Why car wars would hurt everyone

Few brands are more associated with countries than cars. The precision engineering of Volkswagen, Mercedes and BMW is seen to reflect their German origins. Big and brash Cadillacs and Chevrolets seem to characterise America. The style and elegance of Citroen and Renault are so very French. The simplicity and reliability of Toyota’s and Mitsubishi’s reflect Japanese functionality.

Yet this is misleading. Cars are amongst the most global products we have. Almost all car brands are found in every country. And they are made everywhere: not just because the assembly plants are scattered around the world, but because thousands of components are used. The supply chains are enormous. The Volvo XC40 driving through New York might have been designed in the car’s Swedish headquarters, but the company is a Chinese subsidiary, it was assembled in Belgium, and used parts made by contractors in dozens of countries.

Most economists agree that a trade war fought on behalf of carmakers would hurt everyone, while doing little for the brands supposedly being protected. But Donald Trump has been threatening tariffs on European cars even before he became US President more than 18 months ago.

Trump appeared to pull back from his tariff threat after meeting European Commission President Jean-Claude Juncker at the White House on July 25. But his final decision will not be known until a trade inquiry is concluded in coming months.

Trump has celebrated the use of protectionist trade measures since the 1980s, when he railed against Japanese imports. His targets have changed, and before Juncker’s visit, he threatened 25 percent tariffs on cars, which would have triggered retaliatory measures.

The EU currently charges a 10 percent tariff on US cars, while the US charges only 2.5 percent on European cars. Trump says that is unfair, but he omits that the US has a 25 percent tariff on light trucks and SUVs.

Earlier this year, Trump slapped tariffs on nearly all US imports of steel and aluminium, including those from the EU. Amid escalating rhetoric, he described the EU as “a foe” in an interview and tweeted that “tariffs are the greatest!” He is currently thought to be planning a 25 percent tariff on $200 billion of imported Chinese goods.

These measures all have an effect. European manufacturers have bemoaned the steel and aluminium tariffs, pointing out that since they source 94% of automotive steel in Europe, the local steel industry is vital to their manufacturing. The EU has hit back with retaliatory tariffs on US exports, with Juncker memorably describing his tit-for-tat response by saying, “We can also do stupid.”

The tariffs are supported to support American carmakers, and yet the US industry has railed against them and stated the need for free and fair trade. They have warned of job losses as their supply chains grind to a halt and their markets close.

The EU, Japan, Mexico, Canada and South Korea will meet in Geneva later in August to discuss how to respond to the threatened trade war. They can muster solid arguments to show how the automotive industry thrives best in an environment without trade barriers, and how a trade war will hike vehicle costs, hurting sales and global industry jobs. Ultimately it will come down to whether Trump is persuaded to pull back from the brink.