Trump is mad at the EU because they have a tariff of 10% on US cars, while the US only charges 2.5% for European — which really translates to German — cars. EU sells us $40 billion worth of cars, while they buy only $7 billion of our cars. Very unfair! Trump is threatening a 25% tariff on European cars unless they level the playing field. Then Trump hopes that we can sell a lot of cars to Europe! However this line of thinking is wrong in the diagnosis and prescription. Basically, we don’t have enough cars to sell and there aren’t European buyers clamoring for our cars!
First of all, Trump administration officials such as Peter Navarro hide the fact that while the US has low tariffs on passenger cars, it imposes a 25% tariff on all imports of SUV’s and pickup trucks (it’s called the “chicken tax” and has been that way for decades). So, if EU agrees to eliminate tariffs on US cars, it will likely demand that Trump get rid of the protectionist tariffs for SUV/trucks as well. US manufacturers won’t be happy with that, since that will increase competition and hurt profits. Hence it’s no surprise that Automobile Associations and 270 business groups are asking Congress to step in and take away the tariff authority from Trump.
Second, Trump’s first underlying assumption seems to be that the US is producing enormous number of cars. In this fantasy, if only we had someone to buy the cars, they will be shipped away in a jiffy! In reality, we don’t even make enough cars to meet the domestic demand. To be precise, 44% of all vehicles sold in the US in 2017 … were imported!
How’s a country that’s so dependent on imports going to take advantage of new export markets in Europe?
(Here’s the break down: US production of passenger cars is shockingly anemic these days — barely over 3 million per year. In addition, we make about 8 million SUVs/trucks).
Third, Trump assumes that there’s a huge demand for American cars in Europe. That’s so not true. There are many practical and social reasons why US vehicles aren’t and won’t be popular:
- The number of cars per capita in Europe is less than half that of in the US. Europeans are big on public transportation.
- Big American cars are bad for narrow streets in historical European cities. Small is beautiful
- Definitely Europeans are not into pickup trucks — America’s favorite production these days
- Gas is way more expensive in Europe and people prefer small cars
- Europe’s economy is in shambles in many regions
- Of course, in the UK, people drive on the other side of the road, so that’s one country with big purchasing power that won’t buy US-made cars
- All of these reasons are why Ford already has manufacturing plants in Europe where they tailor-make cars that appeal to Europeans. Ford Focus is actually a popular American brand manufactured in the EU.
- (GM had a couple of brands — Opel and Vauxhall — in Europe for a long time, but it looks like all/most of them have been sold to European firms).
This is why all the automobile associations and 270 other trade/business groups have petitioned Congress to take away the tariff authority from Trump. Even GM has said that the auto tariffs will result in higher vehicle prices and lower sales; and that GM will be forced to cut wages and layoff American workers.
So, Trump can bully Europe and get them to lower or eliminate the tariffs on American cars, but it won’t generate many new car manufacturing jobs in the US. (Update on July 2: EU doesn’t seem to back off; it’s now threatening retaliatory tariffs on $300 billion of US exports!)
Author: Chris Kanthan