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Just Call It A Coin Flip: 40% Chance Trump Slaps Europe With Auto Tariffs, Goldman Warns

The whole thing is now maddeningly reflexive.

If we were to see 5% and then rising tariffs on auto parts and vehicles from Mexico, it would have a significant impact on the industry, ourselves included. The core issue is not a trade issue, it’s illegal immigration or immigration in general. But trade and tariffs get caught up in this topic, which makes it a little more complicated.

That’s from Ford president Joe Hinrichs, speaking Thursday from the UBS Industrials and Transportation Conference in New York.

Like the rest of the world, Joe is struggling to come to terms with the Trump administration’s unnerving penchant for blurring the line between trade policy and national security.

It was always clear that Trump’s trade war couldn’t be justified by reference to economics because, as Janet Yellen put it earlier this year, “almost any economist would tell you there’s no real meaning to bilateral trade deficits.”

This is another area where Trump (and the administration’s conservative media cheerleaders) are simply taking advantage of the general public’s ignorance. The obsession with bilateral trade deficits and the couching of trade in terms of “winning” and “losing” is absurd. It’s nonsensical.

Because economics isn’t a “hard” science, it’s always possible to suggest that the consensus view is wrong, but Trump’s conception of global trade and commerce is about as close to “factually inaccurate” as it gets when it comes to the “soft” sciences.

That’s why the administration is leaning on “national security” to justify the plunge into protectionist trade policy. The trade war is based on a factually inaccurate view of global economics, so the only way to justify it amid mounting criticism from virtually all corners of corporate America and clear signs that it’s decimating America’s farmers, is to confuse everyone by eliminating the distinction between trade policy and the rest of the administration’s agenda.

The whole thing is now maddeningly reflexive. “National security” (e.g., the Huawei ban) and “human rights” (e.g., the prospective crackdown on Hikvision) are used to justify actions designed to secure leverage in trade negotiations, and trade broadsides are used to secure leverage in national security discussions (e.g., the Mexico tariffs).

Again, this is wildly self-referential, which is why people like the above-mentioned Joe Hinrichs are so frustrated.

Although the Mexico spat is front and center this week due to the sudden escalation and proximity of tariffs, the quintessential example of the problem outlined above is the 232 auto tariffs as they relate to Europe. In “Nowhere Fast: Trump Bogged Down As US Wades Into Multi-Front Trade War“, we spent quite a bit of time discussing the current state of the discussions between the Trump administration and Brussels. The bottom line is that the talks were already going nowhere even before the Mexico escalation.

One of the first things we noted last Thursday when Trump announced the Mexico tariffs was that the move was likely to make the Europeans even less inclined to talk to Trump. In a new note, Goldman underscores the apparent intractability of the situation.

“After almost a year of intermittent talks, progress towards a US-EU trade agreement appears very limited”, the bank wrote Wednesday, noting that Trump’s decision to delay the prospective tariffs by six months doesn’t likely provide enough time to resolve the issue. “We think six months will prove insufficient to negotiate and finalize a comprehensive trade deal, particularly since trade negotiations in the EU follow a set procedure that usually lasts several years”, the bank goes on to warn.

(Goldman)

The upshot: Even if things went entirely according to plan, we would still be, at best, two years away from a deal. Suffice to say things cannot possibly proceed according to that optimistic timeline because Bob Lighthizer is busy trying to save the USMCA and salvage whatever he can of the China deal. And that’s just on the US side. On the European side, Goldman notes that “the EC has limited ability to deviate from [the procedure in the visual], an issue further complicated by the European election timeline.”

The bank does an admirable job of dancing around the punchline in the interest of not coming across as overtly snarky, but the bottom line is that there isn’t even an agreement on what’s being negotiated. In fact, it doesn’t appear that the two sides agree on what Trump and Jean-Claude Juncker actually said at the famous Rose Garden press conference last July. Here’s Goldman:

A divergence of opinion on what should be included in the trade deal appears to be the main stumbling block for negotiations. When the European Council passed its two negotiating mandates in May, it limited the scope of the negotiations to ‘non-auto industrial goods’ and ‘non-tariff barriers’. Agriculture is unambiguously excluded from the mandates. Conversely, the Office of the US Trade Representative (USTR) published negotiating objectives that specifically include the reduction or elimination of EU agricultural tariffs and the establishment of “specific commitments for trade in products developed through agricultural biotechnologies”.

If you think back to the Trump-Juncker meeting, critics immediately pointed out that the “agreement” was so ambiguous as to be largely meaningless.

Read more: Trump, Juncker Announce ‘New Phase’ In U.S.-E.U. Relationship, Averting Trade War

Goldman reiterates that the ambiguity of the original statement has created interpretation issues. “The statement refers to non-auto industrialized goods and mentions trade in services, chemicals, pharmaceuticals, medical products, soy beans and liquefied natural gas”, the bank writes, recapping, before noting that “the EU refers to the omission of agriculture as a sign that it is therefore out of scope, while the US refers to a lack of an explicit exclusion, suggesting that agriculture is in scope.”

And that’s just a secondary concern. The main problem, Goldman says, is that the two sides have different objectives. To wit:

The US explicitly aims to “improve the U.S. trade balance and reduce the trade deficit with the EU”, while the EU seeks a mutually beneficial trade agreement and is unwilling to make extensive unilateral concessions.

In other words, this is the same story all over again. Trump is obsessed with deficits and “wins” and the Europeans want a deal that benefits both sides, because that’s how trade agreements work.

So, while everyone focuses on the near-term outlook for US-Mexico relations and the medium-term risk of Trump going “all-in” on China, lurking in the background is a dispute with the EU that hasn’t even begun to be negotiated and, based on traditional timelines, would take at least two years to work through.

“A narrow trade agreement seems more likely than not, but we see a 40% probability that the US will impose tariffs on EU autos this year”, Goldman begrudgingly concludes. “We would expect the EU to impose retaliatory tariffs immediately but only partially, with the remaining retaliatory measures identified but implemented later.”

Plan accordingly.


 

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1 comment on “Just Call It A Coin Flip: 40% Chance Trump Slaps Europe With Auto Tariffs, Goldman Warns

  1. Anonymous

    Mexico will give us what we want, and quickly. Then on to Germany!

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