Funny stuff amid headlines discussing the likelihood of President Trump postponing a 25% tariff on European autos. What the pundits are missing is how President Trump has positioned a myriad of trade dynamics that make EU action unavoidable. This is the fun stuff, so let’s enjoy the details.
The current headlines surround President Trump “postponing” a 25% tariff on EU automobiles as an outcome of the major EU manufacturers (mostly Germany) promising increased investment in their U.S. operations. By itself this would be considered a win for President Trump, but that’s not the whole picture, not even close.
What the more broad trade and manufacturing dynamic includes will explain what EU economists are only just now starting to realize. Yes, the major European auto-makers will put more investment into the United States (thereby lessening the EU industrial economy); however, the auto decision is not because they are presenting a magnanimous benefit of sorts, but rather it is a foregone conclusion; an unavoidable reality due to a previous trade agreement construct.
Within the USMCA agreement President Trump negotiated a win-win-win for Mexico, Canada and the U.S. through a requirement that 75 percent of North American auto content must originate from manufacturing within North America. Failure to reach that threshold means the auto company will be subject to a 25 percent tariff to bring the product to the U.S. market.
Example: Seeking to exploit the previous NAFTA loophole BMW recently opened a $2 billion assembly plant in Mexico. However, as soon as the USMCA was announced; and once they saw the loophole closure; BMW also had to announce they would open up a new engine and transmission manufacturing/production facility in the United States.
The USMCA deal meant BMW could not bring German transmissions and engines into Mexico for assembly. The origination requirements changed the dynamic of their production plan; and as a consequence their investment plan.
Keep in mind the steel and aluminum tariffs already exist. Most trade partners with the U.S. are operating under exemptions, waivers, provided by President Trump and his trade team. Those waivers can be withdrawn at any time.
The only time the Steel and Aluminum tariffs are gone permanently, is when the nation signs into an official trade agreement with the United States. [Keep this nugget in mind] All U.S. trade agreements also forbid the partner country from participating in transnational shipping of steel and aluminum.
Additionally, President Trump instructed USTR Lighthizer and Commerce Secretary Ross to use the leverage created within the USMCA (auto sector), in combination with the Steel and Aluminum tariffs, as pressure points -leverage- in all trade agreements with Korea, Japan, China and the EU. [Auto sector 232 tariffs]
Does it work?
Well, two examples: (1) South Korea opened up the KORUS deal to renegotiation specifically to avoid those tariffs (think Hyundai and Kia). The new KORUS deal positioned greater benefit to the US. (2) Japan opened up their market to U.S. agriculture exports in large part to avoid those tariffs (think Nissan, Toyota, Mazda etc.); and that became the framework for the recently signed U.S-Japan trade agreement.
So yes, it works.
That same leverage principle is at play with the EU. Germany must avoid U.S. auto tariffs at all costs. Additionally, Germany and the EU industrial companies, writ large, want to keep their waivers from Steel and Aluminum tariffs. However, Germany cannot avoid the tariff structure within the USMCA. President Trump has the EU over a barrel.
As an outcome of the USMCA, Germany was already going to have to manufacture content in the U.S. in order to avoid auto tariffs. Germany is not going to be able to bring German parts into the U.S. and assemble in U.S. made vehicles. They are going to have to produce more auto parts inside the U.S. The issue is a matter of timing.
As soon as the USMCA is ratified, Germany is going to have to make their U.S. investment. However, with the USMCA not yet ratified, President Trump has deployed the 25% auto tariff threat directly. This forces the EU to make their already unavoidable auto investment in U.S. manufacturing faster than they would like.
So there’s some nuggets of truth within the New York Times article:
The president has not yet announced a decision, and there is no guarantee that dangling new investments will stop him from imposing levies. Mr. Trump has repeatedly criticized Europe for flooding the American market with cars while limiting imports of United States vehicles.
[…] Some analysts say Mr. Trump and his advisers are more interested in the leverage the specter of auto tariffs creates than in actually imposing the levies. They have been willing to threaten tariffs to extract concessions in negotiations with Japan, South Korea and Europe.
Mr. Trump could decide to try to preserve his leverage by extending the deadline to make a decision. That would be frustrating for European officials, who say the trade war’s uncertainty has been dragging down economic growth. Germany, whose economy depends on car making, is on the brink of recession. (read more)