US trade front: the automotive sector

This weekend, the report on automotive imports is expected to be presented to Donald Trump. In all likelihood, it will list several options for increasing trade tariffs. For the US President, totally preoccupied with talks with China, this is not the top priority. The final decision could wait several months, especially as it is no secret for anyone that this is a lever to extract trade concessions from Europe and Japan. Note that Japan is more exposed to trade tariffs on auto than Europe. On the US side, the impact of new tariffs could be more visible on inflation than on activity.

Over the weekend, Donald Trump is expected to receive the Trade department’s report on car imports. The procedure launched in May 2018 must assess whether this trade poses a risk to national security (section 232 of the Trade Expansion Act of 1962). The same reason was used to justify the trade tariffs on imports of industrial metals.
In other words, the argument is not very convincing.
According to some press articles, three options will apparently be proposed: a 25% trade tariff, a 10% tariff or only a tax limited to electric cars! There is a good chance that Canada, Mexico and South Korea, three countries that agreed to review their trade agreements with the US last year, will be exempt. This would leave the EU and Japan as targets.
These two regions each exported $ 44bn worth of passenger cars to the US last year (lhs table). As a proportion of their GDP, the exposure is much higher for Japan (0.9%) than for the EU (0.2%, but 0.5% for Germany). According to the Bruegel think tank1 , it can be assumed that a trade tariff of 10% would cause a maximum shock of 0.11% on Japanese GDP and 0.03% on European GDP (0.06% on German GDP). At 25%, these figures would rise to 0.28% for Japan, 0.08% for the EU (0.15% for Germany).
For the US president, the current priority is China, but the automotive industry in Japan and Europe are unlikely to be overlooked. Trade talks with the EU have not made much progress since the Trump-Juncker meeting last July, except that the EU has threatened to retaliate by taxing $ 20bn of US exports, or 0.1% of GDP. This seems like a minimal shock to activity. The effect on prices of tariff measures could be more significant . A 25% tax could add 0.3pt inflation, which would accentuate the rebound in non-energy goods prices that has been evident in recent months.

Bruno Cavalier – Chief Economist
Fabien Bossy – Economist

ODDO BHF