EU threatened with 20% car import tariffs

US President Donald Trump has threatened to slam huge tariffs on imported cars from the European Union (EU), a massive threat in the escalating trade conflict between the allies. The move would be a huge escalation of Trump's ongoing trade conflict with the EU.

Trump already hit Europe with steel and aluminum tariffs, angering EU leaders and triggering retaliation.

Background

The United States has a history of tariffs dating back to the 1700s. In 2002, tariffs imposed by Bush were thought to have cost the country 200,000 manufacturing jobs. They were lifted a mere 21 months after their imposition. In 2009, Obama imposed a 35% tariff on Chinese tires after lobbying from American companies. This reportedly saved over 1000 jobs. However, some studies have shown that the tariff cost the country $2 billion in total, including a retaliatory ban on American chicken parts by China.

President Trump is known to have a protectionist outlook on trade. On the campaign trail, he promised tariffs against countries such as China, whom he blamed for loss of jobs. He also criticized “bad” trade deals and “unfair trade practices” against America. He said that other countries were "dumping vast amounts of steel all over the United States, which essentially is killing our steelworkers and steel companies”.

Since taking office, Trump has withdrawn from the Trans-Pacific Partnership, and initiated the renegotiation of the North Atlantic Free Trade Agreement. In recent months, experts have begun sounding the alarm about an impending trade war between US and China, the two largest economies in the world. These fears solidified in March, when Trump announced global import tariffs of 25% on steel and 10% on aluminum. The President cited “national security” in order to circumvent WTO commitments. Since then, tensions have escalated. The US has imposed tariffs worth over $150 billion; Beijing responded with $50 billion worth of tariffs.

The US is highly reliant on steel imports. American steel production has fallen from 112m tons to 86.5m tons since 2000. Employment provided by the industry has fallen from 135,000 jobs to 83,600 jobs. Canada is the United States’ biggest steel exporter at 16%, followed by Brazil, South Korea, and Mexico. Japan is 7th and India is 10th.

Analysis

President Trump has threatened to widen the mounting trade dispute between the US and the EU by imposing tariffs on European cars, after the EU threatened of retaliatory levies on American products including bourbon whiskey, Levi’s jeans, and Harley-Davidson motorbikes.

This move raised the chances of sparking a global trade war. The US president tweeted in response to the EU tariffs which came into effect: “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!”

Trump’s new threat comes after the EU imposed tariffs on a range of US consumer goods in response to steel and aluminum tariffs from the White House, which could increase the cost of consumer goods by £200m per year in the UK alone. The US is the biggest market for EU car exports, accounting for 25% of the €48bn (£42bn) total in 2016, when Germany accounted for just over half of all EU car exports and the UK had the second biggest share, at 13%.

The tariffs imposed by the EU on US consumer goods – designed to target producers in Republican states where Trump draws much of his support – were introduced on US goods worth up to €2.8bn (£2.5bn). The EU trade commissioner, Cecilia Malmström, said this week the 28-nation bloc was left with no other choice but to impose tariffs of its own after the “unilateral and unjustified decision of the US”.

The EU drew up the list of products in March when Trump first floated the idea of 25% tariffs on steel and 10% on aluminum. Customs agents across the EU internal market of 500 million people will impose the duty, hiking prices on US-made products in supermarkets and across factory floors.

Assessment

Our assessment is that these tariffs would have damaging consequences for jobs and economic growth on both sides of the Atlantic. Higher international import tariffs are likely to drive up costs for consumers, offsetting benefits of protecting domestic industries for the country imposing them. However, we feel that the consequences for the European economy could be contained in the short term. The affected imports only account for about 1% of all goods coming into the EU from the US, although tariffs on cars would have a greater negative impact. The EU will impose an additional €3.6bn of tariffs if the dispute is still active in three years’ time.