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President Trump: Accept Germany’s Offer to Drop Auto Tariffs

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President Trump: Accept Germany’s Offer to Drop Auto Tariffs

June 24, 2018

Amidst tensions over the President’s refusal to carve out an exemption for the European Union from his steel and aluminum tariffs and the threat of retaliation, the latest episode in the trade saga brewing across the pond has taken a much softer tone, to much less public attention.

Richard Grenell, U.S. ambassador to Germany, has reportedly held meetings with German auto CEOs on a deal to drop mutual tariffs on car imports. The Wall Street Journal (WSJ) reported on Wednesday morning the talks may have produced a tangible proposal that Grenell will likely soon put to the President.

Given America’ $92 billion annual trade deficit with the EU and the large share of cars in that imbalance – European automakers sell $34.6 billion worth of cars more in the US than vice-versa, amounting to nearly 38 percent of our bilateral deficit –, anybody striving to steer the POTUS towards a yes on the plan deserves credit.

The loss in tariff revenue and tougher competition at home with foreign carmakers is likely to weigh heavier in the President’s mind than prospects of enhanced market access and deep cuts in US automakers’ tariff bills. Earlier attempts to challenge that view of trade as a zero-sum game have tended to meet the same aversion to making concessions and meeting in the middle with allies.

Duty-free trade in cars with the EU would yield enormous benefits for our auto industry and could even be touted as a victory for the American worker the President seeks to protect. The following is a plea for freer trade cloaked in protectionist rhetoric.

To be sure, removing all tariffs on auto imports would mean the loss of almost $1.12 billion in annual revenue. But the EU levies a much higher duty on our exported cars: 10% compared to 2.5%. Shattering such a high barrier would markedly improve our carmakers’ prospects of growing sales in countries with high demand but no major production powerhouses where we already run large surpluses – for instance, Romania ($18m worth of car exports in 2017) and the Czech Republic ($15.5m).

Nearly half (47 percent) of our trade deficit in cars is driven by Germany’s annual exports of $21 billion. Across the EU, US manufacturers face a costly mark-up in the form of Value-Added Taxes (VATs) ranging from 18 to 25 percent, an imbalance that went unaddressed by last year’s tax reform bill after a proposed border-adjustment tax provision was dropped. EU countries would be giving up a similar amount of uncollected duties.

Even the staunchest of trade nationalists can recognize the sizable job and investment gains from expanding EU carmakers’ access to our market. Their US plants directly employ upwards of 35,000 workers across 15 plants spanning the post-industrial Midwest (Ohio and Michigan) and the rapidly-growing Southern states (the Carolinas, Tennessee and Alabama).

The Association of German Auto Manufacturers (VDA) claims that accounting for indirect jobs throughout the supply chain puts the overall figure at 116,500. While that may well overstate its members’ real role in the U.S labor market, a simple aggregate of plant staff surely leaves out substantial knock-on effects on US car part makers, repair shops, dealerships and the market for used cars.

Crucially, plants assembling European cars provide the kind of secure, middle-skilled high-paying jobs in distressed communities that the President is so intent on delivering. At BMW’s biggest US plant in Spartanburg, South Carolina, employing just under 9,000 workers, production associates start out above the sector’s average hourly wage - $25 per hour compared $21.68 in 2017, per Bureau of Labor Statistics and Glassdoor data. With the cost of living in South Carolina far below the national average, BMW workers can do well.

The investment picture also offers hope. The last three years have bucked a long-haul trend of growing imports of German cars, with sales dropping 20 percent since 2015 after growing steadily for most of the last two decades. German cars’ share of U.S. sales has shifted away from direct sales through ports of entry to domestic production, and that rebalancing has been followed by profuse investments – a subset of their US auto plants has pledged nearly $15 billion in investments since 2011.

With the NAFTA car market generally seen by European manufacturers as a promise of steady earnings, removing tariffs can lure German giants into matching their declining exports with even higher plant openings and investments in the United States instead of Mexico. This is the type of “reciprocal, fair” trade the President wishes to secure.

VDA is also right to claim its members' role in lessening the effects of their US sales on our trade balance by making US plants the origin of large exports – 430,000 units annually to our NAFTA partners, Asia and even Europe. German carmakers’ share of the US car fleet (8 percent) is indeed way below their share of US exports of light vehicles (25%). Given the WTO’s rules of origin, the prospect of exports of US-made German cars alleviating some of our trade deficits in manufacturing should make a tariff-dropping deal even more attractive to US negotiators.

Another benefit lies in easing inter-firm synergies across the pond to the benefit of industry and consumers in both markets. Friday morning brought news in the WSJ that Ford Motor Co. and Volkswagen AG are exploring a joint-development partnership. A routine practice among leading carmakers, the cost-cutting and efficiency effects of these alliances can help boost parties’ prospects in high-cost, low-margin lines of business such as technologically-demanding new models and electric vehicles.

Daimler Trucks North America is a formidable success story, consistently reporting earnings higher than company-wide averages from its household name brands of cutting-edge electric trucks. Access to foreign capital and technology from its status as a wholly US-owned subsidiary of German giant Daimler allows it to compete with Tesla Semi’s and Nikola’s electric heavy vehicles.

The Europeans’ offer, if it comes through, is an opportunity the President should seize.

Jorge González-Gallarza is a policy associate at Economics21. Follow him on Twitter here.

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