It's complicated

Will Trump's tariffs really hurt German carmakers?

Auto Show Detroit
But for how much longer? Source: DPA

These are worrying times for German carmakers. The industry relies on exports, and one of its biggest markets is starting to pull the plug. First, US President Donald Trump introduced punitive tariffs on steel and aluminium imports, threatening a global trade war, then, at a campaign rally last week, he warned that if the European Union did not open up its markets, “we’re going to tax Mercedes-Benz, and we’re going to tax BMW!”

The threat is all too real. If Mr. Trump does start a trade war with Europe – and many indications suggest he may – the German car industry would undoubtedly lose out. In 2017, its American revenues amounted to €29.4 billion ($36 billion), and 1.3 million German vehicles were sold in the country, 10 percent of total production. So on the face of it, a 25 percent tariff on foreign car imports, as threatened by Mr. Trump, could be devastating for the industry, which directly or indirectly supports almost 2 million German jobs.

But the situation is nuanced. Of the 1.3 million vehicles, some 800,000 were actually built in American factories. Many thousands more were made in German factories in Mexico, which is part of the NAFTA free trade area. And then there’s the fact that the Germans export many of their US and Mexican-built cars, and support 110,000 US jobs. So exactly how worried should VW, BMW, Mercedes et al be about Mr. Trump’s saber rattling?

“We have to take the president's statements seriously.”

Frank Witter, CFO, Volkswagen

So far, the industry’s greatest export asset, Chancellor Angela Merkel, has taken a softly-softly approach, with the full support of the carmakers. For more than a year now, their response to Mr. Trump’s threats has been to placate and appease, and then continue doing business as before. BMW CEO Harald Krüger even hotfooted it to the White House last January after Mr. Trump attacked his company, wisely with a US apprentice from the company’s massive South Carolina plant in tow.

But this hands-off approach reflects the fact that, to date, there has been no substantial action taken against German automakers. Threats to impose tariffs on Mexican car production have not materialized, mainly as a result of NAFTA contraints, and BMW and Mercedes have stuck with plans to open new production sites south of the US border. Audi began making cars there last year.

Even if Mr. Trump renegotiates NAFTA with Mexico on stricter terms, it may well involve no more than a 2.5 percent tariff increase on Mexican-made vehicles and components. American automakers also build cars south of the border, and are lobbying hard to maintain their complex cross-border logistics.

The US president’s threat of tolls on European car production is more of a concern. “A real trade war between the USA and the European Union would be on a different scale to NAFTA renegotiation,” said one German car executive. Audi and Porsche would be particularly hard hit by a hike in tariffs, since they produce cars almost entirely in Germany, while exporting large quantities to the American market. Almost a quarter of Porsche’s sales are in the United States.

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As a result of the threat, German automakers are upping their conciliatory tone, hoping to dissuade the US government from aggressive trade tactics. Herbert Diess, CEO of the Volkswagen brand, even seemed to channel Mr. Trump recently. “You have to ask why Europe has 10 percent tariffs on American cars. The Americans don’t do that,” he said. And Bernhard Mattes, the new head of the German Association of the Automotive Industry, said a trade war must be “avoided by all means.” He has demanded that the German government, EU and car firms do everything possible to resolve the conflict.

Nonetheless, the industry is preparing for the worst. “We have to take the president’s statements seriously,” said Frank Witter, Volkswagen’s chief financial officer. The firm has asked all brands with American business – including its main VW brand, as well as Audi and Porsche – to calculate the possible impact of tariffs on their operations and bottom line, Handelsblatt has learned from company sources.

Manufacturers may decide not to pass on the full impact of any new tariff to their customers. But this would mean absorbing losses; for VW, already losing money in the US in the wake of the Dieselgate scandal, this would be a bitter pill. The company could ramp up production at its factory in Chattanooga, Tennessee, but any change in production schedules would be a slow and complicated process.

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To ward off trouble and mollify Mr. Trump, the industry seems to be pinning its hopes on lobbying from Republican politicians with German car plants in their home states. Daimler will be targeting Republicans in Alabama, home to its big US factory, while BMW hopes figures like Lindsay Graham, US senator for South Carolina, can help out. It’s plant in Spartanburg is the company’s largest anywhere in the world, employing 10,000 people. Many of the cars made there are exported to China: by some counts, BMW is actually America’s largest exporter of cars.

In the long term, those German carmakers that can, may look to increase their US production to avoid tariffs. But that move could run into trouble thanks to another knock-on effect of Mr. Trump’s protectionism. If, as expected, China is targeted with US tariffs, it may retaliate by imposing tolls on US imports, hammering German carmakers on another front. In what could turn into an increasingly complex game of trade chess, BMW’s Mr. Krüger has already reacted to that threat, announcing increased production of the firm’s X1 and X3 SUVs in its Chinese plants. The question is, where will it stop?

 

Handelsblatt journalists, including auto industry specialists Markus Fasse and Stefan Menzel, contributed to this report.

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