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Europe Pessimistic On Auto Trade Talks, But Misread Trump

Europe Pessimistic On Auto Trade Talks, But Misread Trump.

“You never know what will happen with President Trump but he will end up raising tariffs probably, and if he does that then of course we will see more or less a war on trade and that will be really harmful for the auto industry, both in Europe and in the U.S.”

President Donald Trump met European Commission President Jean-Claude Juncker to talk about auto tariffs and there wasn’t much hope around in Europe that an all-out trade war can be avoided.

That might be a misreading of President Trump’s intentions and the tactics he uses to negotiate deals to his liking.

When President Trump sees a problem that has been mouldering for years and cries out for reform, he opens negotiations with proposals that might seem extreme. His exasperation with Europe over the financing of the North Atlantic Treaty Organization (NATO) started off with his questioning of the whole defence treaty idea, but ended with agreement that European nations, most importantly Germany, would indeed up their contributions to previously agreed levels.

Trump’s action over North Korea, Iran, and China trade follow similar lines. Problems which had been left to fester for years were now in Trump’s sites and began to look changeable if not solvable.

You could say the problem with European auto tariffs is the same. The U.S. has for years complained about the unfair regime – a 2% tax if you sell European products in the U.S. – 10% if you sell U.S. products in Europe – and got nowhere. Meanwhile Germany built up a big trade surplus which equals massive profits.

Trump then suggested if he didn’t get fair tariffs he might raise all auto import taxes to 20 or 25%. Politicians then started to listen, as Europe in general and Germany in particular realized a hugely important part of their economy – auto manufacturing – was threatened.

Not following
But it seems Europeans haven’t been following the way Trump does policy, and fear his opening gambit closely relates to the outcome he seeks. That also makes the unlikely assumption that Trump, an international business operator before entering politics, is against free trade and is impervious to the problems to the U.S. economy if there was an all-out trade war.

There is reportedly an offer on the table from the Europeans for both sides to accept zero tariffs, but that hasn’t stopped pessimism that a trade war is on the cards.

Professor Stefan Bratzel of the Center of Automotive Management (CAM) in Bergisch Gladbach, Germany, fears the worst.

“You never know what will happen with President Trump but he will end up raising tariffs probably, and if he does that then of course we will see more or less a war on trade and that will be really harmful for the auto industry, both in Europe and in the U.S.,” Bratzel said.

At Commerce Department hearings in Washington late last week many speakers underlined the damage a 25% auto tariff would cause, and doubted the national security basis for Trump’s plans. The only dissenters so far have been the United Auto Workers union.

And European auto manufacturers are getting nervous.

The European Automobile Manufacturers’ Association, known by its French acronym ACEA, expressed its concern about the tariff issue, and its potential for escalation.

To avoid this scenario, the E.U. has made it clear that it is willing to put forward a number of options, to be discussed during the visit of the President of the European Commission, Jean-Claude Juncker, to the United States. ACEA hopes that there will be a constructive dialogue, and is open to any trade-positive, WTO-compliant options that are put on the table. Ultimately, any trade conflict would be negative for both automakers and consumers on both sides of the Atlantic,” ACEA said in a statement.

Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen, agrees higher tariffs are likely.

Zero tariffs
“Hopefully President Trump will calm down and they will find a solution with zero tariffs for European and U.S. cars. That would be great, but I don’t think Trump will do that,” Dudenhoeffer said.

Dudenhoeffer said if there was a higher tariff regime, that wouldn’t hurt sales of premium brands like Porsche, Ferraris and Rolls Royce much.

“I think the premium cars are in a strong position in competition compared to volume cars. Is a Porsche buyer spending $200,000 going to buy a (Chevrolet) Corvette? No I don’t think so. If tariffs are raised, that will being some burden on the European car industry, but the biggest part of the cost will be to the U.S. which is getting more isolated. This will cost the U.S. customer a lot of money and employment,” Dudenhoeffer said.

If auto tariffs are raised generally and not just to Europe, this would mean much higher prices in the U.S. on regular cars and SUVs, and parts, arriving from Mexico and Canada.

Professor Peter Wells of the Cardiff Business School said Trump is in a strong, short-term position, but long-term, the U.S. industry is threatened.

“I don’t think he is looking at the longer-term because this will damage the U.S. auto industry. He is already pulling away from climate change action – no other significant market is following that route. China is going headlong into electric while North America goes in the other direction. They will drive themselves up a blind alley, trying to bully allies into submission,” Wells said.

Wells was more optimistic for a superficial settlement though, saying there will be a compromise that will look good in the short term, but the long term consequences will be bad for the U.S. industry. He worried that the world economy might be jeopardized.

“Attacking in this haphazard fashion threatens to undermine the whole world trade regime that powered world growth for 40 years. There is significant long term risk other countries will try something similar and we’ll all be mired in trade disputes, investment will be held back and trade curbed,” Wells said.

Professor Karel Williams of the Manchester Business School said Trump does have a point about the injustice of the current system.

“From this point of view (a) the deficit on cars with Germany is a grievance because it represents U.S. jobs lost and (b) as consumers most of his blue collar supporters are more likely to drive F150 pick-ups than Mercedes. Trump has no reason to compromise without extracting large concessions or at least staging a psycho drama of theatre for his domestic constituency. Expect ructions,” Williams said.

 CAM’s Bratzel said if the tariff issue isn’t settled this could signal a big change in fundamental relationships in the West.

“A tariff war will be very harmful for Europe that’s for sure, especially for the Germans who are quite good at exporting cars. But this could also lead to a situation where Europeans maybe can more or less come together more closely, if it seems that old allies like the U.S. can’t be trusted anymore,” Bratzel said.

The E.U.’s Juncker is expected to propose either a bilateral free trade deal in all industrial products or a global free trade deal in autos. So the pressure is on the former Luxembourg prime minister to make a deal. That could be hard on this unelected, bureaucrat president of the European Commission, unused to the hurly burly of front-line negotiating.


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