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Trump’s
trade tariffs: how protectionist US policies will hit German carmakers
‘Shifts in
production’ expected if baseline tariffs on imported goods are imposed to
benefit US auto manufacturing
Jasper Jolly
and Lisa O'Carroll
Sat 9 Nov
2024 06.00 GMT
In 1964 the
new US president was angry about European trade. Specifically about chickens.
In response to Europe’s poultry trade barriers, Lyndon B Johnson imposed a 25%
tariff on light trucks.
That
“chicken tax” is still in place 60 years later. The rules have contributed to
the Ford’s F-Series pickup truck’s unbroken 42-year run as the bestselling
vehicle in the US, and have locked European manufacturers out of a hugely
profitable market for two generations. The chicken tax could also serve as a
model for Donald Trump’s second term in the White House.
The US
president-elect’s promise of imposing baseline tariffs of 10% on all goods
imports has already sent shivers around the world’s manufacturers. Few
industries are more exposed than Germany’s carmakers: the share prices of
Volkswagen, BMW, Mercedes-Benz and Porsche have dropped by between 4% and 7%
since it became clear on Wednesday morning that Trump would win the US
presidency.
If a 10%
tariff were passed on to American buyers, Audi’s US bestseller, the Q5 SUV,
would cost an extra $4,500 on top of its $45,400 starting price.
But just
when German industry needs a strong advocate, its government has fallen into
turmoil. The coalition led by the chancellor, Olaf Scholz, collapsed on
Wednesday after three years in power, casting doubt over who will lead Europe’s
largest economy as the EU prepares for trade negotiations with Trump.
Trump’s love
of tariffs is no secret. He recently told Bloomberg: “To me the most beautiful
word in the dictionary is tariff.” And he has been categorical about his
intentions to slap tariffs on EU imports.
“They don’t
take our cars, they don’t take our farm products, don’t take anything. You have
a $312bn deficit with the EU. You know, the EU is a mini – but not so mini – is
a mini-China,” Trump said during his campaign.
The German
car industry would immediately be affected by tariffs, compounding an already
dire situation for the likes of VW which is wrestling with deep cost cuts. The
US is VW’s second largest export market after China, with 400,000 cars exported
there in 2023.
Hildegard
Müller, the president of the German Association of the Automotive Industry
(VDA), said the US remained “very important for Germany as a production
location”.
However, she
noted that the US “has been increasingly focusing on its own interests for
several years now, and this trend will probably continue”.
Müller
called on Berlin and Brussels to “build on their joint strengths with the US in
economic policy” to create prosperity between allies on both sides of the
Atlantic.
In the same
way as China has begun investing in Europe – particularly in Hungary – Germany
has been investing in the US as it became more protectionist under Trump 1.0
and Joe Biden. Last year a record 908,000 German-branded vehicles were
manufactured in the US, half of which were exported.
Carmakers’
responses to tariffs will depend to a certain extent on their factory
footprints. The BMW chief executive, Oliver Zipse, shrugged off the tariff
threat on Wednesday.
“In the
United States, I would think we almost have a perfect setup for the time to
come,” he said, arguing that BMW already made its most popular US-market cars
there. “There is some natural cover up against possible tariffs or whatever.”
Yet the
German car manufacturers’ existing factories in the US do not appear to have
readily available spare capacity to simply absorb production shifted from
Germany to avoid tariffs.
Volkswagen
had capacity for another 20,000 cars on top of the 160,000 produced last year
at its sole US car plant in Chattanooga, Tennessee, according to the automotive
data company MarkLines.
Mercedes-Benz
has about the same spare capacity in Alabama, where it made 280,000 cars in
2023. BMW might be able to produce another 40,000 in South Carolina on top of
last year’s production level of 410,000.
Even if
carmakers can shift production to the US – to the likely delight of Trump – it
would horrify many Germans. About 780,000 people are employed in the
politically powerful German automotive industry. They will not let work move
abroad without a fight.
“It will
lead to shifts in production,” said Rico Luman, an economist at ING, an
investment bank. “It may get more regionalised also from a strategic point of
view. That’s not good news for the sector in Germany.”
The tariff
threat could hardly come at a worse time for German workers, with manufacturers
across the world complaining of falling profits, and Europe dealing with a
flood of electric vehicles from China. Volkswagen – already planning to close
German factories for the first time ever – is particularly vulnerable.
Its Audi and
Porsche subsidiaries have big US sales but no factories there, and VW imports
thousands of its smaller, cheaper cars from Germany. Morningstar DBRS, a credit
rating agency, said starting more American production was “a transition that
would likely be costly and take years to become operational”.
Trump’s
victory has therefore rattled German trade unions. IG Metall, which will play a
key role in the VW negotiations, said the US election was “a clear message to
Germany and Europe to further develop their own strengths, resilient
relationships with each other and with other countries”.
The union
said Germany’s government needed to invest to strengthen industry – a distant
prospect, with its own election likely in March.
It is not
just German carmakers who will be watching Trump nervously, with a threat of
100% tariffs on imports to the US from its free-trade partner Mexico. The three
big carmakers in Detroit are General Motors, Ford and the Chrysler owner
Stellantis (which also imports cars from European brands such as Peugeot and
Fiat). Together they produced 1.6m cars between them last year in Mexico,
according to MarkLines. Europe’s manufacturers made 800,000 in Mexico, while
Asian companies produced 1.4m.
“Everybody
hates taxes and tariffs,” said Adrian Mardell, the chief executive of JLR,
which owns the Jaguar, Land Rover and Range Rover brands. Britain’s largest
automotive employer exports a quarter of its output to the US. “This is the
environment we are in. Of course all of us would dislike an environment where
we go into larger tariffs.”
There have
already been indications from countries outside Europe that Trump’s tariffs
could achieve the most obvious goal: wresting back jobs from abroad. South
Korea’s trade minister said on Wednesday he expected companies from his country
to invest more in the US if Trump imposed higher tariffs.
A person
close to Toyota said steep tariffs by Trump on Mexican imports could prompt the
automaker to move production of a vehicle like the Tacoma pickup to San
Antonio, Texas. A Toyota spokesperson declined to comment.
Trump has
other ideas to help the American car industry. He has said he planned to begin
rescinding Environmental Protection Agency and Transportation Department rules
that force companies to lower their average emissions – on his first day in
office.
He is
considering removing tax breaks for US-made electric vehicles, a bête noire for
him despite his friendship with Elon Musk, the chief executive of America’s
dominant electric carmaker, Tesla.
Those plans
are supposed to help Detroit’s big three. However, analysts led by Chris
McNally at Evercore ISI, an investment bank, said the changes would cost
General Motors $3bn and Ford up to $1bn in lost subsidies.
There is a
consistent irony in Trump’s automotive proposals: while carmakers in Europe
will suffer under tariffs, and rivals in China are already essentially locked
out of the US market, American businesses will also face steep costs, and
consumers are likely to see increased prices.
That has
been the effect of the chicken tax. Europe’s carmakers may have been locked out
to the benefit of US workers, but Americans have paid more for their pickup
trucks.
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