Back in June, at a laughably contentious G-7 summit in Canada, Donald Trump advanced a “modest” proposal for the future of global trade and commerce.
For those who need a refresher, here’s the video:
For one thing, the idea that he would tout “what he learned at the Wharton School of Finance” is fall-in-the-floor funny for obvious reasons, but more importantly, he was quite literally suggesting a system that is the polar opposite of the system he is currently trying to install.
Trump has spent the entirety of 2018 attempting to roll back decades of progress on globalization and trade openness. The following chart reminds you where things stand currently.
(Goldman)
Just to put that in context, Trump is at risk of taking US protectionism to levels last seen in the mid- 1970s.
(BofAML)
So if the U.S. President is intent on ushering in an era of “no tariffs and no barriers”, he has a funny way of showing it.
Well, as it turns out, the E.U. has already called Trump’s bluff on this. Here’s what EU trade chief Cecilia Malmström told the European Parliament’s trade committee on Thursday:
We said that we are ready from the EU side to go to zero tariffs on all industrial goods, of course if the U.S. does the same, so it would be on a reciprocal basis.
We are willing to bring down even our car tariffs down to zero if the U.S. does the same. It would be good for us economically, and for them.
That, Politico notes, is a step further than the nebulous talking points put forth at a hastily-convened press conference in the Rose Garden late last month when Jean-Claude Juncker and Trump celebrated what was variously billed as a “breakthrough” on trade. That press conference came amid reports that Trump’s top aides are concerned that he’s determined to move ahead with auto tariffs irrespective of the warnings he’s received from business leaders and other people who, for lack of a better description, know what they’re talking about.
“Brussels and Washington are holding preparatory trade talks to define the scope of a potential future agreement”, Politico writes, in the article linked above, adding that “during a first meeting in Washington last week, an EU proposal for including cars in the discussions was rejected by the U.S.”
Remember, auto trade between the U.S. and Europe isn’t as lopsided as Trump likes to make it sound or if it is, there’s some nuance. Recall the following excerpts from a note out in June by SocGen’s Albert Edwards:
Aside from the ongoing and escalating trade friction with China, Donald Trump has focused on the imbalance in bilateral trade with the EU, and Germany in particular – especially luxury autos where German carmakers control more than 90% of the US market. Trump has previously expressed his disdain at German luxury brands, particularly Mercedes, and its prominence on New York’s Fifth Avenue. Autocar has reported that Trump has said he would tax Mercedes models off Fifth Avenue!
[…]
It doesn’t take a genius to see what’s coming down the line after completion of the current US probe into whether vehicle imports have damaged the US auto industry. President Trump has already told French President Macron to expect 25% tariffs on imported autos on the same “national security” grounds used to impose US steel and aluminium duties in March. Currently, the US charges just 2.5% on car imports. This is lower than the EU’s 10% and China’s 25%, although the latter will lower its tariff to 15% from 1 July.
My own observation from a recent two-week trip driving around Lake Tahoe, Yosemite and Sequoia Park is that US automakers appear to have been virtually wiped out in the saloon car market there, and it seems about 80% of saloon cars on the road there are Japanese and South Korean rather than European. But maybe that is just a west coast thing.
I did observe though that the US automakers dominate the pick-up and light truck market. But that may be due to the 1964 US Chicken Tax (tariff). The widely divergent 10% vs 2.5% tariff rate on autos between the EU and the US may indeed look like an anomaly in favour of the EU, but it is nothing compared to the 25% protection US light trucks and pick-ups receive (includes two-seat SUVs). No wonder US automakers are clucking all the way to the bank as they dominate this segment of the market.
So that’s something to think about.
I would note that the E.U.’s proposal here will be a test of whether Trump is actually serious about tearing down trade barriers or whether that’s just a cover for a strategy that involves remaining perpetually at odds with someone, somewhere (and maybe with everyone, everywhere) to ensure there’s always a battle to fight. I talked at length about that possibility over the weekend in “Dream States: Why No Resolution To Current Political Conflicts Is Possible“.
Whatever the case, Malmström’s comments were welcome news for the beleaguered Europe automobiles and parts index, which got a quick (albeit likely fleeting) boost on the headlines.
At the lows, the index was down some 23% off its 2018 peak.
European automakers and suppliers are the third-worst performing sector of 2018 across the pond. The space has been weighed down by generalized anxiety around the trade conflict and also by company-specific news including Daimler’s profit warning (which was trade-related) and another guidance cut from Continental.
Now let’s see how serious Trump is about implementing all the things he “learned at Wharton.”
