With friends like these, who needs enemies?
The US has decided to restore the status of the EU mission in Washington, only months after removing it had caused friction earlier this year. Nevertheless, talks between both parties remain difficult and the threat of US tariffs on imported European cars still loom over the EU car industry.
US President Donald Trump has said repeatedly that he will instate tariffs on cars and car parts imported from the European Union if both parties are unable to reach a trade deal.
“We are negotiating with them. If we don’t make the deal, we will do the tariffs,” Trump told reporters.
Trump is currently reviewing a report from the US Department of Commerce on whether or not imported vehicles and parts constitute a threat to US national security.
“It Trump decides to follow through with these tariffs, it would be an abuse of presidential power as egregious as the bogus national emergency that he has declared on the US-Mexican border,” said Philippe Legrain in Foreign Policy magazine.
The EU has already offered to abolish its 10% tariff on US car imports, but that didn’t placate Trump, whose key objective is to reduce the US trade deficit with the EU. In the first three quarters of 2018, cars and car parts accounted for around $45 billion of that $168 billion deficit. Nevertheless, the US also had a $55 billion surplus in services.
In a recent report, the German IFO research institute said German car exports to the US could fall by almost 50% if the US were to impose permanent important duties of an additional 25%. The car exports of countries like Mexico, Japan, Korea and China would also be severely impacted.
Gabriel Felbermayr, director of the IFO institute, said: "The EU can develop a clever counterstrategy that would bring the effects of US tariffs on the economic performance of both sides to roughly zero. That would be tariffs on US products whose manufacturers would have to react with price reductions.”
Taxing foreign car parts would also damage car manufacturers based in the US, which could potentially lead to job losses and a drop in car exports.
More importantly, another move towards protectionism could further slow down economic growth globally. According to a recent Citibank report, the combination of 25% car tariffs and the EU’s likely retaliatory measures would cut global growth by 0.2 percentage points this year and 0.3 next year. Surprisingly, the US would be hardest hit.
Alienating his traditional European allies could also make it much harder for the US president to gain their support in talks with China.
Image: President Donald Trump and First Lady Melania Trump during a visit to Brussels in 2018