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18th of July 2018

Economy



New auto tariffs would batter German carmakers

THE menace to Americans from immigration of the wrong sort is immense, according to President Donald Trump. The list of items he wants to deter from crossing the border includes objects as well as people, and one in particular holds his attention. In trade terms, he told Fox News on July 1st, “the cars are the big one.” With good reason, he views auto tariffs as a far deadlier weapon than the duties already imposed on steel and aluminium when it comes to extracting trade concessions from other countries.

That is dire news for all carmakers, which are among the world’s most globalised firms. But Germany’s are the most dependent on exports. Most well-off Americans long ago traded in Lincolns and Cadillacs for the refinement of Teutonic marques. A tweet from Mr Trump on June 22nd reaffirming his tariff plans sent the shares of Daimler, which makes Mercedes, and of BMW into a nosedive.

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Mr Trump fumes that American cars exported to Europe attract a 10% tariff whereas cars travelling in the other direction are taxed at only 2.5%—the result of trade negotiations over the years. (He naturally ignores America’s 25% tariff on imported light trucks, imposed in 1964 by President Lyndon Johnson in retaliation for French and German tariffs on American chicken.) A Commerce Department probe that is set to be completed by mid-July may reach the far-fetched conclusion that imported cars, like imported steel, threaten America’s national security. Mr Trump has promised a 25% tariff in response (though this has dropped to 20% in more recent tweets).

Germany’s carmakers will bear the brunt. They account for around half of Europe’s car exports to America. The impact on BMW and Daimler will be severe because, as Barclays, a bank, notes, exports to America account for 10% and 8% respectively of their global sales (for Volkswagen it is only 3%). This tots up to around 600,000 German vehicles. With tariffs at 25%, German carmakers would lose money on every vehicle sent from Europe, according to Evercore ISI, a research firm.

But ridding American roads of German horsepower will not be simple. The premium cars’ popularity convinced both BMW and Daimler to build factories in America; indeed, Mr Trump’s tariff threats may be a ploy to get them to make more in America. Factories must make over 300,000 cars a year to operate efficiently. As the American market is not big enough for all those vehicles, they must export too.

This has made them a target on another front. On July 1st China, in an effort to calm tensions, reduced tariffs on imported cars from 25% to 15%. But in response to tariffs planned by Mr Trump, it will probably raise levies on American-made cars to 40%. And the biggest exporters to China are BMW, which sent over 100,000 vehicles from its American factory last year, and Daimler, which exported over 70,000, according to Jefferies, a bank.

The slamming of globalisation into reverse gear has “caught the industry by surprise”, says the boss of one carmaker. In the short term some of the mooted tariffs can be absorbed and some can be passed on to customers. That will still hit profits and sales. German carmakers are now near the top of global investors’ hit lists of national sectors to avoid because of prominent export surpluses with America.

A longer-term response requires BMW and Daimler to decide whether the proposed tariffs will endure. If so, some production could be relocated to China. Factories in America might also be reconfigured to serve the local market. Instead of making just two or three models they could make twice as many, including the saloons and hatchbacks that are now imported. But that takes two or more years and requires pricey retooling, raising costs and making the plants far less efficient, points out Ferdinand Dudenhöffer of the Centre for Automotive Research in Essen.

Investors’ gloom thus looks warranted. The industry is also having to cope with the fallout of its diesel crisis, and invest heavily in electric vehicles and more fuel-efficient petrol engines. Next, Mr Trump plans to renegotiate NAFTA, creating further difficulties for Germany’s carmakers, all of which either already make vehicles in Mexico for both the American market and the rest of the world or are planning to do so. For German cars, trade disruption looks likely to be the big one.

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