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Merkel to Warn Trump That U.S. Tax Changes May Spark Retaliation

German Chancellor Angela Merkel will warn U.S. President Donald Trump that a proposed tax overhaul could spark retaliatory measures, including higher tariffs for American companies, according to Der Spiegel magazine.

The German government is reviewing its responses to a border-adjustment tax, which would only tax U.S. corporations’ imports and not their exports. Documents for Merkel’s upcoming meeting with Trump cited by Spiegel label the measure a “protective tariff” and say it violates World Trade Organization rules.

Responses from Europe’s largest economy could include incrementally higher duties on imports from America and allowing German companies to make their U.S. import tax deductible, thus compensating their competitive disadvantage, according to the report. Eventually, Germany could also lower corporate taxes and social contributions, making itself more attractive to international companies.

Trade is high on the agenda as Merkel flies to the U.S. for her first meeting with Trump on Tuesday. The chancellor said on Thursday that she’ll fight to preserve free trade and a strong Europe, calling on the European Union to pursue trade agreements with other countries in response to Trump’s protectionist rhetoric.

Read more: Why ‘Border Adjustment’ Is the Talk of Washington

For Merkel, defending Germany’s export-based economic model is key as she seeks to boost her party’s poll numbers and win a fourth term in September. The country had a record trade surplus of more than 8 percent of gross domestic product in 2016, while the U.S. trade deficit widened in January to the most since March 2012.

While House Republicans have proposed the border-adjustment tax, Trump has still to explicitly endorse the idea as part of his plan to put America first and boost domestic production. American Treasury Secretary Steven Mnuchin is said to plan to use his debut at a Group of 20 meeting in Germany next week to drive home the message that the U.S. won’t tolerate countries that use currency devaluation to gain an edge in trade.
Source: Bloomberg

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