Report

Trump’s Trade Wars Are Bad. They Could Soon Get a Lot Worse.

Possible auto tariffs weigh on Trump’s meeting with the European Commission president on Wednesday.

Auto workers rally against the Trump administration’s proposed auto tariffs in Washington on July 19. (Mark Wilson/Getty Images)
Auto workers rally against the Trump administration’s proposed auto tariffs in Washington on July 19. (Mark Wilson/Getty Images)

President Donald Trump and his European Union counterpart will meet Wednesday at the White House in a bid to defuse growing trade tensions between Washington and Brussels. There are plenty of irritants in the relationship—from U.S. tariffs on steel and aluminum to Trump labeling the EU a “foe”—but looming over them all is the biggest threat yet to the global trading system: a potential U.S. tariff on imported cars ahead of this year’s midterm elections in the United States.

Trump has, as he promised on the campaign trail, taken a sledgehammer to America’s trade relations with the rest of the world. He invoked national security concerns to levy tariffs on metal imports from friends and allies. He has slapped tariffs on billions of dollars’ worth of Chinese goods (with more on the way) and driven Beijing to retaliate against American agriculture. Now, he’s hitting U.S. taxpayers with a $12 billion bill to assist farmers affected by the measures.

Trump has also walked away from the Trans-Pacific Partnership and upended the North American Free Trade Agreement. His administration is slowly strangling the World Trade Organization (WTO), has drafted legislation meant to demolish WTO rules, and reportedly still yearns to leave the organization altogether.

It’s not hard to imagine a world where the United States bailed out of the trade body it helped put together, said Phil Levy of the Chicago Council on Global Affairs.

“What the U.S. leaving the WTO would look like is what we see this summer, where we start violating rule after rule, and this system of open trade, which has been very good for the U.S., starts to fall apart,” he said.

The United States doesn’t need to formally leave the WTO to blow up the international trading system. It already is, by citing national security to shield domestic industries—and the damage will be even greater if Trump slaps tariffs on cars.

“It’s just such a perversion of the national security argument. It’s a very bad joke,” said Gary Hufbauer of the Peterson Institute for International Economics. “It’s a spike in the WTO’s coffin.”

The big test will come soon. By next month, the U.S. Commerce Department is slated to wrap up its investigation into the national security risk posed by imported cars. If Volkswagens and Toyotas are found to be a threat to America, foreign cars and car parts could be hit with tariffs of 20 to 25 percent. The administration used national security to justify imposing tariffs on imports of steel and aluminum and is considering doing the same with uranium. But those sectors are dwarfed by the sheer size of the global auto industry, making the decision on auto tariffs the most consequential trade move yet.

The specter of auto tariffs will be at the top of the agenda when Trump meets with Jean-Claude Juncker, the president of the European Commission, and EU trade commissioner Cecilia Malmstrom.

For Trump, the threat of punitive tariffs on one of Europe’s main exports is a way to force the EU to renegotiate its trade relations with the United States. He reiterated the threat on Monday and on Tuesday previewed his chat with Juncker by tweeting, “Tariffs are the greatest! Either a country which has treated the United States unfairly on Trade negotiates a fair deal, or it gets hit with Tariffs.”

Juncker, though, isn’t coming to Washington with any trade proposal, despite hopes by administration officials that Europe is coming to town cap in hand and ready to deal. “There are no offers,” said a European Commission spokesperson ahead of Juncker’s trip. What EU officials do have is a list of almost $300 billion worth of U.S. goods that will be targeted by retaliatory tariffs if auto duties are imposed—reprisals that could hit 100 times more U.S. exports than what Brussels has targeted so far.

Citing national security concerns to increase tariffs on imported cars and auto parts has raised plenty of eyebrows among trade experts. Under international trade rules, countries enjoy leeway to take certain trade actions in the name of national security, but few experts can discern any direct national security threat from auto imports.

The EU, not surprisingly, has assailed the administration’s reliance on a decades-old law to invoke national security for protectionist purposes, as it did with steel and aluminum. The European Commission, in written comments to the Commerce Department, noted its “firm opposition to the proliferation of measures taken on supposed national security grounds for the purposes of economic protection.”

More surprisingly, and unlike the debate over tariffs on steel and aluminum, there’s little support for auto tariffs from the groups the tariffs are meant to help. The Auto Alliance, which groups most of the big U.S. and international automakers, hates the idea and has warned of rising costs for consumers and a huge threat to employment across the industry.

The Peterson Institute estimates that if other countries retaliate as threatened against U.S. cars and trucks, the tariffs could end up killing more than 600,000 U.S. jobs, in addition to adding thousands of dollars to the cost of a new car.

Economists, like automakers and parts manufacturers, all stress the changed nature of modern manufacturing, where global supply chains snake across borders; tariffs are a tool from a long-vanished world.

“There is no such thing as a truly U.S.-based, U.S.-built vehicle,” said Ann Wilson, the senior vice president of government affairs at the Motor & Equipment Manufacturers Association. Like automakers, parts and component suppliers fear the tariffs will inhibit the development of advanced automotive technologies.

“The industry is desperately trying to get the administration to understand that we have the potential to be the center for new automotive development,” Wilson said. “If you can’t have the free flow of goods, that advanced technology will be developed elsewhere. It would take at least a decade to get those jobs back, if you could get them back at all.”

The threat of new auto tariffs come while manufacturers are already grappling with higher costs due to tariffs on steel, aluminum, and intermediate goods from China. At the same time, many countries in Europe, Asia, and Latin America are forging ahead with new, multilateral trade deals of just the kind the Trump administration has rejected. The EU last week inked a new trade pact with Japan that will cover about one-third of the global economy and has similar deals with Canada and Mexico.

Meanwhile, U.S. farmers and manufacturers are facing tariffs on their own exports. The motorcycle-maker Harley-Davidson is shipping jobs out of the country to avoid retaliatory tariffs. The appliance-maker Whirlpool is getting hammered by higher costs for steel and aluminum. U.S. farmers worry Chinese reprisals will close off one of their biggest markets.

“The president is setting up a world where you are at a severe disadvantage if you produce in the U.S.,” said Levy of the Chicago Council.

Keith Johnson is Foreign Policy’s global geoeconomics correspondent. @KFJ_FP

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