the same Made in Mexico game.  So all of the big car-makers of Germany would suffer to some degree with the tariff put into effect.

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