Shifting gears

US envoy proposes zero tariffs to German carmakers

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Let's do it my way. Or the highway. Source: DPA

The US ambassador to Germany, Richard Grenell, spent the first Fourth of July holiday in his host country on the job. He held a “secret” meeting with carmakers, seeking to defuse a trade dispute that threatens to cripple exports of Germany’s popular cars to the United States.

According to industry sources, Mr. Grenell invited an exclusive group of chief executives to the meeting to convey an offer directly from President Donald Trump — elimination of all tariffs on automobile imports on both sides and removal of non-tariff barriers, such as regulations on the size of rear mirrors.

If only. Dieter Zetsche, Herbert Diess, and Harald Krüger — the CEOs of Daimler, Volkswagen and BMW respectively — must have thought they were dreaming to get such an offer from the president’s confidant. It could mark a turnaround from Donald Trump’s aggressive trade strategy with Europe, a long-term partner in politics and business, and prevent a trade war between the two blocs.

After he slapped import duties on European steel and aluminum imported into the US from June 1, the US president has threatened to levy a 20-percent tariff on auto imports from the EU. Mr. Trump complains that the EU tariff of 10-percent on auto imports is unfair given that the US tariff is currently only 2.5 percent. The 20-percent tax would also be retaliation against European counter-levies on US products, which came into force last week.

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US levies on European cars would especially hit German carmakers, which export hundred thousands of cars per year to the US as well as a range of auto components. It could also trigger a retaliation wave of higher tariffs in other countries, denting German car exports around the globe.

The offer from Mr. Grenell, who has twice offended Germans since taking office in May, came after BMW, VW and Mercedes-maker Daimler urged the Trump administration to reconsider its protectionist stance. After all, the German carmakers all have factories in the US and export some 430,000 cars from America to other countries. These sales, and the corresponding jobs, are also on the line if a fully-fledged trade war breaks out.

The US ambassador’s proposal, however, has strings attached: Firstly, the German companies must commit to invest and create more jobs in the US. Secondly, a bilateral deal on cars with Germany or even the European Union would violate international trade rules that seek to keep the global field level for all players.

The second issue is a real problem. World Trade Organization regulations would give all its 164 member the same advantages as the US and Europe would enjoy if the two blocs lift all duties on cars. In Europe, this could lead to substantially higher imports from Japan, South Korea and China, which would hit the market shares of European carmakers.

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An alternative would be an agreement on tariffs among major auto exporters. This would bring in Japan, South Korea and China as well as the US and EU. To fit into WTO rules, however, such an accord would also require the unanimous consent of all 164 members, or the tariffs agreed upon must be extended to all members. China might consider it a better course to abstain from the agreement and benefit from its decision without making any commitment on its own tariffs. This type of multilateral accord faces another hurdle: It is precisely the type Mr. Trump doesn’t like.

A third option under consideration is a streamlined version of the Transatlantic Trade and Investment Partnership (TTIP) deal that was under negotiation but effectively abandoned when Mr. Trump took office last year. This “TTIP Lite” would include cars but fulfill WTO rules for a comprehensive agreement. Other WTO members cannot take advantage of such deals.

However, French President Emmanuel Macron is not supporter of this route. He has clearly indicated he would prefer to have a unified Europe – under his leadership – as an economic counterweight to the United States, rather than submit time after time unilateral decisions by Washington. Mr. Macron has argued that Mr. Trump only understands a language of strength. Moreover, after the US unilaterally withdrew from the Paris climate accords and the Iran nuclear deal, the French president sees no reason to accommodate his US counterpart.

France, of course, has much less at stake in the dispute over auto tariffs, because it hardly sells any cars to US customers. In fact, a comprehensive trade agreement would delve into agricultural products, creating problems with France’s powerful farm lobby that Mr. Macron would sooner avoid.

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European Commission President Jean-Claude Juncker will visit Mr. Trump at the end of this month to improve the trans-Atlantic relationship. Mr. Juncker is considering the options of a multilateral deal on cars and TTIP Lite, sources in Brussels said. But he has not yet decided which proposal he would discuss with the US president.

There is skepticism in Brussels that any effort to appease the US president – even TTIP Lite – would deter him from his aggressive course. Rather, the auto dispute is likelier to follow the pattern set by the US tariffs on steel and aluminum that went into effect June 1. These would include filing a complaint with the WTO, setting protective measures for domestic industry, and imposing retaliatory tariffs on US imports. Under that scenario, there would be no U-turn on Donald Trump’s policies, but a head-to-head collision course called trade war.

Given the importance of its auto industry, Germany is eager to avoid such escalation. “It’s worth every effort to try to defuse this conflict so it doesn’t become a real war,” Chancellor Angela Merkel said in parliament on Wednesday.

Sven Afhüppe, Thomas Sigmund, Markus Fasse, Dana Heide, Jan Hildebrand and Till Hoppe contributed to this report. Darrell Delamaide and Gilbert Kreijger adapted the article into English. To contact the authors: d.delamaide@extern.handelsblatt.com and kreijger@handelsblatt.com.

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