US car imports and exports - What do Trump's punitive tariffs mean?


One thing you can't blame Donald Trump for - that he doesn't keep his promises from the US election campaign. All those who had relied on moderation and a "natural grinding down process" in office have been proven wrong. On hardly any other point is this more evident than in Trump's trade policy. Barely a week has gone by without new headlines in the international trade dispute since the US President initiated the first punitive tariffs in February. Car imports and exports from Europe to the USA and vice versa are, so to speak, in the middle of the action.

The German car industry has a bad feeling about it, at least since Donald Trump declared in April during the visit of French President Macron, that he would continue his trade policy until no Mercedes could be seen on New York's Fifth Avenue. At the same time as Macron's visit, an inspection order was issued to the US Department of Commerce to check whether vehicle imports threatened US national security. If the results of the check were positive, the US president would have the power to impose punitive duties on cars almost single-handedly.

Customs policy and protectionism - not only by Donald Trump

Only a few days ago, Donald Trump repeated his threat of punitive duties on European cars. In one of his infamous Twitter messages, he waved a 20% penalty on car imports from the EU in response to the European customs sanctions on some US products, which in turn were in response to US punitive tariffs on steel and aluminium from Europe. This is what an escalation spiral looks like.

[Tweet from Donald Trump]

Based on the Tariffs and Trade Barriers long placed on the U.S. and it's great companies and workers by the European Union, if these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20% tariff on all of their cars coming into the U.S. Build them here!

- Donald J. Trump (@realDonaldTrump) June 22, 2018]

Should the punitive tariffs become reality - whether 20 percent or 25 percent, as already been read - this would be a severe blow to the German automotive industry. Last year, Germany exported vehicles worth 22 billion euros to the USA. A total of 1.35 million vehicles from German production were sold in the United States in 2017. However, the majority of these were produced in their own factories in the USA - where punitive tariffs would probably not apply. But around 493,000 vehicles came across the Atlantic to the United States, and some manufacturers such as Porsche or Audi are even 100 percent dependent on this route as they have no US production facilities. Penalty duties would make car imports significantly more expensive and have a negative impact on sales - an effect Trump wanted.

Despite all the criticism of the US President's approach and justified doubts as to whether protectionism can even be effective - customs policy is by no means an invention of Donald Trump. The EU has always been a master in controlling trade flows via customs duties. There are also remarkable "inconsistencies" - especially when it comes to car trade with the United States. For passenger cars, the EU levies an import duty of 10 percent on US car imports, while in the opposite direction, the duty is currently only 2.5 percent. The "customs balance" is more balanced for many pick-ups and light trucks. Here, the EU demands 22 percent for US imports of certain pick-ups, while the US demands 25 percent for vehicle imports from Europe.

Incidentally, the 25 percent rule has a history. In 1963, the then EEC had imposed punitive tariffs on chicken meat imports from the USA. The Americans retaliated with higher customs duties - including on flatbed trucks and light trucks from Europe. The import duty here was raised from 8.5 percent to 25 percent. This hit the VW Bulli, which was very popular in the USA at the time, particularly hard. The dispute cost Volkswagen an estimated 50 million D-Marks. The customs tariff still applies. The "chicken war" could even be considered a blueprint for new US punitive duties on vehicles. It is probably no coincidence that a 25 percent rate is again being discussed. Trump has the argument on his side in the case of car tariffs, that the EU has so far burdened US car imports more than vice versa.

TTIP would have been a chance

But it is not only customs duties that hinder free car trade across the Atlantic. US car imports to Germany are subject to an additional 19 percent import turnover tax, because the tax is also levied on the customs duty. But these are by no means the only import costs. Not to forget, that these are not inconsiderable costs for technical conversion, such as tests, expert opinions, proof, permits, etc. for the operation of US vehicles on German roads, and can easily add up to around several thousand Euros. It remains to be seen whether the extensive regulations for conversion, operation and approval are exclusively factually justified or whether the intention behind them was also not to create non-tariff trade barriers. One thing is certain though: US car imports to Europe already present hurdles that not need be necessary.

The Transatlantic Trade and Investment Partnership (TTIP) would have offered an opportunity to remove such obstacles. With the establishment of a free trade area between the US and the EU, tariff and non-tariff trade barriers on both sides would have been removed in the long term, and would have opened up completely new prospects for car imports from the US. The history of TTIP is well known. The negotiations were launched in 2013, and by October 2016, no decisive breakthrough to an agreement had been achieved, while at the same time, resistance to TTIP was spreading in many EU countries. With the election of Donald Trump as the new US President, further negotiations became obsolete. Since then, TTIP has officially been on ice. Many even believe that the agreement is dead for good. Today, some would be grateful for such free trade agreements.

Soon EU punitive duties on US car imports?

How can things go on now? If Donald Trump makes good on his threat and actually imposes punitive tariffs on car imports from Europe, the EU is likely to respond with countermeasures again. Then car imports from the USA could also be burdened with higher duties. The acquisition costs for popular models such as the Chevrolet Corvette, Camaro, Dodge Charger or Ford Mustang could then rise noticeably - by ten percent or more, depending on the penalty duty chosen. Real US car fans will certainly not be frightened by this either, but the penalty duties would be painful.

But, this would not mean more than a pinprick for US foreign trade. Last year in Germany, just over 19,000 imported vehicles from the USA were registered. Vehicles from US production have a negligible market share of 0.6 percent in this country. This contrasts with the almost 500,000 cars from German production, which are heading in the opposite direction. This is where the German trade surplus with the United States is particularly noticeable.

It remains to be seen whether there will actually be a further escalation. It is difficult to assess the actions of the US president - as well as the European reactions to them. In this respect, much is currently speculation. It would be wrong, however, to see Trump's announcements and threats exclusively as "momentary inspirations". There is already a deliberate policy behind them. The fact that Trump is determined and has no consideration for others, should have become clear since the last G7 summit.

Rising dollar makes US car imports even more expensive

In addition to the discussion about punitive tariffs, the dollar has gained significantly in recent months, while the euro is weakening. Compared to the beginning of the year, it has lost 2.7 percent against the dollar, and even 6.6 percent against the euro from its high in February, when the euro was just over 1.25 euros, and as a result, US car imports have become more expensive. The strength of the dollar is primarily due to the flourishing US economy and rising interest rates in the United States. In Europe, on the other hand, interest rates remain at zero and uncertainty is growing. Against this background, the euro could become even weaker. Therefore, now would be a good opportunity for US car imports, before the dollar becomes even stronger and punitive tariffs are possibly added on top. The issue of free trade between Europe and the USA will probably only come up again in the post-trump era.