Trump’s Car Tariffs and Transatlantic Reciprocity

All of Washington agrees that trade and investment between Europe and the United States make the transatlantic market the most integrated economic area in the world. That’s not FAKE news, but a quote from the web site of the Office of the U.S. Trade Representative.

Two-way U.S.-EU trade has been roughly balanced over time and the very high levels of foreign investment accounted for by each in the other’s markets means that the transatlantic economy is arguably the most integrated on Earth.

Except for the only one whose opinion really matters in America’s contemporary parallel “truth” universe is that of the current occupant of the White House. The President, in his speeches and tweets, loves to hammer away at the fact that other countries “rape” the United States.

Trump is particularly irate about the “scandalous” tariff that the EU imposes on imported cars – levied at 10% — when the United Sates has a tariff of only 2.5%. Hence a call for reciprocity!

It sounds entirely reasonable – if it weren’t for those pesky details. The real world is, alas, more complex. President Trump and his sidekick Wilbur Ross, the current U.S. Secretary of Commerce, live in a world where everything is binary. Their preferred alternatives are: Either I win – or you lose. Everything else is “cheating.”

Those pesky facts

Both Trump and Ross conveniently forget that there are actually two U.S. tariffs on automobiles: 2.5% on light vehicles, but 25% on pickup trucks.

That second one — in case you care about the truth — was not any untoward demand by the Europeans. Instead, it was imposed by Lyndon B. Johnson, the 36th President of the United States, all the way back in 1964.

The pretext for this tariff was the so-called chicken war with Europe. The real motive was to answer the plea from the UAW (the United Autoworkers Union) to keep Volkswagen mini-buses out of the U.S. market. The 25% tariff, at this high level an aberration even in the U.S., world champion of so-called tariff peaks has not been touched since.

It would have stayed at the same level for 25 years in the now defunct TPP. Does the call for discussions on the 10% European tariff mean that the Trump administration is ready to put on the table that 25%? This will be greeted with enthusiasm in Detroit.

The problem for Trump arises as soon as one realizes that trade negotiations are actually more complex than a game of strip poker. In trade negotiations, the tit-for-tat is called reciprocity. It is measured not in a binary fashion, but across many sectors, in accordance with Ricardian principles: Think Bordeaux wine versus British textiles in the 18th century.

The very basic calculation to find a deal that is fair to both sides runs as follows: You multiply the volume of trade by the lowering of tariff on a given product, add all tariff lines and the numbers for the two parties must be equal at the end of the process.

The Uruguay Round

And so it was that, during the last major tariff negotiation between the United States and the EU, the Uruguay Round in the GATT (1986-1993), American and European negotiators (myself included) spent sleepless nights making sure that their bilateral concessions were strictly equivalent.

Never once did the U.S. side request a reduction of the EU tariff on automobiles. Was that a matter of their incompetence? Or a sign of a traitor to the American cause?

No. In the United States, the main competitor on the car market at the time was Japan. The Big Three – GM, Ford and Chrysler – lived happily sheltered behind the wall of the 25% duty on pick-ups. They also loved the euphemistically called “voluntary exports restraints.”

Those are GATT-illegal export restrictions which were adamantly pursued by the U.S. government and which Japan agreed to in the trade equivalent of a shot-gun wedding. (Those sacred vows lasted till 1994).

Meanwhile, the Europeans chose to maintain their tariffs at 10%. This move received the enthusiastic support of the European subsidiaries of the United States’s Big Three automobile manufacturers. Their European subsidiaries, mostly established in Germany, catered to the local market under the protection of the — GATT or WTO legal — EU tariff, which raised by 10% the cost of imported Japanese cars.

The magic question

Would an alignment of the European duty rate on the American one (down to 2.5% from the current 10%) generate a tidal wave of made-in-America cars to Europe?

Unlikely. Even Donald Trump should know why. He has owned more Ferraris, Lamborghinis or Mercedes-Benzes than Cadillacs. Not that such truth would matter to him. For Trump, it’s always “do as I say,” not as I do myself.

Selling cars to Europe is a bit like selling coal to Newcastle (in the olden days, when there was still coal in Newcastle). Look at car rankings inside the United States: Japanese and European cars top US models in terms of customer satisfaction.

It should not come as a surprise to anyone who ever took an Economy 101 class. If you are a Big Three manufacturer in Detroit, why would you try to compete on the light vehicle market with exports to Europe when you can have big fat margins on domestic sales of pick-ups inside the United States, protected behind a 25% tariff wall?

Add that any move by the Trump administration to weaken the fuel economy standards or raise emissions will be an added handicap in the European market, where consumers care about fuel costs and the fight against climate change.

Enough said about cars. If you want to look at surpluses on a strictly sectoral basis, what if the U.S. trading partners were looking at deficits in the aerospace industries or services (Hollywood movies)? Or to the digital economy and the insolent domination of the Silicon Valley-based tax artists, called internet robber barons?

Better not to throw stones when you live in a glass house!