In May 2018, Donald Trump commissioned the US Department of Commerce to investigate whether car imports constitute a threat to US national security. It would seem so according to figures, but that is no more than an excuse to impose tariffs, writes Dr Clemens Fuest.
Dr Clemens Fuest is the president of the Ifo Institute, a Munich-based think tank, and director of the Center for Economic Studies at the University of Munich.
In its investigation, the US Department of Commerce points out that the share of cars imported into the US market has risen from 32% to 48% over the last 20 years. Between 1990 and 2017, the number of jobs in the US automotive industry fell by 22%.
US firms accounted for only 20% of global research and development expenditure in the automotive sector, and for just 7% of car production. It therefore seems very likely that the US government will argue that car imports pose a threat to national security. But it is no excuse to impose tariffs.
Who would be affected by the import tariffs? Donald Trump first called for higher taxes on all the Mercedes-Benz and BMWs sold in the US way back in the 1990s. So car tariffs primarily seem to be directed against Germany.
But in fact, other countries will be hit harder by the tariffs for two reasons: firstly, the majority of car imports into the US do not come from Germany, but from Mexico, Canada and Japan. In 2017, Mexico cars worth a total of $46 billion were imported by the US, followed by Canada with $42 billion and Japan with $40 billion. These three countries together account for two-thirds of car exports to the US.
They are followed by Germany, trailing a long way behind in fourth position, exporting a total of $20 billion worth of cars to the US. Of course, there may always be tariff exemptions for individual countries. Germany’s surprisingly low share of imports is partly due to the fact that Volkswagen, BMW and Daimler also produce a share of their cars sold in the US domestically.
Secondly, Audi, BMW and Mercedes-Benz buyers can be expected to react less sensitively to price increases than consumers in the mass market. This would suggest that German manufacturers could pass on a larger share of punitive tariffs to their buyers than producers from other countries.
US punitive tariffs on cars would nevertheless be a burden on the German economy. Calculations by ifo researcher Gabriel Felbermayr show that a 25% US punitive tariff on cars would reduce Germany’s GDP by €5 billion.
In the debate over US punitive tariffs, it is often argued that Donald Trump’s goal is to divide Europe. Germany is by far the biggest car exporter to the US among all EU states. The next largest European car exporter is Britain, which is leaving the EU and does not count, followed by Italy with an export volume of almost $5 billion.
Many expect that Germany’s EU partners may refuse to take retaliatory measures. Only Germany would suffer from US auto tariffs, while everyone would have to bear the costs of retaliatory measures.
This assumption overlooks the fact that German car exports include a large volume of intermediate inputs provided by car component suppliers that are largely based in Italy, France, Austria and the Visegrad countries. In Hungary, for example, losses from car tariffs measured as a percentage of Hungary’s GDP would be even higher than in Germany.
What is the right response to the US threats of car tariffs? German car manufacturers have now suggested getting rid of car tariffs altogether in transatlantic trade, instead of introducing new tariffs. This would be desirable in principle, but given the trade imbalance, it is unlikely that the US would agree to a reduction in tariffs that was only limited to cars.
Any such agreement would also violate GATT rules. The most-favoured-nation-clause would demand that all countries should benefit from the reduction in tariffs. Article 24 of the GATT agreement only allows for divergences from this rule as part of free trade agreements that cover “the majority of trade” between two countries, and not just cars.
If the US does actually decide to levy punitive tariffs on cars, it is important that the EU shows unity. This is not self-evident, despite cross-border links in the automotive industry.
At the last G7 summit, Italy’s government, for example, departed from the stance adopted by the other EU countries in discussing the EU’s relations with Russia. The EU should take retaliatory measures and apply equally high retaliatory tariffs on US exports to Europe. It is particularly important to avoid giving the impression in US domestic political debates that Trump’s protectionism has no cost for the US.
Another aspect is important: more cars from Japan and other countries can be expected to arrive in European markets. The EU should not react with tit-for-tat protectionist measures, as this would merely lead to an escalation in the trade war.
If the US wishes to isolate itself from world trade, then we cannot stop it from doing so. But we should not allow protectionism to spread any further.