RTC Director

Trump's Plan to Make European Cars More Expensive Has a Flaw

President Trump’s threat of 25 percent tariffs on EU car imports could spark an automotive trade war—one that will result in higher prices for all and will never end in European consumers buying more American autos.

PRESIDENT TRUMP WANTS Americans to buy fewer European cars and Europeans to buy more American cars. To speed his pipe dream along, on Sunday night he said that new tariffs on EU companies would “definitely happen.” (The ones he announced on Mexico and Canada have been stayed for now.) His threat of 25 percent tariffs on, among other things, car imports from the EU could spark an automotive trade war.

Market reaction to this was predictable: European automaker shares fell yesterday. Stellantis and Volkswagen were down 6.8 and 5.6 percent, respectively. Volvo fell by 6.5 percent, while Mercedes Benz, BMW, and Porsche lost between 3.6 and 4.3 percent.

Despite his Bavarian ancestry, Trump has a special beef with German cars. In a 2018 report from the German magazine WirtschaftsWoche, Trump told French president Emmanuel Macron that he wanted no more Mercedes rolling down New York’s Fifth Avenue. And, according to several unnamed European and US diplomats, Trump also asked Macron why so Germans buy so few Chevrolets yet American drivers choose BMWs.

The accuracy of this conversation was confirmed in November when former German chancellor Angela Merkel told Italian news outlet Corriere Della Sera that Trump was “obsessed with the idea that there were too many German cars in New York.” Trump's might well have been among them, as the European cars the president has owned apparently include a Mercedes-Benz SLR McLaren, Lamborghini Diablo, and Rolls-Royce Silver Cloud.

It’s an odd obsession because a Mercedes-Benz spotted by Trump rolling down Fifth Avenue will likely have been made in Alabama. There are mammoth BMW and Volkswagen factories in the US, too, building big cars tailored to US tastes.

Trump has demanded that overseas auto companies must henceforth manufacture in the United States seemingly oblivious to the fact that since the 1990s millions of cars have been made in America by European brands—especially German ones.

Volkswagen said last year it is investing $10 billion in the US, split between its Chattanooga, Tennessee, plant and a joint venture with EV maker Rivian. South Carolina has the largest BMW assembly plant in the world—it made 396,000 automobiles there last year—and has been so successful over 30 years that BMW’s global CEO, Oliver Zipse, recently received an economic award from the state’s Republican governor.

Porsche and Daimler also build vehicles in the US. German automaker plants in Alabama, South Carolina, Texas, and other Trump-voting states directly employ some 50,000 American workers, with yet more employed by parts suppliers, dealerships, and service centers.

“To make any distinction between what is an American car and what is a German car is nonsense," says Jacob Kirkegaard, a European trade expert with the Washington, DC-based Peterson Institute for International Economics.

There’s also an increased international comingling of car brands. Chrysler, historically one of the Big Three US automakers alongside GM and Ford, was bought by Fiat of Italy and, since 2021, has been part of the Amsterdam-headquartered Stellantis group, which owns the supposedly all-American brands Dodge, Jeep, and Ram Trucks.

Also, imposing tariffs on European cars won’t supercharge Trump’s plans for US automakers to sell more cars in Europe, experts say. Kirkegaard says putting hefty tariffs on any part of the auto industry could lead to price hikes globally.

“This is an industry that has very, very long supply chains,” Kirkegaard says. “The imposition of further tariffs on the auto industry would severely disrupt those supply chains.”

Nevertheless, Trump is right about an imbalance in car sales between Europe and the US. The EU currently levies a 10 percent tariff on car imports, while the US imposes 2.5 percent. The US is the number one export destination for EU-made cars. In 2023, European car manufacturers exported $58 billion worth of vehicles and components to the US, accounting for 20 percent of the EU’s total automotive export value and supporting almost 14 million European jobs. Because of their greater reliance on US sales, Volkswagen, Volvo, and Stellantis are the most threatened by Trump’s tariff weaponization.

Trump’s threat to raise the tariff to 25 percent, making imported European cars significantly less competitive against American and non-EU alternatives, could dent car sales overall forcing automakers to reduce investment globally, and this could lead to workforce culls or plant closures in the US.

Nor will European consumers buy more American cars anytime soon. It might hurt Trump to learn this, but European consumers aren’t overly fussed about US-made cars, especially gas-powered ones. While SUVs now account for half of all European auto sales (note that these SUVs are smaller than the ones made in the US), these are primarily manufactured in the EU because European consumers prefer EU-built internal combustion engine (ICE) cars.

The reason? These EU-built models are generally safer than US-built cars because of more demanding EU safety standards and, because of stricter emissions regulations, they also tend to have cleaner engines. Europe’s ICE cars also tend to be more fuel-efficient, making them cheaper to run, a key sales benefit in countries where gas is not as subsidized as it is in the US.

Tesla sales are now dropping off a cliff in France, Germany, and Sweden—being lampooned as Swasticars is boosting this vertiginous fall from grace—but for the last several years the company has dominated EU sales of electric cars, although that’s via the firm’s vanilla offerings. The discordant Cybertruck falls foul of multiple EU safety rules and therefore can't be sold in Europe, even if European consumers wanted such truck in the first place. And according to Clarissa Hahn, an automotive economist at the London-based consulting firm Oxford Economics, they don’t: “Most Europeans don’t want to buy Tesla Cybertrucks or other huge SUVs, as they're simply not suited to European tastes.”

American automakers mostly make autos for Americans. For the likes of GM and others, there’s little tailoring to a non-US audience. Ford’s F150 might shine in America, but large trucks aren’t anywhere near as popular in Europe, where city roads are narrower and parking spaces smaller.

Source- Wired

by RTC Director