Economy: Trump again threatens high import duties on cars

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At a time when the European car industry is already suffering from a slump in demand –particularly for electric cars – US President Donald Trump has announced tariffs on car imports "in the order of 25%". This comes shortly after imposing tariffs on steel and aluminum from mid-March, as well as on goods from China. He also wants to impose high tariffs on semiconductor and pharmaceutical imports.

This contradicts some rules of international trade that have been developed over decades by the World Trade Organization (WTO), such as the most-favoured nation principle. The latter states that trade advantages that benefit one contracting party must be granted to all contracting parties as part of the principle of equality. This threatens to cause major shifts in the finely balanced structure that has already applied to around half of global taxes. A global trade war with serious damage is looming.

"Border adjustment tax" and "chicken tax"

On February 14, Trump said that he wanted to make a statement on possible tariffs on cars on April 2. Members of his cabinet are also expected to present him with reports on further possibilities for a series of import duties. One of these is called the Border Adjustment Tax (BAT). In principle, this would make everything that is imported into the USA from abroad subject to tax. A new authority, the External Revenue Service, would determine the respective amount based on how much the respective goods are taxed in the opposite direction. The duty would then be set reciprocally.

In his opinion, this would solve the problem of unfair treatment of American car exports on foreign markets. The European Union, for example, levies a 10 percent tariff on vehicle imports, while the USA only charges 2.5 percent. Trump would like to not only equalize this tax rate, but increase it to 25 percent. This is the same rate that was previously levied on pick-up trucks, unless they are imported into the USA from Mexico and Canada. There were special import conditions for these two countries. This protective duty has so far made the pick-up truck business extremely profitable for US manufacturers. However, the so-called "chicken tax" is not one of Trump's ideas. This duty has been levied on poultry and commercial vehicles not built in the country since 1964.

Calculations made without the import sales tax

Trump also sees the sales tax of other countries as a tariff against the USA. He would therefore impose an additional 19 percent on goods from Germany, which would make them costly. It is difficult to understand what disadvantage is to be compensated for when this tax is paid by the end customer to their respective state. European manufacturers pay VAT in Europe in the same way as American manufacturers pay sales tax. Companies that deliver from the USA to other companies in the EU are refunded the import sales tax anyway. This generally applies to companies that import goods from a third country and supply another company in the EU.

The Trump government's tariff intentions also seem almost incomprehensible in terms of their direct impact. If the threats are not enough, the planned levies are likely to lead to strong inflation in the USA and the loss of hundreds of thousands of jobs. Cars and their parts are still Germany's most important export goods. The most significant single market for exports from Germany is the USA for the first time since 2015. Before that, it was China.

The US economy would slump sharply

According to a preliminary estimate by the German Economic Institute (IW) and the Institute for Macroeconomics, published by the Süddeutsche Zeitung, the US economy would fall by between around four percent in the current year. It would also fall by almost five percent in each subsequent year. 2028. Representatives of the US car industry, such as Ford boss Jim Farley recently, have expressed similar views. They would rather not be protected by tariffs. For Germany, it is still between a good []percent by 2026 and around half a percent by 2028.

It can therefore still be assumed that the tariffs are being used as threats to ensure that the countries affected meet the US in other ways. When Trump was asked whether the EU could avoid the reciprocal tariffs proposed last week, he replied that the EU had already signaled that it would lower its tariffs on US cars to the US rate. It is fitting that Trump did not provide a date for the introduction of 25 percent tariffs on pharmaceuticals and semiconductor chips. Rather, he said that manufacturers of medicines and chips should be given some time to set up factories in the USA to avoid the tariffs.

In the case of the announced tariffs on cars, there could be a repeat of what happened in 2018 and 2019 during Trump's first term in office. The results of an investigation by the Department of Commerce into car imports apparently persuaded Trump to refrain from doing so in 2019. It is therefore possible that the President will announce a compromise that suits him on April 2 instead of the 25 percent levy that had been on the table until then. The newly invented border adjustment tax, including the new ministry created for it, could become his new favorite instrument in his literally limitless quest for power. This is because it would give Trump the opportunity to play off individual European countries against each other instead of the EU as a whole, and thus have a lever to weaken the cohesion of the EU.

(fpi)