German Chancellor Angela Merkel has warned that a trade war between the US and the rest of the world may lead to a global financial crisis. Speaking at the German parliament on Wednesday, she warned that consequences of US tariffs on cars from Europe would prove ‘much more serious’ than the duties imposed on steel and aluminium.

The Trump administration has put tariffs in place on imports of aluminium and steel from the EU and is considering adding a similar import duty on cars and trucks as well as automotive parts.

Such a policy of taxing car imports to the US would hit Germany hard, as it has a large automotive manufacturing sector. Negotiators from the European Union will attempt to reach a deal with the US government later this month, including Jean-Claude Juncker, Head of the EU’s Executive Commission.

Merkel said: “The international financial crisis, which ensured that we now act in the framework of the G20, would never have been resolved so quickly, despite the pain, if we hadn’t cooperated in a multilateral fashion in the spirit of comradeship. This has to happen.’

She added that the situation has developed into a trade conflict already and stressed that the conflict needs to be defused so that it does not become a full-scale war. ‘It is worth every effort to try to defuse this conflict so that it doesn’t turn into a real war, but of course there are two sides to that,’ she said.

Merkel emphasised that the European Union is making every effort to avoid a trade war with the increasingly protectionist US and pointed out Germany’s commitment to raising defence spending in line with US wishes. She continued by saying that the world economy’s ongoing efficiency depends on partnerships between countries while questioning the wisdom of gauging surplus and deficit figures solely by trade in goods. She said that if the cost of digital services were included in trade figures, then there would be a likelihood of the US having a surplus with the EU. She said: ‘It is almost old-fashioned only to count goods and not to count services.’

The US has been pressing Germany in recent months over what it sees as inadequate defence spending. In May, German defence minister Ursula von der Leyen said that the German government plans gradual increases in defence spending over the coming years. Defence spending was as low as 1.1% of GDP in 2015, and the current plan is to increase this to 1.3% of GDP by next year. Germany’s current defence spending is 1.24% of GDP. Von der Leyen said: ‘We will notify the NATO summit in Brussels that we want to reach defence expenditure of 1.5% of GDP in 2025.’

The US is likely to remain unimpressed with this level of defence spending, as the target that NATO countries have committed to over the next ten years is 2% of GDP. US President Donald Trump has repeatedly said that he is not satisfied with the German military budget allocation. Merkel, who is also under pressure to raise military spending from the Germans, defended her government’s position, saying that ‘Germany is a reliable partner in NATO. We are the second-biggest troop provider; we participate in many missions, and Germany will remain a reliable partner in NATO.’

Official surveys in Germany have reportedly found that the Bundeswehr is in a poor state. The German military has been hit by repeated budget cuts since the fall of the Berlin Wall, and this has resulted in a lack of funds to support personnel and equipment.