Ben Roback is Head of Trade and International Policy at Cicero Group.
The Grand Old Party has traditionally bled free trade. It is to the Republicans what the social safety net is to Democrats and what free enterprise is to us Conservatives. In so many policy areas, President Trump has picked up and moved the anchor of the Republican Party, but none more so than on trade. “I like punitive tariffs” is not a statement we are accustomed to hearing from Republican occupants of the White House, but when it comes to putting ‘America First’ into action, this president will use all the tools at his disposal. “I love tariffs, but I also love them to negotiate,” the President also said on the same day – welcome to his Art of the Deal.
Those comments came ahead of a US Commerce Department report due to be published which is expected to recommend that the EU vehicle industry be classified as a threat to US national security. This is on the grounds that it strips the USA of an industrial base needed to produce military hardware. On the basis of that recommendation, the President could raise tariffs from 2.5 per cent to up to 25 per cent within the next three months.
Analysts fear the wider impact of a back and forth conflict, like Dutch financial services giant ING who warned ‘if the tariff precipitates a ‘tit for tat’ trade battle between the US and EU, economies on both sides of the ocean would be hurt significantly more’.
For motor manufacturers in the big production countries like Germany and the UK, that could turn into an economic nightmare – as well as inflicting punishment on the very blue-collar workers in manufacturing states that helped propel Donald Trump to the White House. German car manufacturers exported almost 500,000 vehicles to the US last year, while the car trade between the US and the EU is estimated to be worth at least around €50 billion annually. BMW’s largest plant in the world is not in Bavaria, but South Carolina. In the States, 113,000 Americans work for European vehicle manufacturers whilst 186,000 people are employed directly in motor manufacturing in the UK. Crystallising the potential domestic impact, a report from the Center for Automotive Research published last week showed that a worst-case scenario of a tariff of 25 percent would cost 366,900 American jobs in the auto and related industries. Readers accustomed to accusations of Project Fear will have to wait and see whether the forecasts are any more accurate than the direst projections made related to Brexit.
If the US Commerce Department recommends a hike in tariffs, we can expect the European Union to quickly respond in kind. That risks setting off a transatlantic trade war from which the President will not want to back down – especially after he was widely seen to have conceded to the Democrats in order to bring an end to the 35-day government shutdown. It would also mark another cooling of EU-US relations, in the same week that Mike Pence delivered a stridently ‘America First’ message to the Munich Security Conference. On Iran, Pence said the “time has come” for European partners to “stop undermining US sanctions against this murderous revolutionary regime”. But in urging EU Member States to pull out of the Iran Deal, he was met with a stony silence in the room. Far from considering pulling out of the Iran Deal, in February the E3 (France, Germany and the UK) announced the creation of a new platform aimed at facilitating legitimate trade between European firms and Iran.
Make no mistake, the tariffs floated by the President are purely the design of political gain rather than economic or security necessity. Otherwise, they would be fiercely supported by the sector. Instead, the tariffs are firmly opposed by the US car industry. The Motor and Equipment Manufacturers Association has said: “Not a single company in the domestic auto industry requested this investigation.”
Another bad news story is the very last thing motor manufacturing in the UK can handle at this delicate time. Ford, Nissan, Toyota and most recently Honda have all sounded a collective alarm over the future of their physical presence in the UK. Brexit and political instability are undoubtedly contributing factors – just as the industry is adapting to new global trade deals like the EU-Japan deal which reduces the incentive to build in Europe, and changing consumer behaviour that seeks out electric as well as petrol/diesel.
Motor manufacturers in the UK have sounded drastic warnings about the likely impact of No Deal on their sector. Some around the Cabinet table have sought to amplify that caution, like Greg Clark and his colleague Richard Harrington. But look beyond Brexit and we might collectively find that it is in Washington and Brussels where much of the industry’s future is being thrashed out.