June 20, 2018 / 3:28 PM / 3 months ago

Breakingviews - EU’s best bet is to indulge Trump on car tariffs

LONDON (Reuters Breakingviews) - Facing a possible trade tit-for-tat with U.S. President Donald Trump, the European Union has two unpalatable options: keep matching American measures, or extend a hand to defuse tensions. Offering to slash tariffs on auto imports would dent Europe’s pride, but might avert further economic damage.

German Chancellor Angela Merkel speaks to U.S. President Donald Trump during the second day of the G7 meeting in Charlevoix city of La Malbaie, Quebec, Canada, June 9, 2018. Bundesregierung/Jesco Denzel/Handout

The tension is Trump’s doing. His administration imposed steel and aluminium duties on allies like the EU, Canada and Mexico, and started a probe into car, truck and auto-part imports that might mean tariffs. Europe responded to the steel measures with planned levies targeting products from Republican districts, like Kentucky bourbon. It could hit back again if Trump goes ahead with the car tariffs, which might be as high as 25 percent according to the Wall Street Journal.

Best not to let things get that far. Trump’s mooted auto tariffs would cost German trio Volkswagen, Daimler and BMW about $5.3 billion if they absorbed the costs, reckon Evercore ISI analysts. A proportionate countermeasure on other products would hammer Europeans with higher prices, and Trump is unlikely to be deterred by World Trade Organization challenges.

Luckily, Europe has a carrot to offer. Trump’s main gripe on cars, judging from his tweets, is that Europe charges a 10 percent duty on U.S. auto imports – higher than America’s equivalent 2.5 percent tariff. In reality, just 1 billion euros of a total 6.5 billion euros of U.S. passenger car imports last year were subject to the full tariff, according to EU data. American car companies like Ford have shifted away from the sedans Europeans prefer, so are unlikely to suddenly start outselling Volkswagen and co.

There would be costs. WTO rules mean Europe would have to drop the tariff for everyone, raising the threat of cheap Chinese electric cars encroaching on BMW and Renault’s turf. But tariffs, which ultimately punish consumers, are the wrong solution. Better for Europe to incentivise heavier investment in electric vehicles, as has the People’s Republic.

The move might also be seen as rewarding Trump’s antics, setting a bad precedent. By making the move conditional on the United States dropping its own tariffs, and using it as an incentive to come to the negotiating table, Europe can remove that risk. Regardless, it’s a better option than helping contribute to an all-out trade war.

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