The risks of an EU-US trade war

For now, Europe’s automotive industry can breathe a sigh of relief. US President Donald Trump announced in May that he would not be slapping tariffs on imports of European cars and car parts, pending efforts on both sides of the Atlantic to resolve their wider trade tensions. But the threat is clearly there: if the President’s mood changes, the European automotive industry could be shut out of a key export market, and the consequences could be devastating.

The European Union is already preparing for the worst. EU Trade Ministers vowed in May to fight any US curb on EU cars and car parts. They dismissed Mr Trump’s suggestion of quotas on European exports to the US, and emphatically rejected his claim that such shipments pose a threat to national security.

European car exports face tariffs of 2.5% to access the US market, while the EU imposes a 10% duty to American exporters. Mr Trump has threatened in the past to impose tariffs of 25% on vehicles imports, which would add an average €10,000 to the sticker price of EU cars.

Tariffs would be particularly difficult for Germany. Almost 8% of German economic output – and by some accounts a quarter of industrial production – depends on the automaking. A 25% tariff would slash car exports from Germany by 7.7% in about five years, according to the German IFO institute.

Yet Germany also builds many cars in the US. As German Chancellor Angela Merkel points out, “the biggest BMW factory is in South Carolina, not in Bavaria.” Carmakers like Volkswagen, BMW and Mercedes have told Mr Trump that they employed 8,000 new American workers in 2018, and plan to hire more, if the market stays open.

Indeed, EU-owned auto makers built more than 3 million vehicles in the United States last year, accounting for 27% of total US production. Many of these vehicles are exported to third countries again, including the EU. EU car manufacturers directly and indirectly employ nearly half a million Americans.

This is not just an issue about commercial advantage. Car and truck makers directly and indirectly employing some 13 million people, or 6.1% of the EU’s working population. The sector is also a key driver of innovation, investing €54 billion annually in research.

Beyond that, the industry is intricately tied to the general transport sector. We count on cars, trucks and buses more than any other transport mode. We depend heavily on vehicles to get us to work, to school, on holiday – and to deliver our food and other essentials to shops. If the industry suffers, so too does the economy.

A trade war would hurt margins. This could be critical now that car and truck makers are required by law to develop cleaner and safer vehicles. The overall industry would probably be robust enough to survive a trade war, but some individual companies might not.

If the EU wants to stay a leader in car making, and to blaze a trail in zero-emission vehicles, it needs to look after its manufacturers. A trade war could put them at risk, endangering the EU’s transport and environmental strategy.