Not everyone agrees with the use of tariffs to achieve changes in trade relations.
However, a recent article in The New York Times article reports the threat of 25% import tariffs on the U.S.’s main automotive trading partners could prove to be spectacularly successful.
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Autos are the soft underbelly of major auto economies like Germany, Japan, South Korea and Mexico in their trade relations with the U.S. Although the first three have invested heavily in U.S. manufacturing facilities over the years, they still ship huge volumes into the U.S. from their home countries and have largely perpetuated an unfair reciprocal relationship in terms of tariff barriers.
The E.U., for example, exported $42.8 billion worth of motor vehicles to the U.S. in 2018 — more than one-fifth of the cars imported by the U.S. — at a tax rate of 2.5%. Meanwhile, the E.U. imposes a 10% tariff for cars exported in the reverse direction.
In response to the threat of 25% tariffs, the E.U. offered to scrap tariffs in both directions, a step it has resisted in all previous negotiations.
But with carmakers’ backs against the wall, the Trump administration was not about to let up with a simple scrapping of tariffs, long overdue as that may be.
The administration is in discussions with the E.U. and its carmakers about increasing their investment and employment in the U.S. The more cars foreign carmakers manufacture in the U.S., the less they will ship in from abroad, benefiting the balance of payments and creating employment stateside.
Consumers benefit from continued access to a wide range of manufacturers without the cost implications of the threatened tariffs being imposed, estimated to be between $1,400 and $7,000 per vehicle if applied at 25%, the article notes.
Even U.S. carmakers are in favor of removing all tariffs, as they see a reduction in overseas import tariffs as an opportunity worth the increased domestic competition that foreign carmakers setting up in the U.S. may pose.
The only losers, should the deal be agreed, could be said to be foreign carmakers who will lose domestic exports, an impact that Germany is expected to feel the significance of more than any other country. Germany runs the second-largest trade surplus after China, with autos making up a sizable portion of that mercantilist trade structure.
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Foreign carmakers are being asked to provide details of proposed investments and plans already in the pipeline.
The German car industry is promising to create 25,000 jobs at factories in the United States, according to The New York Times. However, the Trump administration is looking for new jobs and investments, not simply plans that were already in the pipeline before the current negotiations were started.
A deal has not yet been reached; unofficially, both sides are making encouraging noises, raising the prospects for some good trade news to lift the spirits of investors who have been disproportionately depressed by a barrage of negative media coverage on the topic in 2019.