(Bloomberg Opinion) -- If Donald Trump had his way, the U.S. wouldn’t import any German cars at all. “Build them here!” he barked in a recent tweet threatening 20 percent tariffs on European automakers.
No matter that the Germans have invested billions of dollars in U.S. plants and their employees build hundreds of thousands of cars in the country annually, many of them for export. Until every last BMW, Mercedes or VW sold in the U.S. is also built there by an American worker, it probably won’t be enough.
Trump’s tariff threats are an attack on the German automakers’ business model, compounding the challenge from the decline of diesel and the rise of electric and autonomous vehicles. They may need to become less ambitious, and less profitable. Little wonder VW shares are down 25 percent from their peak this year and BMW 20 percent.
Perhaps Trump’s latest spat will end in some kind of grand bargain. Perhaps Europe and the U.S. will agree to eradicate all automotive-related tariffs and trade barriers (BMW CEO Harald Krueger is among those openly pushing the idea). But don’t hold your breath. Trump is an economic nationalist who thinks European companies are out to raid America’s “piggy bank.” He also appears to have spent too much time roaming the car parks of his upscale country clubs and seems to think German carmakers have a stranglehold over the U.S. market. In reality, they account for about 8 percent of it.
And if Europe scrapped its 10 percent tariff on car imports in return for the U.S. giving up its 2.5 percent tariff on cars and 25 percent levy on commercial vehicles and light trucks, the Germans would probably benefit most. Former vice-chancellor Sigmar Gabriel had it right when he quipped last year that the way to fix America’s trade deficit in autos was not by reducing tariffs but for the U.S. to “build better cars.”
Instead GM and Ford are lowering their ambitions, choosing to focus more of their efforts on selling trucks to American consumers. These have become a cash-cow for U.S manufacturers over the years in part because that 25 percent tariff protected them from foreign competition.
Until now, Germany’s automakers have been deft at navigating the protectionist impulses of foreign governments. In China they entered costly technology- and production-sharing joint ventures to gain access to the massive local market. In India, Russia and elsewhere they ship kits of components for assembly by local workers, thus circumventing high import tariffs on finished autos.
Efficient? Hardly. Yet even with these compromises the trio generated a combined 30 billion euros of net income last year, far more than their more Europe-focused French rivals. And unlike Detroit, the Germans didn’t require a bailout in 2008.
Central to Germany’s success was a strategy of setting up factories in regions where they sell most cars and where they could benefit from free trade agreements and cross-border supply chains. The U.S. is a big car market and is part of the North American Free Trade Agreement, so it was a natural home for BMW and Mercedes-Benz’s sport utility vehicles production.
The various tariffs and retaliatory actions that have been proposed could cost BMW almost a fifth of next year’s estimated operating profit, estimates Max Warburton, analyst at Bernstein Research. For Mercedes and VW the hit could be about one-tenth. Building every single model locally — as Trump seems to want — would add yet more pain. “If production plants need to be split and tooling duplicated, it will harm margins significantly,” according to Warburton.
Making more lower-margin sedans in the U.S., where labor costs are high and the vehicles aren’t that popular anyway, would only squeeze margins further. That’s why VW builds so many of them in Mexico. Typically, about 40 percent of the components of a vehicle imported from Mexico are made by U.S workers, according to the Association of Global Automakers. Not that Trump cares about that.
Hence the U.S. president is really advocating that Germany’s carmakers invest in a lot more robots and/or make less money. Meanwhile for consumers, his tariffs spell higher prices and less choice. In theory, the beneficiaries will be those carmakers who haven’t been as successful expanding overseas, like Peugeot, or those that focus on a couple of very large regional markets, like GM. But GM’s warning on Friday that tariffs would also undermine its competitiveness, suggests such benefits are illusory in practice. As an economic vision, “Build them here!” is a bleak one.
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