Escalating the Transatlantic Trade Conflict: Trump Threatens EU with Tariffs on Cars

© Fotolia/Tan Kian Khoon

‘America First!’ – U.S. President Trump believes that the global trading order is inherently unfair. After implementing tariffs on steel and aluminium in the name of national security, U.S. Secretary of Commerce Wilbur Ross initiated an investigation under Section 232 of the Trade Expansion Act of 1962 on automobiles. However, car imports do not endanger the national security of the United States. What’s more, tariffs will hurt U.S. competitiveness and will lead to major job and income losses.

Late May 2018, U.S. Secretary of Commerce Wilbur Ross initiated an investigation under Section 232 of the Trade Expansion Act of 1962. The investigation will determine whether imports of automobiles, including SUVs, vans and light trucks, as well as automotive parts threaten to impair the national security of the United States.

The investigation is yet another manifestation of the trade policy change in the United States. U.S. President Trump wants to place America first. He wants to strengthen industrial production and competitiveness. The large U.S. trade deficit is, in his eyes, a sign of unfair trade.

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, creating jobs and income. Therefore, the Federation of German Industries and the German Chamber of Commerce and Industry jointly submitted a report to the Department on Commerce at the end of June, 2018. BDI and DIHK call on the United States to preserve the rules-based multilateral trading system and refrain from automotive tariffs.

German Car Companies Contributing to Jobs and Growth

The 5,300 German-owned companies in the United States are an integral part of the local economy with a strong presence across all U.S. states. Germany is the fourth-largest foreign investor in the United States, accounting for more than ten percent of total foreign direct investment (FDI) ($373 billion by the end of 2016). The German automotive industry is one of the reasons for these strong FDI numbers, with the first Original Equipment Manufacturers (OEMs) investing in the United States dating back to the 1990s. The United States is by now the most important recipient country of FDI by the German automotive industry. A quarter of its total FDI stock is in the United States (32.9 billion U.S. Dollar).

With 214,000 units in 2009 and 804,200 units in 2017, German OEMs have quadrupled their production in the United States during the past decade. Of this total, 60 percent were exported from the United States to other countries (480,000 vehicles) – in fact, the two biggest U.S. vehicle exporters are German OEMs.

In 2009, the United States imported more vehicles from Germany than were produced by German OEMs in the United States. Today, the opposite is true: in 2017, German OEMs in the United States produced almost double the number of vehicles than were imported from Germany (804,200 compared to 493,600).

Considering the 674,000 employees across all U.S. states, German companies are the fourth-largest foreign employer in the United States. Thus, German companies account for almost ten percent of the total 6.8 million jobs created by foreign companies in the United States. The German automotive industry alone employs a total of 118,000 people in the United States. Moreover, all German OEMs and many suppliers carry out their own research and development in the United States. Germany is the largest foreign employer in research and development in the United States with 26,400 employees.

Market Access Is Not Unfair

Trump criticizes that market access for automobiles is not fair in U.S.-EU trade. Trump is right that the EU tariff on cars exceeds the respective tariff in the United States: The EU imposes a tariff of ten percent on 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. Other than that, tariff requirements on high-priced heavy trucks and automotive parts roughly balance each other out with similarly high levels.

Recent analysis shows that U.S. tariffs on industrial products are slightly lower on average. For example, EU tariffs on transport are on average around four percent, and in the United States three percent. 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 (figures refer to 2015) ). Overall, in bilateral trade, the tariff burden for most products is very similar.

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 Organisation (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, several laws on the federal and subfederal level restrict the access to procurement markets for foreign bidders.

Costs to the United States and the Global Economy

A predictable and stable business environment is essential for local production, research, and jobs. The current scenario of U.S. tariffs coupled with world-wide countermeasures is considered a significant threat to automotive companies – for their local production, research, and jobs. In the first instance, 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 13-14 billion U.S. Dollar per year. Aggravating the primary effects, the EU and other major economies are expected to implement rebalancing tariffs on imports from the United States, valuing as much as 294 billion U.S. Dollar – accounting for 19 percent of U.S. worldwide goods exports in 2017. Furthermore, imposing tariffs on car imports could raise prices of imported vehicles by up to 6,000 U.S. Dollar per car in the United States.