Trade War Heats Up as EU Vows to Retaliate on U.S. Auto Tariffs

(Bloomberg) -- The European Union vowed prompt retaliation if the U.S. follows through on a threat to impose tariffs on imported vehicles, as trans-Atlantic trade tensions showed no signs of easing.

If European exports are hit by U.S. actions, the EU will “react in a swift and adequate manner,” Margaritis Schinas, a spokesman for the European Commission, told reporters in Brussels on Monday -- a day after President Donald Trump received a report on the national-security implications posed by auto imports.

Trade War Heats Up as EU Vows to Retaliate on U.S. Auto Tariffs

The EU has prepared tariffs on a total of 20 billion euros ($23 billion) in U.S. goods should Trump follow through on his threat, which would chiefly hit Germany. Chancellor Angela Merkel gave an impassioned defense of the country’s car industry to an audience of senior security officials in Munich over the weekend, calling the Trump administration’s suggestion that European autos are a threat to U.S. security a “shock.”

The car dispute follows American tariffs on European steel and aluminum imports, brought using the same national-security justification. The bloc retaliated imposing duties on 2.8 billion euros of U.S. imports, ranging from Harley-Davidson Inc. motorcycles to Levi Strauss & Co. jeans.

The renewed threat of car duties calls into question a tentative truce reached in July. At a meeting in Washington, Trump and European Commission President Jean-Claude Juncker agreed to a political accord to “work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods.”

Uneasy Detente

At the July meeting, “we agreed that both the EU and the U.S. would refrain from taking any measures that would go against the spirit and the letter of the joint statement,” Schinas said. “President Juncker trusts President Trump’s word. The European Union will stick to its word as long as the U.S. does the same.”

Later this week in Bucharest, trade ministers from the 28 EU member states will discuss draft mandates so that official talks with Washington can begin on a trade agreement.

U.S. tariffs on European cars would mark a significant escalation of trans-Atlantic tensions because the value of EU automotive exports to the American market is about 10 times greater than the bloc’s steel and aluminum exports. As a result, European retaliatory duties would target a larger amount of U.S. exports to Europe.

A 25 percent U.S. levy on foreign cars would add 10,000 euros to the sticker price of European vehicles imported into the country, according to the Commission. That would especially affect German brands such as Volkswagen, Porsche and Mercedes-Benz.

German Shock

If the U.S. imposed permanent tariffs of 25 percent, German car exports to the U.S. could fall by almost 50 percent, or about 17 billion euros, according to the Ifo Institute. Total European car exports would fall by 18.4 billion euros, or 7.7 percent. The risk to Germany’s economic prompted Merkel to push back by pointing to BMW’s plant in South Carolina, the carmaker’s largest factory worldwide and the home to models such as the X5 sport utility vehicle.

“Look, we’re proud of our cars. We’re allowed to be,” Merkel said Saturday in Munich, where BMW is based. “And these cars are built in the United States of America. If these cars -- which are no less a threat than those built in Bavaria -- are suddenly a national security threat to the U.S., then that’s a shock to us.”

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