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May 25, 2018

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No more BMWs on 5th Avenue

It is generally advisable not to make any forecasts that concern Donald Trump. But when it comes to German cars he has been only too consistent ever since his Playboy interview in 1990 when he promised

"I’d throw a tax on every Mercedes-Benz rolling into this country"

Now he has the opportunity. Trump yesterday started a process that could could end with the imposition of a 25% tariff on imported cars by this time next year. The US Department of Commerce has up to 270 days to investigate the matter, and then Trump has 90 days to make a decision on the basis of the Department's report. Congress is not involved.

We have the sense that this is not the last time we will be writing about the 1962 Trade Act, under which Trump has been launching this action. It includes the catch-all national security override which Trump has also used to justify the steel and aluminium tariffs. There is no need even to discuss the merit of this argument. But we don’t think that it is possible, legally, to obtain a judicial override of a President’s invocation of national security. 

The Department of Commerce already said it had evidence to suggest that foreign car imports had eroded the domestic industry. The official issue under investigation will be whether this had weakened national security.

No country in the eurozone would be more affected than Germany. German car makers exported half a million cars last year at a total value of €20bn. FAZ runs an estimate by Gabriel Felbermayr, of the Ifo Institute, who puts the total damage to the German economy at €5bn. That number strikes us as too low.  It does not sufficiently take into account all of the total network effects: expectations of further trade tariffs, lower investments in supply chains given those expectations, and financial effects such as lower stock prices. 

If the US were to impose tariffs on cars, the EU would almost certainly retaliate. In seven days, Trump will decide whether to end the EU's exemption from import tariffs on steel and aluminium. The expectation in Brussels is that the exemption will be cancelled. The EU will then impose retaliatory tariffs on a selected range of US products. 

FAZ concludes that the result of the Department of Commerce's investigation should be a foregone conclusion despite the promise of a fair and transparent procedure. They took note of Trump tweeting that there will soon be very good news for US automobile workers. 

The decision will also test the solidarity of the EU, since Germany is going to be the country most affected by this. France and Spain export no cars to the US. Fiat owns Chrysler, but produces its vehicles for the US market in the US itself. 

The odd thing about these tariffs is that US manufacturers did not ask for them, FAZ claims. The decision will affect all car imports, not only from the EU. It has triggered angry reactions also from South Korea and Japan, both of which do not levy any tariffs on US cars. We agree with the assessment of Hiroshige Seko, Japan’s industry ministry, who said Trump's threat would causes lasting damage to the global trading system. Japan’s car exports to the US were €40bn last year, around one-third of Japan’s total exports to the US. 

The FT quotes some experts in the US as expressing hope that these tariffs would never be introduced because the US consumer would revolt, or the Republican Party would. It sounds to us like the over-confident forecasts in 2016 by liberal US commentators who predicted Trump would not become the Republican candidate, and then that he would never be elected.

The trouble in this particular case is that the EU, and Germany specifically, will find it hard to engage with Trump in a process of deal-making. Germany is totally over-reliant on the good functioning of the global trading system. Trump wants Germany to cancel the Nordstream 2 gas pipeline, switch from US to Russian gas, and raise military spending. We see no chance of a deal here.

Our other stories

We also have stories of Merkel’s bilateral with Xi Jinping; of Macron’s bilateral with Putin; of Scholz’ dismissal of ESBies; on a more cautious tone in the ECB’s minutes; on Greek banks' reluctance to end capital controls; on the UK formally tying Galileo to future security and defence co-operation; and on the German fear of miniBoTs.

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