Tariffs on EU Cars

It my understanding the Trump wants to raise tariffs on EU cars because, among other things, Europeans have a habit of buying cars made in Europe (paraphrased from radio report I heard this morning.) And the answer to this is to raise the tariffs on cars that they sell here? The EU has responded by agreeing to drop all tariffs on cars if the U.S. does the same. This is not good enough for Trump. I guess the question up for debate is - Does raising tariffs on EU cars sold in the U.S. have any impact on consumer preferences in Europe? If so, how? This makes zero sense to me but I am not as economically astute as the current resident of the White House.

The theory is that if the EU drops tariffs on cars then Europeans will buy more of them. The difficulty seems to be that the EU also wants tariffs on passenger trucks dropped and Ford and GM don’t like that part.

I think the logic is, the Europeans mostly buy European cars, so Americans should mostly buy American cars in order to reduce the trade deficit.

I think that Trump, in so far as he’s even aware of any of this stuff, wants to raise tariffs on EU cars (and several other things) because the EU places a VAT tax (that varies depending on the product, but is pretty high IIRC on US vehicles) that makes ours uncompetitive with products in the EU which don’t pay the same level of VAT. By the same token, European cars don’t pay a VAT tax in the US, since we don’t have one, so that means they compete pretty well in the US, especially if they have manufacturing plants in the US, which many do. That’s the most generous answer to why Trump is doing this stuff (the unflattering answer is he really doesn’t understand any of this shit and he’s doing it because he has a very simplistic view towards trade and it’s a populist position that gets a segment of the voting public riled in the US…and Trump probably believes he DOES understand this). I guess it’s also possible Trump is doing this to browbeat the EU into renegotiating and giving the US some concessions, or maybe to attempt a broader free trade agreement (which the US and EU doesn’t current have) of some kind.

VAT applies uniformly to domestic and imported products. There aren’t any special VAT rates for US cars as opposed to European cars.

Just going from memory, so grain of salt, but I believe that products manufactured in the EU don’t have the same tax level as those manufactured outside, especially those without a free trade agreement. If I have a chance I’ll look it up later, and I could be mis-remembering, but from what I recall this has been one of the main beefs US auto manufactures gripe about (while agricultural products are uniformly griped about outside of the US because of our subsidies). Assuming you are right about the VAT thing, there is still a 10% tariff on US cars.

Of course, I don’t really see any of this making a huge difference regardless. I don’t think that the EU is some vast untapped market for US car manufacturers, so don’t think that even if Trump got the Europeans to get rid of the 10% tariff (and presumably we got rid of the ancient 25% tariff on small trucks) that either market would be substantially affected. That’s the thing with all of this…it’s complex and not really subject to simple answers. Changing the tariff picture between the US and EU wouldn’t really have that great an impact. Then you have the fact that many European car manufactures actually manufacture cars IN the US, meaning they use US labor (and of course sell us cars our public obviously want to buy). And the fact that many individuals and companies make a lot of investment in the US, including buying our securities, which further complicates the picture. It’s easier to just rant about trade deficits than to look into all of the ramification so that they actually mean (and don’t mean), and it strikes a cord with many populist types who get all worked up about this stuff without even a basic understanding of how it works.

Yes. That’s correct. The EU has a tariff of 10% on imported cars (not just from the US, but from anywhere, unless abated by a trade agreement). The US also has a tariff in imported cars, but I think it’s only about 2.5%.

Then VAT is charged on all cars, domestic and imported, sold in the EU. The rate at which it is charged varies from member state to member state, but in all of them it applies to domestic and imported vehicles alike. Therefore it doesn’t advantage domestic manufacturers over foreign manufacturers.

The EU has proposed a deal whereby both sides drop their tariffs on cars to zero, and is also reportedly seeking to broaden the deal to include other major car-producing countries and regions.

Why wait until now? That’s a clear imbalance. Trump raises tariffs on anything, the EU instantly retaliates with equal tariffs. Yet the USA has been letting them charge a 10% tariff on American cars without matching?

I don’t think it’s right to look at this tariff in isolation. We have no idea how many deals hinge on that balance. It was probably a concession granted for some other advantage somewhere else. The only realistic way to look at this is to take the entire picture into account. Every trade deal, every exchange, every treaty, every alliance, and weigh all those costs compounded over god knows how many different variables and factors.

It’s interesting. I used to believe that our relationship with Europe is 100% beneficial all around. Now that I’ve waded through the data, all I really can say is “too hard, no idea.” I’m inclined to believe that a mercantile/isolationist USA would not benefit nearly so much as a globalist/hegemonic USA, but looking at things from the most distant picture, it almost looks like the middle class benefited most (historically) from the former and not the later. Again, though, “too hard, no idea.”

It would be very, very interesting to see a full blown analysis that takes into account all the benefits/costs to our relationship with Europe. Not in isolation, though, because I don’t think that’s useful. I feel like we gain way more than we lose, but “I feel” and “I have data and analysis to support” are lightyears apart from one another.

Because US auto makers haven’t been pressing for this. US auto manufacturers make cars for the EU market in the EU, where both Ford and GM enjoy significant market share. The cars they make in the US aren’t particularly aimed at European markets; even with zero tariffs, they wouldn’t expect to sell many US models into the EU. (Which is why Trump is not jumping up and down at the EU proposal for the reciprocal abolition of tariffs on cars; the truth is that even though the EU is giving up the larger tariff, it would probably benefit more from the elimination of the US 2.5% tariff than the US would from the elimination of the EU 10% tariff.)

More broadly, it’s rarely the case that, as between two countries, tariffs line up exactly. Each country has different interests, and there will be trade-offs. If A produces a lot of agricultural produce, while B produces not much of that but lots of consumer electronics (say), then in trade negotiations B may reduce tariffs on agricultural produce in return for A reducing tariffs on consumer electronics.

It seems to me that it would be most fair to just not pick winners. “X % tariffs on all goods. Lower yours, we lower ours”. This kind of corrupt bickering benefits some industries at the expense of others and makes it all unnecessarily complicated.

It would also make the tariffs easier to enforce and harder to cheat.

Well, it has to be said that tariffs generally have been substantially lowered in recent decades. But this has been most effectively done through the kind of multilateral arrangements on which Trump likes to piss.

When it comes to bilateral negotiations each side is going to pursue its own advantage, and what negotiating capital they have they will expend in the way that is most beneficial to them. Since they tend to have comparative advantages in different areas the incentives are all set up for this kind of asymmetric tariff system to develop. And that’s what happens.

I don’t pretend to know what’s going on in Trump’s brain, but I don’t think we can look at trade without considering national security. Under Trump, the United States seems to be rejecting outright or diminishing the value of multilateralism of all kinds. In its place is a foreign policy - economic, political, military - in which the United States engages with countries not as members of an alliance, but one on one, with the assumption that the United States has the dominant position and can force individual countries to capitulate to American demands.

Here’s why that’s significant: he wants to deal with China, not as a member of the WTO, but one on one. It seems that at least some of the motive behind his trade war with China isn’t just about intellectual property and unfair currency practices (the Yuan was actually strengthening); it’s about putting boundaries on Chinese power. It’s a rejection of the inevitability of China as a superpower rival to the United States.

The main reason for that tariff is to protect EU car makers from Asian ones, or make the Asian co’s establish production in the EU. The fact that it’s higher than the US general tariff on cars* is just past US policy to have a lower tariff for the classical economics benefit to the importing country of lower tariffs.

I find a lot of discussion of trade now doubly confused by the sort of seat-of-pants populist/merchantilist view most people naturally have, then further twisted around by ‘whatever Trump says must be wrong’. Some people who hate Trump were free traders all along, others are now pretending to be though a few years ago they were protectionist like the Democrats have generally be in recent times (NAFTA was backed by Bill Clinton but his party voted against it in Congress), others try to maintain the seat of pant populist view of trade themselves but still say Trump is all wrong.

Anyway per classical economics a 10% EU tariff is hurting the EU more than a 2.5% EU tariff would and should not worry the US. The US would hurt itself more with a 10% (not to mention a 25%) tariff on EU cars than leaving it at as 2.5%. But both would be better off at zero. It’s easier to argue that free trade with countries with a much different labor cost (eg. Mexico) causes negative social change which outweighs the aggregate economic benefit. And it’s easier to argue China is a special one-off case due to its size and role as putative challenger to the US as No. 1 power generally. That doesn’t mean free trade with developing countries is a bad idea, just that there’s a bit more of a leg to stand on in serious economics in arguing about it at the margin than there is wrt trade with other developed countries.

But back to EU, even accepting classical economics, in real life it tends to become a matter of game theory. Can threatening 25% on EU cars (worse for both sides) lead to a negotiation where both lower the rate to zero (better for both sides)? Some free traders who like Trump claim that is really his goal, which in fairness he has proposed, though other times contradicting himself as on many things. And it seems Trump’s basic gut feeling is an aversion to foreign made cars in the US, which would not be fixed by lowering EU tariffs on US cars.

*not counting the US 25% tariff on light trucks like pick ups and vans, not SUV’s though. That is the result of a US-Europe tit for tat, enacted in the early 1960’s in retaliation for high French and German tariffs on US chickens and still called the Chicken Tax. It’s hard to see the US 3 not vigorously opposing its elimination in any new vehicle tariff deal with EU, especially if the EU lowered its vehicle tariffs all around so high Asian content pick ups could be assembled in eg. Romania for export to US.

VAT (in English, Value Added Tax) is just what Sales Tax is called in the EU. It varies by location and type of item but doesn’t vary by where the item was made. The VAT paid in, say, Pamplona (Spain) to buy a car made in Phoenix, Pamplona, Burgos or Munchen is exactly the same. The rate in Munchen is different from that in Pamplona, but again applies the same to all four cars.

And the main reason most American brands sell badly in Europe is simply lack of coverage / interest on the American brands’ party; those who want to get a foot here, have. Ford sells quite nicely, Buicks are rare and Dodge is something you barely see - but searching for their stores just in Spain (where I know the exact vocabulary to use, concesionario españa [brand]) finds 3 stores for Dodge, tells me I need to go Peugeot or Suzuki stores to find a Buick, and lists over 50 Ford stores. Ford.es is happy to let me configure my next car; Dodge.es exists but it’s clunky as all get go; Buick.es doesn’t even exist.

There are companies, brands and factories. Ford is strong in all three here in EU. GM and Chrysler are erratic. Germans are strong in USA, have factories there and would not be surprised if they manufacture enough cars for export too. No one cares for Fiats, Renaults and Citroens in USA. Not target marketing group, I guess. How much cars really crosses the Atlantic? I’d say Koreans are stronger on both sides here in that manner.

Currently, GM sells more cars in the EU than Ford does - 89,000 new registrations in June 2018, as opposed to 86,000 for Ford. (This compares with 187,000 for Volkswagen, the top-selling EU car company.) US Chrysler is a subsidiary of Fiat Chrysler, an Italian-American company with its headquarters in London. The Chrysler brand does not have significant sales in the EU but Fiat, of course, does - 74,000 new registrations in June 2018.

What matters for tariff purposes is not the base of the company that makes the car, or the brand under which it is sold; it’s where the car is made. The Ford and GM vehicles sold in Europe are made there (and, in the case of GM, are mostly sold under European marques like Opel and Vauxhall). Chrysler used to have a European operation, but sold it to Peugeot Citroen in 1979. And now, of course, since the acquisition by Fiat, the combined operation mostly markets the Chrysler brands in the US, and the Fiat brands in Europe. There is some crossover, with Chrysler’s Jeep brand being marketed in Europe, and Alfa Romeo and Maserati being marketed in the US, but it’s quite limited.

Opel and Vauxhal brands were sold to PSA lart year. Looks like transfer is still open. (“agreed to buy”, according to Wiki). FIatChrysler, as it looks stupid, seems to go well. See a lot of Fiat Freemonts around here. They just look to unreal to be Fiats. AFAIK, they are just retagged Dodge Journeys made in USA.

That’s true, but then you miss out on the legitimate national security reason to have tariffs: You want to ensure that there’s a thriving national industry in certain things so that you aren’t beholden to another power for necessary things.

And there’s no particular reason that the optimal tariff to support, say, an automobile industry is the same as one to support chicken farmers, or electronics manufacturers.

Having the same tariff on all classes of goods will be excessively wasteful in some cases and accomplish nothing in others.