Prospects that the trade war could rip apart the global auto industry are scary, perhaps even for President Donald Trump. Good thing it could just turn out to be bluster.

Toning down his rhetoric, Trump is expected to give the European Union and Japan 180 days to agree to a deal that restricts the U.S.’s imports of autos and car parts, Bloomberg News reported Wednesday. The Commerce Department found that American innovation capacity was at risk; low research and development spending posed a national-security threat; and “imports continue to displace American-owned production,” according to the report, which cited people familiar with the matter. 

Whether or not there’s a delay shouldn’t obscure the Trump administration’s flawed logic. If that’s the premise for potentially disrupting the world’s vast auto supply chain, there’s still cause for worry.

Companies in the U.S. aren’t notable laggards in comparison to their rivals in Europe and Japan on R&D. Meanwhile, the U.S. is still drawing plenty of investment. Last year, the world’s largest carmakers announced around $4.4 billion of outlays in North America, almost 80% of which was destined for U.S. facilities. Around a quarter of that would be directed toward R&D operations in the U.S.

That positive trend now risks being reversed. Already around $14 billion of trade a month is being redirected or lost as a result of tariffs, as global suppliers try to avoid or minimize direct duties. Meanwhile, an analysis by the International Monetary Fund last October found that a 25% levy on all imported cars and auto parts would have just as serious an effect on the U.S. and global economy as the same tariff imposed on $267 billion of Chinese imports. Together, the measures would reduce U.S. real output by about 0.8 percentage point compared with a tariff-free scenario, and take about 0.4 percentage point off the global economy.(1)

The irony is that the health of the U.S. car market partly depends on foreign companies doing business there. Some 27% of U.S. auto production comes from the local plants of European auto companies, and much of that activity depends on parts imported from across the Atlantic. The U.S. is also the EU’s biggest auto-export market, accounting for about the same volume of trade as the next three countries combined, according to the European Automobile Manufacturers Association. That puts countries like Germany in a tight spot. So-called “growth shocks” among the country’s six biggest auto companies explain close to 15% of GDP changes in the country, according to Goldman Sachs Group Inc., while only contributing around 10% to output.


It’s a similar picture with Japan. A quarter of Japanese-branded vehicles sold in the U.S. are imports, including the vast majority of Subarus and Mazdas. More than a third of Japanese auto exports go to the U.S., according to the Japan Automobile Manufacturers Association.

Trump’s botched playbook (if there is one) appears to draw heavily from the 1980s, when a young trade negotiator named Robert Lighthizer pushed Japanese automakers to accept voluntary restraints on their export activity – one of the reasons those companies now build so many cars in the U.S. 

That model looks outdated in the current context of the American and global auto industry, where widespread production changes and restructurings are afoot. In the U.S., more than half of all cars are made and sold domestically, while Mexico accounts for around 15% of imports. Only a fifth are imported from the EU and Japan.

European and Japanese carmakers now have large production bases in the U.S. and Mexico, and they’ve been expanding their capacity over the course of the last year. More than half of production from the U.S. factories of Germany’s big three automakers is exported, improving America’s trade balance as a result. 

Despite all this, the balance of trade – in autos and otherwise – has never quite shifted in favor of the U.S. America’s trade deficit has deeper roots in its budget and the Treasury market than can be cauterized by tariff policy alone. That suggests punitive measures from Washington are unlikely to achieve their intended effect. Let’s all hope Trump’s hectoring stays just that.


(1) It’s likely that the measures being contemplated wouldn’t be quite as serious as the IMF’s forecast, since Canada, Mexico and South Korea -- three of America’s biggest auto trade partners -- are exempt thanks to their existing trade deals with the Trump administration.

To contact the authors of this story: Anjani Trivedi at atrivedi39@bloomberg.netDavid Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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