President Donald Trump looks to be cooling on the idea of an aggressive 25% tariff on imported cars and parts, according to Bloomberg News. That’s good news for politicians and businesses in Europe, especially in Germany, which runs a $24 billion auto trade surplus with the U.S.
A tariff hike of that magnitude would cost the euro zone’s biggest economy $20 billion in car exports, according to industry analysts at UniCredit. Such a hike would hurt Americans too, pushing up their average car prices by $4,400, according to one estimate by the Center for Automotive Research. The idea has always looked reckless.
But Germany and Europe aren’t out of the trade woods yet. Any delay to tariffs beyond the May 18 deadline will probably be presented as a stay of execution, not an acquittal. If the threat is kept on the table, it will continue to have a political and economic impact. It will affect investment and financial market confidence, and will be linked explicitly by Trump to progress by U.S. and European Union trade negotiators on striking a new trade deal. No doubt he will use it to try to split the EU member states. Brussels officials complain frequently of Trump using tariffs like a gun to the head. It’s still loaded.
Even without a 25% levy, Trump’s trade antics have already been extremely damaging to Berlin. The escalation of tit-for-tat tariffs with China has put sand in the gears of global trade – bad news for the export-dependent Germans – and chilled investor sentiment. Germany’s economy narrowly dodged recession at the end of last year, and GDP growth in the first quarter was 0.4%. Factory orders have fallen sharply. Every 100 basis point drop in U.S.-China trade knocks about 5 basis points off euro zone GDP, according to Bank of America-Merrill Lynch.
Read more: Weidmann Warns Flaring Trade War Is a ‘Poison’ for Global Growth
It is this pressure, combined with Trump’s threat to “tariff the hell” out of the EU, that has dragged Brussels’s top trade official, Cecilia Malmstrom, to the negotiating table with the U.S. (much to the annoyance of the French president Emmanuel Macron). The immediate problem is that it’s hard to imagine what kind of progress might happen on a trade deal between now and November, when a new European Commission is appointed.
The resistance on both sides to clearing away long-held objections – the U.S. wants access to Europe’s agricultural markets, while the EU wants to avoid “Buy American” provisions – has left only industrial goods as the commonly agreed area for a quick deal. Trump could yet revive his threats.
There are some optimistic voices who believe Trump is more reluctant to ratchet up a trade spat with the EU than he lets on. The president’s main focus is containing the rise of China; Europe is treated somewhere between a punchbag and an afterthought. And given the EU’s huge role as the No. 1 export market for the U.S., tit-for-tat tariffs can backfire. American icon Harley-Davidson Inc., which got caught up in the earlier trade sparring with Europe, barely broke even at the end of 2018.
The optimists assume two things: That Trump has a long-term game plan, and that it’s one where he’ll ultimately want to keep the Europeans onside. But there’s every indication that this U.S. administration is ideologically opposed to the entire system that allows the EU to thrive as an open, trade-reliant and soft-power economy. Trump applauds Brexit, hates the World Trade Organization and prefers bilateral arm-twisting to international rules. It’s hard to see how delaying fresh tariffs means anything other than short-term relief.
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Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.
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