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Trump ramps up pressure on German car manufacturers

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12/01/2018 | 12:42pm EDT

As the G20 summit starts in Argentina, the White House opportunely leaked information that Donald Trump would be ready to act on his threat of placing a 25% surtax on vehicles imported into the United States. A tightening of the American position which comes after a calmer period, following the summer meeting between Trump and the president of the European Commission, Jean-Claude Juncker. Now that experts have some perspective on the issue, what would happen if Washington carried out its threat?

Let's start with an inventory. In 2017, the export of vehicles by the EU looked like this, according to the European Automobile Manufacturers' Association:

This represents 5.875 million vehicles exported for 138.6 billion euros ($157.5 billion), 91.4% of which are passenger cars. The inflow corresponds to 3.66 million vehicles for 48.25 billion euros, which guarantees a trade surplus of 90.32 billion euros. First observation: the average price of a vehicle exported by the EU is €23 586, while the average import price is limited to €13 174. Europe is indeed a champion in the export of high-end vehicles. It goes without saying that the Mercedes SUV shipped to the United States or China will cost a little more than the Renault Clios produced by Renault in Turkey for the European market (Turkey is to the EU market what Mexico is to the US market).

The European automotive sector is an essential part of the old continent's economy. The industry itself directly employs 2.5 million people. Eurostat estimates that it employs a total of 13.3 million people, including indirect industries (tyres, electronics, sensors, air conditioning, etc.), distribution and services (concessions, garages, hire, accessories, etc.), transport and infrastructure construction. This represents 6.1% of European employees.
227 automotive plants in the EU (Source ACEA)

The overall trade balance with the United States shows that the Automotive sector accounts for one-third of the trade surplus in favor of Europe. "Given that cars and spare parts account for 33% of the EU's trade surplus with the USA, it is hardly surprising that the sector has attracted Washington's attention," say analysts at Barclays Bank. And of these 33%, no less than 55% are attributable to Germany.

In 2017, the EU produced a total of 19.6 million vehicles and exported 5.875 million vehicles, including 1.16 million to the United States, the main European export market, with 19.8% of the total, well ahead of China (9.7%). In value terms, the American market is significant: an average of €32 529 per passenger car exported, when this average only reaches €13 997 to Turkey, Europe's third largest export market. However, the Chinese market is also huge: €37,179 per vehicle exported, better than the United States. The appetite of the new local economic elite for European premium vehicles continues unabated.

However, Donald Trump has now reactivated his threats of taxing European imports. For the moment, French automakers can rest easy since they left the United States a long time ago. But for German car manufacturers, this is another story: BMW generates 14.8% of its turnover in the United States, but 71% of the vehicles sold at Uncle Sam are produced in Europe. For Porsche, the equation is even more complex: the group manufactures only in Germany but sells 23% of its models in the United States. The Germans are not the only ones potentially affected: Jaguar Land Rover is 100% established in the United Kingdom but makes 19% of its sales in the United States (will Brexit provide an answer?).


Share of vehicles sold in the USA produced in Europe - Zonebourse with Barclays

Where things are getting tough is that the flows of the automotive industry are highly globalized. Let's take BMW again. The group has a large factory in the United States, which assembles the large SUVs in the X range (X3, X4, X5, X6, X7), which are popular here in America. For site specialization reasons, the other models sold in the United States arrive from Europe by boat. The rest of the X-model production from the Spartanburg, South Carolina plant is mainly destined for China. Ironically, it is not General Motors, Ford or Chrysler that is the largest American automotive exporter by value, it is BMW. However, the large X models sold to the Chinese elites are now 40% taxed by Beijing, which has decided to overtax vehicles from the United States. If Donald Trump imposes a 25% surtax on vehicles produced in Europe, BMW will be penalized on its exports to the United States, while suffering a 40% surtax on its cars exported from the United States to China. In addition, there are other barriers previously erected, such as those affecting steel and aluminum supplies, whose impact on production costs is far from neutral.

The American President could make a big mess in the industry if he decides to go ahead with these tariffs. Barclays estimates that the introduction of a 25% surtax on car imports in the United States could cost 0.3 to 0.4% of European GDP in 2019, which would reduce it from 1.6% to 1.3% or even 1.2%. The magnitude of the shock would certainly require a monetary policy response, the British bank predicts. Especially if it occurs in parallel with a slowdown in the Chinese market, which is affected by trade tensions with the United States and by the structural reduction in the country's growth and a Brexit whose form remains uncertain. Unless the meeting organized by the White House next Tuesday with the German manufacturers changes the situation. Let’s wait and see…

Romain Fournier
© MarketScreener.com 2018
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