‘American Cars First’ – Uncertainty about Car Tariffs Persists

© Fotolia/Tan Kian Khoon

After implementing tariffs on steel and aluminum in the name of national security, U.S. Secretary of Commerce Wilbur Ross initiated an investigation on automobiles in May 2018. Although U.S. import tariffs on EU cars and car parts seem to have been avoided for the time being after EU Commission President Juncker and President Trump reached an agreement late July 2018, Trump’s repeated tariff threats severely burden the transatlantic relationship.

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.

At the end of July 2018, U.S. President Donald Trump and European Commission President Jean-Claude Juncker agreed on the reduction of transatlantic trade barriers. As long as negotiations are being conducted, tariffs were to be put aside. The threat of 232 auto tariffs seemed to have been averted only temporarily, however. After the U.S. negotiating objectives for a trade agreement were published by the USTR in January 2019 and after the EU negotiating mandates were approved mid-April 2019, talks on the mutual recognition of conformity assessment commenced in early May 2019. However, President Trump continues threatening tariffs.

The 232-report on automobiles and their parts was submitted to the U.S. President mid-February 2019. One day before the end of the deadline, mid-May 2019, the White House issued a proclamation from the U.S. President announcing a 180-day delay in the decision to impose import restrictions in the automotive sector. The proclamation begins with a summary of the unpublished DOC report. According to the proclamation, the 232 report concludes that: a) investment in research and development (R & D) by U.S.-owned automakers was critical to national security; b) the decline in market share of U.S.-owned carmakers threatened the necessary level of R & D investment; c) the decline in market share of U.S.-owned car companies was due to imports and because protected foreign markets such as the European Union and Japan made exports difficult. Based on the report, U.S. Secretary of Commerce Wilbur Ross recommended that measures be taken to adjust imports so that they no longer pose a threat to national security. Agreeing with the report’s findings, Trump instructed the U.S. Trade Representative, in consultation with other members of the Administration, to enter into negotiations with the EU, Japan and other countries to avert the threat to national security. The USTR is further to inform the President of the outcome of these negotiations within 180 days. The Secretary of Commerce is to monitor imports in the automotive sector and to keep the President informed about the possible need for further action.

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. 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.

  • There is a trend towards on-the-ground production. German exports of automobiles to the United States have been declining in the last years. In 2009, more cars were exported to the United States than were locally manufactured. In 2018, however, almost twice as many German cars have been manufactured in the United States than have been imported from Germany (744,300 German cars were produced in the United States; merely 470,500 cars were imported from Germany).
  • In 2018, 55 percent of U.S.-made German cars were exported. Two of the biggest U.S. car exporters are German companies. Germany ranks third as an import market for U.S. cars.
  • 149,000 cars made in the United States were exported to Germany in 2018, among them 43,000 automobiles of German carmakers (predominantly premium vehicles by Mercedes and BMW).
  • German car producers employed over 118.000 workers in the United States in 2018 (38.000 in the manufacturing plants and 80.000 in the supply chain).
  • The United States is the premier destination for foreign direct investment of the German car industry (roughly a quarter of German automobile foreign direct investment at the end of 2017, worth 30.1 billion U.S. dollars).
  • 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 (2016 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 tariffs on automobiles of 25 percent together with retaliatory measures could endanger 624.000 jobs in the United States. 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. 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.

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.