Trump’s European Tariffs Would Weaken US Economy, Transatlantic Alliance

This is the ninth article in a series produced by NDN challenging Trump’s tariffs.

On Friday, Nancy Pelosi will head to the Munich Security Conference with dozens of Congressional Democrats to reaffirm America’s security and economic commitments to our European allies. Since the end of the Second World War, the transatlantic alliance has played a critical role in defending liberal democratic values and ensuring widespread economic prosperity throughout the West, particularly in the United States. Today, over 7,000 European troops serve alongside American soldiers in Afghanistan, and exports to the EU support over 2 million jobs in the United States each year. While the Democrats reiterate America’s support for this critical alliance this weekend, however, Donald Trump will be preparing to drive a stake into its very foundations. On February 17th, the Department of Commerce will release their report on the national security implications of auto imports from the EU, which will almost certainly rubber stamp Trump’s claims that the EU is taking advantage of the US on trade. Following the report’s release, Trump will have 90 days to impose tariffs on EU auto imports as leverage to negotiate a trade deal, something that Sen. Grassley said Trump “is inclined to do” in an interview last month. Such a move would be devastating to the transatlantic system both economically and geopolitically, and Congress must decisively challenge such a decision.  

The imposition of auto tariffs of 25% on $65 billion worth of imports from the EU would be devastating to the US economy. First, the move would certainly lead to a trade war with the Europeans, and EU Trade Commissioner Cecilia Malmstrom already said last week that any tariffs on European auto exports would be met with reciprocal tariffs on tens of billions of dollars worth of American auto, agricultural, and industrial exports. As a result, auto production would fall significantly in the United States as exports fell, causing an estimated loss of over 700,000 jobs in the industry and a reduction in US GDP of $62 billion. This is on top of billions of dollars of lost earnings reported by Ford and GM as a result of Trump’s already imposed steel and aluminum tariffs, and would likely lead to negative earnings for the major American automakers in 2019. Second, the US tariffs act as a de facto tax on all American consumers. European-made cars would immediately skyrocket in price, but European-made auto parts are an integral part of American automakers’ supply chains, meaning that the price of US-made cars would also increase. The Center for Automotive Research estimates that the average price of a car would increase by $3,500 as a result of the tariffs. Not only would price increases reduce the disposable income of Americans, they would also reduce the number of overall cars sold per year in the US, causing significant job losses in the auto transport and dealership industries. Indeed, LMC Automotive estimates that the tariffs could cause US auto sales to fall by 2 million vehicles per year. The car sales industry employs over 1 million Americans, and a major slowdown in sales would lead to large employment losses there. What effect would a trade war over auto tariffs have on the US then? Tens of thousands of lost manufacturing jobs, and a big reduction in the disposable income of American workers.

Even worse, the auto tariffs could be the decisive blow that sends an already weak Eurozone economy into recession, something that could spark a global recession given already weakened global growth as a result of the US-China trade war. Over the past six months, growth in the euro area has weakened significantly as a result of global trade tensions, Brexit uncertainty, and fiscal issues in Italy. Last week, the European Commission slashed its growth projection for the Eurozone in 2019 from 1.9% to 1.3%, and Germany, the bloc’s largest economy, only narrowly avoided a technical recession in Q4 2018 while Italy, the bloc’s third largest economy, entered a recession last quarter. The imposition of auto tariffs by Europe’s most important trading partner would likely tip the weakened euro area into recession. Germany is by far the largest driver of growth in the bloc, and auto exports alone account for 5% of German GDP. Considering that German GDP growth was actually negative in the second half of 2018, a major shock to its most important industry would reverberate throughout its entire economy. Indeed, Barclays estimates that a 25% tariff on auto imports could lead to a 0.4 percentage point reduction in euro area growth in 2019. The result of a Eurozone recession would be very negative for the global economy, already in the midst of a slowdown from US-China trade tensions. The euro area is the 3rd largest source of global demand after the US and China, so a major slowdown there would lead to further weakness in global exports, and potentially a global recession.

Outside of the significant economic consequences of a trade war with the EU, such a move by Trump could tear the biggest hole in the transatlantic alliance since the end of the Second World War. America’s standing in the eyes of Europeans has already fallen enormously during the Trump administration, with “confidence in the US President to do the right thing regarding global affairs” falling by 75 percentage points in Germany, 70 in France, and 57 in the UK. Furthermore, Trump has consistently attacked the European Union as an entity (both in his support for Brexit and his support for far-right German parties opposed to Merkel) and has supported authoritarian, anti-Semitic regimes in Poland and Hungary even while the EU has attempted to sanction them. A unilateral American attack on the economy of the EU, however, would be a step beyond all of these actions, striking at the core quality of life of European citizens. The move would demonstrate that the United States under Trump fundamentally doesn’t care about Europe and the transatlantic alliance, and that Congress is either unable or unwilling to stop Trump from causing material harm to the EU. Further, the trade war is all the more harmful to EU-US relations because it is so clearly based upon fantasies created by Trump and his trade advisor Peter Navarro. Rather than taking advantage of the US on trade issues, the EU actually has a lower average tariff rate than the US according to the World Bank (2.35% in the EU vs. 3.36% in the US), and there have been no allegations of EU dumping or industrial subsidies regarding its auto exports as have been the case with China with furniture or solar panels for example. Trump is willing to significantly harm the EU’s economy to fix a make-believe trade problem that even his hawkish trade representative Robert Lighthizer says is a distraction from the real problem of China. With this in mind, the EU is likely to rethink their relationship with the US, and adopt a more “go-it-alone” strategy as has already started to become the case.

A new imposition of auto tariffs on the EU would likely devastate the US auto industry, cause a recession in the euro area and inflame the global growth slowdown, and significantly widen the growing schism in the transatlantic alliance. And what is Trump likely to get in return for such a move? Likely very little. Trump has justified the tariffs as needed leverage in future trade talks with the EU. However, the EU has clearly stated that they are not interested in a broad trade deal, and especially not one that includes agriculture. Furthermore, they have a strong incentive to not give in if Trump imposes auto tariffs, even if there is significant economic hardship: such a move would only encourage Trump to hold the EU’s economy hostage in the future for other negotiations, and being seen as subservient to Trump, the most unpopular US President in generations in Europe, would be politically disastrous for European leaders. Furthermore, as we saw in the Canada-EU trade negotiations that were almost derailed by half of the Belgian government over agricultural regulations and the failed TTIP negotiations, negotiating a trade deal with the EU involves harsh sacrifices by both sides that can fall apart at even the slightest hint of trouble, let alone a significant attack on the EU’s economy. And so the EU negotiations are likely to go about as well as the China negotiations – little progress made while the global and American economies suffer. But this time, the global economy starts from a much weaker position than it did in June 2018, and the Europeans are our critical allies, not our strategic rivals like China. In the face of these risks to global economic prosperity and the essential alliances that have created 70 years of peace and prosperity in the West, Congress must act to challenge this looming trade war and reaffirm our essential relationship with Europe. Doing so at Munich this weekend would be a great way to start.