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Next disaster for Europe's car industry? Trump's 25% tariff threat

Volkswagen has warned about the damaging impact of US car tariffs. Photo: Sean Gallup/Getty Images
Volkswagen has warned about the damaging impact of US car tariffs. Photo: Sean Gallup/Getty Images

The European auto industry is bracing for a head-on collision with the Trump administration within the next few days.

The US Commerce Department is expected to issue a report by Sunday outlining that car imports into the US pose a national security threat, and then suggest ways for US president Donald Trump to restrict these imports through high tariffs and quotas. From there, Trump has 90 days to make a decision.

Trump has said in the past he would consider a 25% tariff on car imports. That’s the same figure levied on steel imports, which were also deemed a national security threat last year.

“The Commerce Department recommendation will probably follow how the steel recommendation came out,” said Robert Martin, a leading US economist at UBS who previously advised the Bush administration on trade policy. A tariff of 25% is “their go-to number,” he told Yahoo Finance UK.

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The US imports nearly $200bn (£156bn) worth of new cars each year, with the vast majority coming from Mexico, Canada, Japan and the European Union.

Within Europe, Germany is the top exporter to the US and has the most to lose, followed by the UK and Italy, according to Justin Cox, a director at LMC Automotive.

Germany alone exports over $20bn worth of cars to the US each year, or about 15% of its total exports to the country.

A true national security threat?

Of course, no one truly believes that car imports are a threat to US security, and they didn’t think steel was a threat either. Experts say Trump is using this as a negotiation tactic to gain more leverage in trade talks with partners, including the EU and Japan. He has called out Europe in the past for its 10% car import tariffs. Trump also thinks new US tariffs could boost the American car industry and manufacturing jobs by keeping competitors out.

“This is the favourite tool of the Trump administration … it’s a pretty heavy-handed approach,” said Peter Nagle, a senior researcher focusing on automotive economics at IHS Markit.

UBS researchers expect Trump will ultimately decide to levy 25% tariffs on foreign cars, but avoid putting tariffs on imported car parts. The researchers also predict that all countries except the EU could ultimately get tariff exemptions.

Europe’s automotive sector is already struggling with a range of deeply damaging trends: Brexit uncertainty, a crash in demand for diesel vehicles, slowing sales in China, plus new EU emissions testing standards that created massive production problems at the end of 2018.

These trends paved the way for Jaguar Land Rover and Ford (F) to recently announce thousands of job cuts in the UK and Europe.

Reaction from Europe

The European Automobile Manufacturers’ Association said it opposed the introduction of any new US tariffs.

“Our industry thrives best in an environment without trade barriers. Any trade-restrictive measures in the auto sector will have a serious negative impact on the EU, the US and global economies,” a spokesperson said in a statement.

The industry association noted that European car companies have US-based factories that support hundreds of thousands of American workers, building cars that are exported globally. European-owned car factories in the US account for 26% of the country’s auto production.

Volkswagen Group (VOW3.DE) – which has a large factory in Tennessee that produces the Volkswagen Passat and Volkswagen Atlas SUV – also warned about the damaging impact of new tariffs.

“The Volkswagen Group has made significant long-term investments in the United States that would be impaired by restrictive changes to trade. We believe that increased tariffs will make the auto industry in the United States less competitive, threaten job growth and result in higher prices for consumers,” said Volkswagen.

British firm Jaguar Land Rover may have the most to lose: Every single one of the 123,000 cars it sold in the US last year was manufactured entirely in Europe.

“The US is a key market for Jaguar Land Rover. Fair trade, without additional tariffs, is essential for us to remain competitive as a business,” the company said in a written statement.


Which cars will get crushed?

The impact of a 25% tariff on car imports would be felt unevenly throughout the industry.

High-end European-made car sales from McLaren, Aston Martin (AML.L), Ferrari (RACE) and Lamborghini may not be too affected. Rich American customers would likely follow through with purchases regardless of a tariff-induced price hike, noted Nagle at IHS Markit.

But other “mainstream” cars would be more affected, warned Cox of LMC Automotive.

“European-built ‘mainstream’ products, like the Italian-built Jeep Renegade or Honda’s (HMC) UK-built Civic are at perhaps the greatest risk from significant cuts in volume due to an increase in US import tariffs,” he told Yahoo Finance UK.

At this part of the market, thin margins and intense competition may limit the scope of a manufacturer to absorb tariff costs or, indeed, pass them onto the consumer,” he said.

Jeep, owned by Fiat Chrysler Automobiles (FCA.MI), exported about 100,000 Jeep Renegades from Italy to the US last year.

A potential workaround strategy

Martin from UBS said many car companies could potentially find creative strategies to avoid the 25% tariffs on finished cars. For example, Volkswagen could ship nearly-finished cars to the US, add on final touches like wheels at its American factory, and then sell the vehicles without incurring tariff costs.

“Trade lawyers will have to make that differentiation” on what is technically considered a finished car, he said. “It’s a very subjective line.”