Auto Tariffs

The Trump-sized risk that won't go away

ONLY USE ONCE – Handelsblatt Autogipfel 2017 Dieter Zetsche Gabor Steingart Mercedes Daimler CEO Handelsblatt publisher
Daimler CEO Dieter Zetsche (here with Handelsblatt publisher Gabor Steingart) worries about Trump trade restrictions on car imports. Source: Marc-Steffen Unger for Handelsblatt

The steady drumbeat of protectionist rhetoric flowing out of Washington is leading German automakers to voice increasing concerns that their car exports to the lucrative American market could be hampered by tariffs or other Trump administration efforts to restrict trade.

Appearing at an “auto summit” conference organized by Handelsblatt, Matthias Müller, the chief executive of Volkswagen Group, was asked if he thought that the question of US tariffs had been resolved. “Unfortunately, the topic is still on the table,” Mr. Müller said, “There are three different versions, which would each be difficult for us in different ways. We cannot just simply move our factory.”

He appeared to be referring to Volkswagen’s existing vehicle assembly plants in Mexico, including a facility in Puebla that is the company’s largest factory outside Germany. VW subsidiary Audi also opened a €1.6 billion ($1.9 billion) plant to assemble SUVs in Mexico last year.

Similar concerns were voiced at the Handelsblatt conference by Dieter Zetsche, CEO of Daimler, the parent of Mercedes, who urged Germany to make its conviction clear that “free trade is the only way forward.” He said trade restrictions harm everyone, most of all the countries that initiate protectionism. Mercedes is making SUVs at a factory in Mexico.

“The anxiety has not faded. There is a great deal of uncertainty.”

Dieter Zetsche, CEO of Daimler

Mr. Zetsche said that US rhetoric has yet to have an impact on car sales, but asked if his worries about Mr. Trump had faded in the 10 months since he took office as US president, Mr. Zetsche replied: “The anxiety has not faded. There is a great deal of uncertainty.” He said that while he is usually an optimist, “there remains a risk.”

He noted that while Daimler’s chief economist found the global economic outlook to be free of any dark clouds on the horizon, the political situation was just the opposite. “We can almost not see through the clouds,” he quipped. “It is quite clear that politics could have a huge impact on economics.”

President Trump said in May that “the Germans are very bad,” later clarified by the White House to mean bad at international trade because of the country’s €54 billion trade surplus with the United States, much of which comes from car sales. Responding to BMW’s plans to open a car factory in Mexico next year, Mr. Trump threatened to impose a 35 percent tariff on German car imports unless German companies moved their factories to produce vehicles in the US.

In addition to attacking the Germans, the administration has demanded that a new North American Free Trade Agreement, which is being negotiated by Washington, Canada and Mexico, be rejiggered to require that cars contain at least 85 percent content from the three countries to qualify for duty free treatment when shipped across borders, up from 65 percent currently. The Trump administration has also added a new demand that 50 percent of the content had to be made at American plants to qualify for tariff-free entry into the US.

While these changes are aimed primarily at domestic car manufacturers that have moved some production offshore to Mexico, they would also impact German companies assembling cars there. Joshua Meltzer, a senior fellow in the Global Economy and Development program at the Brookings Institution in Washington, said the German firms were “absolutely correct” to worry about the Trump administration’s trade policy.

“Trade could be heading down a track that could be very disruptive to companies like the German car manufacturers,” Mr. Meltzer said. “President Trump doesn’t understand international trade and believes he can spin it as a political win for himself even if it hurts his own constituents.”

VW’s Mr. Müller said he was also worried about the decline of Europe’s ability to influence events now unfolding in Washington or Eastern Europe. “I am an avowed European but Europe seems to be weakening at the moment,” he said.

He contrasted VW’s relations dilemma about the US with its relations with China, which had imposed a quota for electric vehicles that worried German companies because they are not yet equipped to meet the numbers required. VW had engaged with the Chinese early on and reached a compromise to delay implementation of the quotas, which he called a “reasonable balance between Chinese authorities and German manufacturers.” Mr. Müller is unlikely to get that kind of balance from Mr. Trump.

Gabor Steingart is publisher of Handelsblatt. Sven Afhüppe is the editor-in-chief of Handelsblatt. Charles Wallace, an editor in New York, contributed to and adapted this story for Handelsblatt Global. To contact the authors: steingart@handelsblatt.com and afhueppe@handelsblatt.com.

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