EU, Japan Reprieve From Trump Car Tariffs May Be Short-Lived

(Bloomberg) -- The sighs of relief for European and Japanese carmakers after Donald Trump’s expected decision to delay imposing punitive tariffs may prove premature.

The U.S. president is poised to give the EU and Japan 180 days to agree to a deal that would “limit or restrict” imports into the U.S. of automobiles and their parts, according to a draft executive order seen by Bloomberg. The problem is that Trump’s plan concludes that car imports do in fact constitute a national-security threat, and what he’s seeking in return for a tariff reprieve may not fly.

World Trade Organization rules prohibit any voluntary export restraints. The European Union, and especially countries like France, says it opposes any deal with the U.S. that would violate WTO rules and the international rules-based order.

EU, Japan Reprieve From Trump Car Tariffs May Be Short-Lived

“It’s extremely unlikely that the EU will accept quotas or any other form of quantitative restraint,” said Luisa Santos, director of international relations at BusinessEurope, the Brussels-based association of European trade federations. “In a moment the WTO is already under considerable strain this would be yet another blow to the system and I don’t think the EU would like to be responsible for this.”

The European Commission declined to comment until Trump’s decision is made public.

Optimists may hope that European powers which are most keen to avoid car tariffs, such as Germany, could convince the bloc to turn a blind eye to potential WTO violations with export restrictions. The bloc was ready to accept a fudged deal of this kind last year, when Trump threatened the EU with punitive tariffs on steel and aluminum.

In a last-ditch attempt to avoid the levies, the EU signaled it was willing to tolerate quotas. This means that it wouldn’t legally challenge or retaliate potential tariffs on steel and aluminum, as long as these were imposed after a certain volume of exports.

In practice, what Trump was demanding and what the EU was willing to tolerate proved impossible to reconcile. U.S. tariffs on steel and aluminum were eventually imposed, and the EU retaliated with duties on a long list of U.S. goods ranging from motorcycles to bourbon.

Talks Ongoing

The difference with last year’s trade brawl is that this time around the EU and the U.S. are formally negotiating a trade accord to cut tariffs on industrial goods and they have said they won’t impose additional levies while talks are moving.

But ongoing negotiations with Beijing didn’t stop Trump from hitting China with new duties, and judging from the president’s previous comments comparing the EU and China, there’s no guarantee he’ll treat his western allies any differently. And the EU has made clear that it would abandon negotiations if any new tariffs are levied.

Japan struck a similar agreement with the U.S. with regards to not escalating trade tensions. Japanese Chief Cabinet Secretary Yoshihide Suga noted Thursday that when Japan and the U.S. agreed last year to open bilateral trade talks, the U.S. pledged not to impose auto tariffs while talks were under way.

“Prime Minister Abe confirmed directly with President Trump that while trade talks are going on no actions will be taken against the spirit of the joint statement, and additional tariffs will not be imposed under Section 232 on cars or car parts,” Suga said.

High Stakes

French Finance Minister Bruno Le Maire backed the expected U.S. decision to delay auto tariffs because of the damage it could do the the economic prospects of the world.

"It’s a wise decision because we have to avoid any kind of trade war, any kind of sanctions and any kind tariffs that might jeopardize global growth all over the world and especially for Europe,” Le Maire said in Brussels on Thursday. “A trade war will have only negative consequences for global growth, for prosperity and for the creation of jobs in Europe.”

The stakes in the fight over U.S. levies on car imports and Europe’s anticipated retaliation couldn’t be higher. "U.S.-China trade is about 3% of global trade. Automobile trade globally is about 8% of global trade,” WTO’s Chief Economist Robert Koopman said in March. “So you can imagine that the impact of automobile tariffs are going to be bigger than the impact of the U.S.-China trade conflict."

The U.S. imported $191.7 billion in passenger vehicles and light trucks in 2018 with more than $90 billion of those imports coming from Canada and Mexico, which are duty-free under Nafta. Passenger cars are now subject to a 2.5% U.S. tariff but Trump has threatened to raise that to 25%, arguing that the EU and other countries have higher barriers to U.S. auto exports.

European carmakers Thursday gave up gains following the decision to delay tariffs. Volkswagen AG, maker of the Porsche and Audi brands, fell 1% after rising as much as 5.7% Wednesday. Daimler AG and BMW AG also declined, 1.1% and 0.2% respectively after rising by a similar amount the day before.

©2019 Bloomberg L.P.