Blog Post

Still on the road? Assessing Trump’s threat to European cars

Just how exposed is Europe’s automotive sector to a potential escalation in the EU-US trade war?

By: , and Date: March 13, 2018 Topic: Global Economics & Governance

The authors are grateful to Maria Demertzis, André Sapir and Guntram Wolff for the useful comments received during the preparation of this note.

After the signing of a decree on March 8 laying out his plan to impose new tariffs on steel (25%) and aluminium (10%), President Trump has further escalated the threat of a trade war with Europe, warning with a typical-style tweet that the US will slap a tax on European cars if the European Union retaliates against the steel and aluminium tariffs.

Two days later, speaking at a Make America Great Again rally in Pennsylvania, Trump further reinforced the warning: “They [the EU] say: ‘We want those tariffs taken off.’ I say: Good. Open up the barriers and get rid of your tariffs and if you don’t do that we’re going to tax Mercedes-Benz. We’re going to tax BMW.”

Given that the automotive sector is an essential component of both the EU’s manufacturing system (representing more than 10% of its production value) and its trade (equalling €125 billion in extra-EU exports in 2016), these threats have sparked concerns in Europe generally, and in Germany in particular.

The maximum impact of the tariff […] would imply a maximum reduction in European export revenue by €17 billion per year.

This note examines the current state of the EU-US trade in cars, to assess the potential implications of eventual US tariffs in the sector.

The US represents the first destination market for European exports of cars. This trade totalled €38 billion in 2016 (Figure 1).

Among European countries, the one most exposed to the US market by far is Germany, whose car exports to the US amounted to €22 billion in 2016 (Figure 2).

Zooming in on the company level, it is possible to show that all European car makers, with the exception of Fiat Chrysler, are highly exposed to potential US tariffs on cars.

Audi, Jaguar Land Rover and Porsche have no assembly factories in the US, and therefore all their cars sold in the country are imported. Volvo produces 15 models out of 16 outside the US, Volkswagen 19 out of 22, Mercedes-Benz 16 out of 20, BMW 19 out of 28.

In January 2017, then-President-elect Trump hinted at his intention to impose a tariff of 35% on cars imported to the US. Figure 4 shows the hypothetical impact on the price and demand of European exported cars to the US if such a tariff were implemented. The maximum impact of the tariff would correspond to a price increase of 35% of European car exports. Assuming a price elasticity of demand of -1.3, this would correspond to a maximum decrease in the US demand for European cars by 516,000. This would imply a maximum reduction in European export revenue by €17 billion per year. In reality, though, the tariff’s impact would likely be lower. This is because the US represents a large market for European car exports, which means that European suppliers would decrease their total production in response to the lower demand from the US. The lower demand could reduce the price of their exports to the US, thus partially mitigating the impact of the tariff. However, even if the tariff ultimately only increases the price of European car exports by, for instance, one third of the tariff, the reduction in European export revenues would still exceed €5 billion.

The effect of an additional, potential, US tariff on imported cars could therefore significantly affect the European car industry. Of course, it should be outlined that imposing this tariff would imply the opening of a full-fledged trade war by the US. The national security issue used by Trump to justify the steel and aluminium tariffs would indeed not be workable in the case of cars, openly pushing the matter out of the realm of international trade rules.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Upcoming Event

Sep
2
11:15

Towards a new global trade regime: reform of the WTO

Bruegel Annual Meetings, Day 2 - the World Trade Organisation has been going through trying times, a phenomenon amplified by the pandemic. Why are we headed towards a new global trade regime? And what lies ahead for the WTO?

Speakers: Ngozi Okonjo-Iweala and Guntram B. Wolff Topic: Global Economics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read article More on this topic
 

Blog Post

A world divided: global vaccine trade and production

COVID-19 has reinforced traditional vaccine production patterns, but the global vaccine trade has changed considerably.

By: Lionel Guetta-Jeanrenaud, Niclas Poitiers and Reinhilde Veugelers Topic: Global Economics & Governance Date: July 20, 2021
Read article More by this author
 

Blog Post

The European Union’s carbon border mechanism and the WTO

To avoid any backlash, the European Union should work with other World Trade Organisation members to define basic principles of carbon border adjustment mechanisms.

By: André Sapir Topic: Energy & Climate, Global Economics & Governance Date: July 19, 2021
Read about event More on this topic
 

Past Event

Past Event

Strengthening the weak links: future of supply chains

What new supply chains trends will we see in the post-pandemic era?

Speakers: Ebru Özdemir, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Date: July 7, 2021
Read article Download PDF More on this topic
 

Policy Contribution

Commercialisation contracts: European support for low-carbon technology deployment

To cut the cost of decarbonisation significantly, the best solution would be to provide investors with a predictable carbon price that corresponds to the envisaged decarbonisation pathway.

By: Ben McWilliams and Georg Zachmann Topic: Energy & Climate Date: July 1, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

Avoiding a requiem for the WTO

The WTO has been 'missing in action': how can we restore the organisation's role as a global forum for cooperation on trade?

By: The Sound of Economics Topic: Global Economics & Governance Date: June 16, 2021
Read article
 

Opinion

Relaunching transatlantic cooperation with a carbon border adjustment mechanism

The best way for the EU and the US to jointly introduce carbon border adjustment would be to form a ‘climate club’.

By: Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, Global Economics & Governance Date: June 11, 2021
Read article More by this author
 

Podcast

Podcast

A transatlantic climate alliance

When Joe Biden visits Europe for the first time as US president, he should begin forging a transatlantic green deal.

By: The Sound of Economics Topic: Energy & Climate, Global Economics & Governance Date: June 11, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

The Value of Money, Controversial Economic Cultures in Europe: Italy and Germany

A discussion of Italian and German macro-economic cultures and performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 10, 2021
Read article More on this topic More by this author
 

Blog Post

Inflation!? Germany, the euro area and the European Central Bank

There is concern in Germany about rising prices, but expectations and wage data show no sign of excess pressures; German inflation should exceed 2% to support euro-area rebalancing but is unlikely to do so on sustained basis.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 9, 2021
Read article Download PDF
 

External Publication

European Parliament

Digital European Economic Sovereignty? The Case of Semiconductors

Study prepared for the European Parliament's Committee on Foreign Affairs (AFET).

By: Niclas Poitiers, Pauline Weil and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Innovation & Competition Policy Date: May 28, 2021
Load more posts