Donald Trump: Rejects EU offer of zero car tariffs

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Yesterday, the European Trade Commissioner, Cecilia Malmstrom, told the European Parliament that the European Union would be willing to eliminate car tariffs if the United States did the same. Only hours later President Trump turned down the potential offer.

The European Union is almost as bad as China, just smaller.
— Donald Trump (Source: Bloomberg)

Tariffs on cars have been one of the main points of contention between the United States and the European Union. As it stands, the U.S. differentiates between light trucks/pickups and light vehicles. The former fall under a 25 percent tariff, whereas lighter vehicles are taxed at 2.5 percent. The European Union currently taxes all passenger vehicles imported from the United States at 10 percent. The difference between the European taxation band and the 2.5 percent tax levied on lighter cars by the United States has given rise to the fury of President Trump, aimed at the European family. 

Is Europe "robbing" the United States? 

Although Trump's rhetoric (and constant flow of relevant tweets), along with the carefully chosen figures presented, may have you believe the United States is a victim in this bilateral agreement, this is not the whole truth

According to MarketWatch, European carmakers sold cars totalling approximately $43 billion to Americans last year - this is not but a small percentage of all the vehicles sold in the U.S though. Out of 17.3 million cars and light trucks sold in the United States last year, only a mere 7% came from Europe. It should also be noted, that this figure does not include cars by European automakers made in the United States. As previously noted, SUV vehicles are taxed as light trucks, thus having a 25 percent custom duty levied on them upon import. As a response to this, many European carmakers have established factories within the NAFTA zone, in order to avoid the onerous taxation of their SUVs. Production of the latest BMW X3, for example, moved from Austria to BMW's plant in South Carolina. Another interesting fact missing from the polemic on the European Union is the fact that approximately 65% of the vehicles sold in the United States are SUVs (which are taxed at a higher 25 percent) - sedans account for the rest. Considering that the President's goal was to force carmakers to "Build them here", it is rather surprising to see him fighting to change the status quo. 

Furthermore, as Christine McDaniel, senior research fellow at George Mason University’s Mercatus Centre told MarketWatch, it is estimated that only 15% of the vehicles shipped to the EU last year were subject to the tariff: the rest fall under an exemption that allows tax-free importation due to their parts being produced in the European Union. 

Which side would a car tariff-free zone benefit? 

Cecilia Malmstrom, European Trade Commissioner

Cecilia Malmstrom, European Trade Commissioner

At present, considering Trump's tariff war on China, it seems likely that, upon securing a US/EU zero-tariff agreement, many European carmakers would have an incentive to relocate their manufacturing to the European space. Although there is no data on the efficiency of such move, the benefits are obvious. European carmakers would retain the tax-free benefits of having plants in the U.S. (without actually having them here), but they would additionally secure tax-free importation of vehicles currently made in the US (as their production would move to Europe).

American carmakers would probably face even fiercer competition in their home turf, without necessarily enjoying an increase in their popularity in the European Union. As President Trump rightly pointed out, (European) "consumer habits are to buy their cars, not to buy our cars". Indeed, the vast majority of the cars sold in the European Union are by European and Asian carmakers. Finally, given the potential escalation of the trade war between the United States and China (President Trump just delivered another promise for $200b China tariffs), a US/EU zero-tariff zone would give Europe (whose trade relationship with China seems more stable, at least for the moment) the upper hand in attracting car manufacturers. 

The fact that virtually all German automakers back a zero-tariff agreement should be telling. It is probably wise for President Trump to turn down a zero-tariff agreement with Europe - but is there any other measure that could reasonably be accepted by the European family which would help American carmakers as much as the President suggests it would? Probably not. 

Photo Credit: Gage Skidmore / Boberger