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Germany Lines Up with China in Trade War

Germany's top manufacturing companies -- Volkswagen, BMW, Daimler, BASF and Siemens -- announced tens of billions of dollars of new investments in China as Chinese Premier Li Keqiang posed for a photo op with German Chancellor Merkel in Berlin.

Houston, we've got a problem. Forget about Harley-Davidson. Some of the world's most powerful industrial firms have just given China a gigantic vote of confidence.

BMW will expand its joint venture with Brilliance Auto to produce 519,000 vehicles a year. It also set up a joint venture to produce an electric version of the Mini together with Great Wall Auto. And it agreed to buy $4.7 billion worth of batteries from Chinese producer CATL, which just announced a new plant in southern Germany. Volkswagen earlier this year announced that it would invest $18 billion in China by 2022 and construct six plants to build electric vehicles. Oh, and BMW will move some of its SUV production out of its South Carolina plant in response to auto tariffs.

Daimler will start to test self-driving cars in Beijing. China's new cities are designed to accommodate self-driving cars, unlike older American cities. Chemical giant BASF will spend $10 billion on a second giant facility in China. And Siemens will develop gas turbines together with China's State Power Investment Co.

None of this is good news for the United States. The two countries that run the biggest trade surpluses with the United States, China and Germany, are joining forces to set the standard for electric vehicles, self-driving cars and battery production.

There's no love lost between China and Germany, to be sure. Germany's right of center daily Die Welt describes the relationship as a "tightrope walk." Nonetheless, Asia will offer a bottomless source of demand for autos during the next twenty-five years. GDP per capita has risen 45-fold (that's 4,500%) since 1982, and Chinese who grew up unable to afford a bicycle now buy cars.

America now has 91 cars for every 100 people. China has 15 cars for every 100 people, and it has four times as many people. Do the math: If China rises to the car ownership level of South Korea (46 cars per 100 people), it will have to produce or import roughly 400 million cars to reach that level. They might be cheaper cars, but there will be a lot of them.

In more than forty years of following markets and the world economy, I've never seen a realignment of investment priorities of this size and speed. President Trump is magnificently right to warn that China's rise represents a challenge to the United States, but he is wrong to think that tariffs will fix the problem.

Unless.

At the Group of Seven meeting in Canada on May 23, President Trump proposed that all nations should eliminate all tariffs on automobiles. That's a brilliant idea that U.S. Ambassador to Germany Richard Grenell has talked up with German manufacturers. German Chancellor Angela Merkel has already endorsed it. And I am told by people close to the government in Beijing that China would agree to the proposal, provided that it was a global agreement encompassing the world's largest automakers (that's the German view as well).

China doesn't want a trade war. It's winning gradually and has nothing to gain from an early confrontation. Chinese President Xi Xinping reportedly will take Trump's deal as an alternative to trade war, and that would be good for everyone. It would allow consumers around the world to choose whatever car they wanted without the fat thumb of government on the scale, and it would force auto producers to compete on the basis of price and quality.

A lot hangs in the balance here. No one ever wins trade wars, and the German-Chinese realignment is a warning that not everything would go America's way if things get nasty. But the president's zero-tariff proposal offers a way out that's good for everyone. The next move is Trump's to play.