‘American Cars First’ or Tentative Signs of a Détente?

© Fotolia/Tan Kian Khoon

After implementing tariffs on steel and aluminium in the name of national security, U.S. Secretary of Commerce Wilbur Ross initiated an investigation on automobiles in May 2018. Although tariffs for EU car imports seem to have been avoided for the time being after EU Commission President Juncker and President Trump reached their agreement, the threat of new tariffs puts the rule-based global trading system in danger.

The investigation under Section 232 of the 1962 Trade Expansion Act aims at determining whether imports of automobiles threaten the national security of the United States. As in the previous investigations regarding steel and aluminum, following a consultation phase the U.S. Departments of Commerce (DOC) has 270 days to publish its final report and issue recommendations to the White House.

The investigation is yet another manifestation of the trade policy change in the United States. America is supposedly being rescued from unfair trade practices. For Trump, the large trade deficit is evidence for the world trading system working against U.S. economic interests.

However, automobile imports do not threaten the national security of the United States. Quite the contrary, foreign car companies play an important role in the U.S. economy by providing employment and generating added value. Therefore, the Federation of German Industries (BDI) and the German Chamber of Commerce and Industry (DIHK) jointly submitted a report to the DOC at the end of June 2018. BDI and DIHK called on the United States to preserve the rules-based multilateral trading system and refrain from imposing automotive tariffs.

German Car Companies Contribute to Jobs and Growth

  • There is a trend towards on-the-ground production. German automotive exports to the United States are declining. In 2009, more cars were exported to the United States than were locally manufactured. In 2017, however, more than 800,000 German cars were produced in the United States. Merely 493,000 cars were imported from Germany. Since 2009, German production in the United States has increased fourfold.
  • 60 percent of American-made German cars are going into export. Two of America’s biggest car exporters are German companies. Germany ranks third as an import market for American cars.
  • 166,000 cars made in the United States were exported to Germany in 2017, among them 42,000 automobiles of German carmakers (predominantly premium vehicles by Mercedes and BMW).
  • With roughly a quarter of German automobile foreign direct investment and assets held in the fourth quarter of 2016 worth 32.9 billion U.S. dollars, the United States is the premier destination for foreign direct investment of the German car industry.
  • Over the course of the next four years, investments exceeding five billion U.S. dollars are planned.

Market Access Is Not Unfair

Trump criticizes that market access for automobiles is not fair in U.S.-EU trade. It is true that EU tariffs on passenger cars exceed the respective tariffs in the United States. The EU imposes a tariff of ten percent on passenger cars while the respective value is 2.5 percent in the United States. However, Trump neglects to mention that the United States imposes a tariff of 25 percent on light trucks while the EU only imposes a tariff of ten percent. U.S. tariffs on industrial goods are slightly lower on average than those of the EU. However, weighting tariffs by the actual EU-U.S. bilateral trade in industrial goods, the average tariffs in Europe are slightly lower than in the United States: 1.4 percent versus 1.6 percent (2015 figures). Overall, the tariff burden in bilateral trade for most products is very similar or equal.

U.S. Secretary of Commerce Wilbur Ross calls for full reciprocity, comparing individual goods with goods, sectors with sectors, and countries with countries. Reciprocity has always been a fundamental principle of the World Trade Organization (WTO). Reciprocity in the WTO, however, means that mutually granted concessions should be balanced. The current tariffs bound at the WTO are the result of decades of negotiations between countries with different offensive and defensive interests. Accordingly, reciprocity can also be maintained if countries grant each other concessions in different sectors. As a result, tariff levels on the same product can differ.

Furthermore, focusing on tariffs does not pay regard to modern trade flows and global value chains. Rather, non-tariff barriers and discriminatory government procurement practices can also pose considerable barriers to trade. In the United States, many laws on the federal and sub-federal level restrict the access to procurement markets for foreign bidders.

Costs for the U.S. Economy

Studies show that tariffs on cars would massively hurt the U.S. economy. An EU analysis posits that additional import tariffs of 25 percent, applied to automobiles and automotive parts, are expected to have a negative impact on U.S. GDP in the order of 13 to 14 billion U.S. dollars per year. What is worse, the balance sheet of U.S. trade in goods would not improve. Moreover, rebalancing measures by the EU and other major economies would increase the negative effects significantly. Imports from the United States valuing as much as 294 billion U.S. dollars could be hit by counter-tariffs, which account for 19 percent of U.S. worldwide merchandise exports in 2017.

In late July, President Trump and EU Commission President Juncker agreed in a meeting in Washington D.C. to start negotiations on the reduction of transatlantic trade barriers. For the duration of the negotiations, no further tariffs shall be imposed. At least for now, the risk that EU car exports could be subjected to increased tariffs seems to have been averted. This is a good sign. However, additional U.S. tariffs should be ruled out completely. What is more, other U.S. trading partners should not have to face tariffs on car imports either.

The EU and the United States have decided to reduce transatlantic trade barriers. Now words must be turned into deeds. The rules-based trading system, which the United States and the EU have created over decades, must be preserved. Businesses require foreseeable and stable market conditions for further trade and investment. Only under such conditions, the German automotive industry can expand U.S. capacities and enhance the competitiveness of the U.S. industry.