Trump’s Car Tariffs Would Victimize Eastern Europe, Too

(Bloomberg Opinion) -- Germany may be the biggest likely victim of any punitive U.S. tariffs on car imports, but the industry’s complex geography means other European countries would also be hurt – and in relative terms, some may take an even bigger hit. Two of them, Italy and Hungary, are run by populist governments with leaders well-disposed toward President Donald Trump.

Eight of the top 15 countries that export cars to the U.S. are European. Asked to name them, most Americans would probably mention Germany, Italy, the U.K. and Sweden – each of them home to popular car brands. It’s not well known Fiat Chrysler Automobiles NV’s Jeep Renegade, one of its best-sellers in the U.S., is made in Melfi, Italy. It will surprise many, too, that Slovakia, Hungary and Finland are among the top exporters, selling more than $1 billion of cars a year each.

Few in the U.S. have ever heard of a Slovak car -- but Volkswagen AG, Slovakia’s biggest private sector employer, produces Touareg SUVs, Audi Q7s and Porsche Cayennes for the U.S. market in Bratislava. Daimler AG and VW brand Audi have large factories in Hungary, while Finland’s Valmet Automotive is a big contract manufacturer for Daimler.

That, however, is only the most visible part of European countries’ automotive exports to the U.S.; central and eastern European nations are deeply integrated into international production chains, especially those of German manufacturers. In Hungary and Poland, components - body and chassis parts, and in Hungary also engines – account for a greater share of automotive exports than complete vehicles. Austria and the Czech Republic are also notable component exporters. 

Last year, Robert Stehrer, a trade economist at the Vienna Institute for International Economic Studies, calculated that the direct and indirect value added due to car exports to the U.S. amounted to between 0.5 percent and 0.9 percent of economic output in Hungary, Slovakia, the Czech Republic and Austria.

But that can hardly be a precise calculation because not enough data are available about the constantly changing state of the automotive industry’s value chains. Even in complete vehicle production, Finland turned into a major exporter to the U.S. in just two years thanks to the Valmet-Daimler contract; when it comes to components, the geography of supplies changes as manufacturers’ model lines, procurement and sales strategy shift.

When it comes to the threatened 25 percent U.S. tariff, it’s not easy to calculate the potential damage to countries that export components to Germany and other countries where “German” cars are made.

If the tariff prompts manufacturers to try and cut costs, eastern European countries might benefit over time. But in the near-term, they would all stand to lose as sales decline. Hungary and Slovakia, with their almost entirely export-oriented automotive industries, would be first in line.

The direct effects of the tariffs on economic output may turn out to be small; after all, demand for luxury cars like those Slovak-made Porsches isn’t particularly price-elastic. But in the highly flexible auto industry, job cuts are almost inevitable after any kind of shock to sales. The ripple effect will be noticeable in small countries like Hungary and Slovakia.

Eastern European countries tend now to have a more positive image of the U.S. than those to the west. In Hungary, favorability toward the U.S. has even risen a little, to 63 percent in 2018 from 62 percent at the end of the Obama presidency; in Germany, it fell to 30 percent from 57 percent.

A U.S. attack on one of these countries’ most lucrative export industries, however, would not be good for America’s popularity. It would also be likely to damp the enthusiasm shown by the region’s populist leaders for Trump. It’s difficult to imagine them backing the tariff or trying to explain it away; America First, in this case, means direct damage to Hungary First, Slovakia First, or Italy First.

With his tariff threats, Trump isn’t just alienating Germany. He’s sowing the seeds of anti-Americanism where it wasn’t widespread before – in countries grateful to the U.S. for giving them a chance at a better life than they had as Soviet satellites. Undermining the economic growth of which eastern Europeans are proud isn’t a smart policy for the U.S., however Trump may feel about German cars.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

©2019 Bloomberg L.P.