‘American Cars First’ – Uncertainty about Car Tariffs Persists

© Fotolia/Tan Kian Khoon

According to an unpublished report by the U.S. Department of Commerce, U.S. car imports endanger the national security of the United States. In mid-May 2019, U.S. President Donald Trump had postponed a decision on import restrictions by 180 days. The President allowed this deadline to pass mid-November without comment. However, it is still too early to give the all-clear.

The investigation under Section 232 of the 1962 Trade Expansion Act aims at determining whether imports of automobiles and their parts threaten the national security of the United States. The investigation is yet another manifestation of the trade policy change in the United States. For Donald Trump, the large trade deficit is evidence for the world trading system working against U.S. economic interests.

Section 232 is a relic of the Cold War period. Before President Trump, it has rarely been used. The U.S. Department of Commerce (DOC) has 270 days to submit its final report and issue recommendations to the U.S. President. Subsequently, the U.S. President has up to 90 days to decide on possible measures. By another interpretation of the rules of the U.S. Code, the deadline for the President to make a decision based upon the report can be extended by another 180 days. The measures would then be imposed within two weeks.

The DOC presented the 232-report on motor vehicles and their parts to the U.S. President in mid-February 2019. According to the unpublished report, U.S. imports of vehicles and vehicle parts endanger the national security of the United States. One day before the 90-day deadline expired, the White House issued a presidential proclamation in mid-May 2019. President Trump mandated the U.S. Trade Representative (USTR), in consultation with other members of the government, to conduct negotiations with the EU, Japan and other countries to avert the threat to national security. The USTR was to inform the President of the outcome of these negotiations within 180 days. According to media reports, this occurred in mid-November. To date, however, the President's decision has not been made public.

The United States Code (19 USC §1862 c 3 A & B) specifies that the decision to impose tariffs or to refrain from doing so must be published in the Federal Register. It is unclear whether and when the administration will comply with this statutory publication requirement.

In November 2019, the U.S. Court of International Trade (CIT) also confirmed in a judgment in the "Transpacific Steel LLC v. United States" case that Section 232 is not a Carte Blanche. The administration argued that the President could continue or amend any of the duties under Section 232 at his discretion as long as he agreed earlier with the Secretary of Commerce that imports threaten national security. The CIT strongly disagreed: the clear and unambiguous steps of Section 232 - investigation, consultation, reporting, review and action - required timely action by the Secretary of Commerce and the President. CIT reiterated the specific deadlines in Section 232.

The longer the President does not comment on possible auto tariffs, the more difficult it will be for him to apply Section 232. However, it is still too early to give the all-clear. According to press reports, the Trump administration seems to be considering using an alternative trade instrument against the EU: Section 301 of the Trade Act of 1974, which allows the President to impose punitive tariffs on goods from other countries without the consent of Congress and for an indefinite period. This is possible when another country denies the U.S. rights arising from a previously concluded free trade agreement, or when it takes measures that are "unjustified, unreasonable or discriminatory". This instrument, used in particular in the trade dispute with China, would allow the U.S. to impose tariffs on a wide range of EU products. Contrary to the 232 tariffs, no resistance has yet formed in Congress on Section 301. If the President chose to use this, it would lead to a serious escalation in trade disputes between the United States and the EU.

German Car Companies Contribute to Jobs and Growth

U.S. imports of automobiles and their parts 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:

  • In 2018, the German automotive industry employed over 180,000 people in the United States: 38,000 in the plants themselves and 80,000 at suppliers.
  • For years, the number of imports of German automobiles has been declining as more and more German manufacturers produce in the United States: in 2018, more than 744,300 German automobiles were produced in the United States and only 470,500 imported from Germany. This means that production of German automobiles in the United States has almost quadrupled since 2009. The trend is towards local production. German exports of automobiles to the United States have declined in recent years. In 2009, more German vehicles were exported from Germany to the United States than were produced there. In 2018, however, significantly more German vehicles were produced in the United States than were imported from Germany.
  • 55 percent of the German automobiles produced in the United States in 2018 are exported. The two largest automotive exporters in the United States are German corporations. Germany is the third most important foreign market for U.S. vehicle exports. In 2018, 149,000 U.S.-produced vehicles were exported to Germany, including 43,000 vehicles from German manufacturers.
  • The United States is the primary destination for foreign direct investment by the German automotive industry (2017): German manufacturers and suppliers have also announced further investments in the United States for the next few years.

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 only slightly higher than in the United States: 2.7 percent versus 2.2 percent (2017 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. According to the Peterson Institute for International Economics (2018), tariffs on automobiles of 25 percent together with retaliatory measures could endanger 624,000 jobs in the United States. An analysis by the European Commission (2018) 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. U.S. exports valuing as much as 294 billion U.S. dollars could be hit by counter-tariffs of U.S. trading partners, which account for 18 percent of U.S. worldwide merchandise exports in 2018. Moreover, according to the Center for Automotive Research (CAR, 2019), U.S. consumers would also directly suffer the effects of import tariffs: In the worst case scenario, U.S. tariffs alone would increase the price of light vehicles manufactured in the United States by an average of 2,750 U.S. dollars, and the price of imported vehicles by as much as 3,700 U.S. dollars. The number of cars sold would fall by around 1.3 million.

Outlook

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