Build the Wall—To Keep Out the BMWs and Benzes

Beware enemies hiding in plain sight. The Audi in the driveway and that BMW creeping around the corner are threats to national security. These days, it’s not the reds under the bed Americans need to worry about—it’s the Mercs on the lurk.

Or so the Trump administration appears to have concluded. A leaked copy of a Commerce Department report delivered to President Donald Trump on Feb. 17 deems imports of automobiles and auto parts a threat to U.S. national security. That is preposterous—especially when they are made in countries such as Germany, Britain, and Japan that are long-standing U.S. allies.

This blatant protectionist ploy provides Trump with a legal loophole to impose punitive tariffs on U.S. imports of cars and car parts within 90 days. For now, he is using that threat as leverage in ongoing trade talks with the European Union, in which the EU had already offered to abolish its 10 percent tariff on U.S. car imports.

For Trump, a key objective of those talks is to slash the U.S. trade deficit in goods with the EU. Cars and car parts accounted for around $45 billion of that $168 billion deficit in the year to the third quarter of 2018; the United States also had a surplus in services of $55 billion.

If Trump decides to follow through with these tariffs, it would be an abuse of presidential power as egregious as the bogus national emergency that he has declared on the U.S.-Mexican border. It would also spark a devastating new trade war at a time when economies and markets are fragile, U.S. relations with Europe are at an all-time low, and tensions with China are growing on trade and other fronts.

Trump has already slapped stiff duties on around $300 billion of U.S. imports: $250 billion from China, $41 billion of steel and aluminum, and some $10 billion of washing machines and solar panels. Adding cars to that list would greatly raise the stakes: In the year to November 2018, the United States imported $371 billion worth of motor vehicles and parts, which account for nearly 15 percent of its total goods imports.

While the United States already levies a 25 percent tariff on light trucks to protect domestic automakers—and therefore imports relatively few—its duty on cars and many car parts is only 2.5 percent. Hiking this to 25 percent, as Trump has threatened to do, would potentially be the single biggest protectionist act by a U.S. president since Richard Nixon imposed a short-lived 10 percent surcharge on all imports in 1971. It would dwarf the so-called voluntary export restraints to which Japanese carmakers agreed at the start of Ronald Reagan’s presidency in 1981, which lasted until 1994.

One study suggests sustained 25 percent tariffs could nearly halve German car exports to the United States, which totaled $21.7 billion in 2017. Overall in 2017, the United States imported $62.6 billion of vehicles and parts from the EU, which has already announced that it would retaliate with tariffs against 20 billion euros ($22.7 billion) of politically sensitive U.S. products if Trump targets those EU exports.

The impact on Japan, from which the U.S. imported $56.7 billion of vehicles and parts in 2017, would also be severe. And unless Canada and Mexico were exempted, the blow to integrated North American supply chains would be calamitous. The United States imported nearly $175 billion in vehicles and parts from its NAFTA partners in 2017. Last year, the three governments concluded a new United States-Mexico-Canada Agreement that will replace NAFTA—but only when it is ratified by the U.S. Congress, in which the Democrats now control the House of Representatives.

The first hit from an automotive trade war would be to fragile financial markets. After tanking late last year, stock markets have rebounded this year, in part thanks to hopes that Trump will soon reach a peaceful resolution of his trade war with China (failing which U.S. tariffs on $200 billion of Chinese imports are set to rise from 10 percent to 25 percent on March 2). Opening up a new global front over cars could dash investor confidence and sap belief in the durability of any deal Trump strikes with China. Since Trump seems to view the Dow Jones Industrial Average as a barometer of his performance as president, this would be a personal blow as well as a financial one.

More importantly, the financial fallout would compound the economic damage to the U.S. and global economy. For most Americans, a car is their biggest single purchase (after housing, which is also an investment). So a hike in prices would hurt and feed through into inflation. Toyota estimates that the cost of importing a car from Japan would rise by $6,000; while it might absorb some of that cost in lower margins, sticker prices would inevitably rise substantially.

Taxing foreign car parts would also harm U.S.-based manufacturers that rely on them, costing jobs and crimping exports. Take General Motors’ Chevrolet Bolt, an ostensibly American car that is assembled in Detroit. It actually contains only 20 percent U.S. and Canadian content. So a 25 percent duty on its many imported parts would push up the cost of the car significantly, denting sales and potentially encouraging GM to shift export production overseas.

A further lurch toward protectionism would also dent economic growth, which is already slowing both in the United States and globally. A recent Citibank report (which is not yet publicly available) calculates that the combination of 25 percent tariffs on auto and auto parts imports (with exemptions for Canada and Mexico) and the EU’s likely retaliatory measures would cut global growth by 0.2 percentage points this year and 0.3 points in 2020. That would cost jobs and shrink incomes in the EU. But perversely, from Trump’s perspective, the United States would be the hardest hit: by 0.3 percentage points in each year, in part due to the expected impact on business confidence and market sentiment. And the damage could be even greater if Canada and Mexico are also targeted, supply chains are disrupted more significantly, and broader business confidence takes a hit.

Politically, slapping tariffs on European car exports on bogus national security grounds would deal yet another blow to both the battered Western alliance and World Trade Organization rules. Trump’s imposition of tariffs on steel and aluminum imports on national security grounds has already been challenged at the WTO by the EU and others. This places the WTO in a lose-lose conundrum: Failing to rule against the United States would provide carte blanche for others to use national security as a pretext for protectionism, while ruling against Washington on such an ostensibly sensitive matter of national sovereignty would invite a furious response from Trump and could provide a pretext for him to pull the United States out of the WTO, as he has previously threatened.

It is often said that relations between the United States and Europe are at their lowest ebb since 2003 in the run-up to the Iraq War, which France and Germany opposed. But today’s trans-Atlantic rift is actually much worse. Whereas then-President George W. Bush maintained Washington’s longstanding support for European integration, Trump has called the EU a foe, in part because the union gives members greater collective clout.

Whereas Bush expanded the membership of the North Atlantic Treaty Organization, Trump has threatened to pull out of the mutual defense club. And while Bush bridled at international rules that constrained U.S. autonomy, his administration still had much greater consideration for the United Nations, the WTO, and U.S. allies than Trump, who treats them all with contempt. For instance, in 2003, Bush lifted tariffs he had imposed on steel imports the year before after the WTO ruled against them and the EU threatened further retaliation.

The trans-Atlantic chasm was in full view at last weekend’s Munich Security Conference, a sort of Davos for defense. U.S. Vice President Mike Pence’s regurgitated “America First” mantras were greeted with stony silence, while German Chancellor Angela Merkel’s full-throated defense of rules-based multilateralism was cheered to the rafters.

Trump doubtless doesn’t care. He thinks the United States can bully weaker powers and force them to comply with its demands. But while the United States is still the most powerful country on earth, it cannot take on the rest of the world and win. Alienating traditional allies will also make it much harder to gain their support in challenging a rising China, which many in Washington increasingly view as a military threat as well as an economic and technological one.

Economically, protectionism is unlikely to shrink the U.S. trade deficit with the EU, which has little to do with its generally low trade barriers. The overall U.S. trade deficit widened last year even as Trump imposed tariffs left, right and center, in part because his tax cuts boosted consumer spending—including on imports—while the Federal Reserve’s rate hikes strengthened the dollar (making imports cheaper and U.S. exports pricier). On the European side, Trump would have more success—and more international support—if he instead pressed Germany and other eurozone countries with large surpluses to boost domestic demand (and thus their own imports, including ones made in the United States).

Nor is pushing up the cost of producing cars in the United States likely to lead to a revival of its manufacturing heartland, let alone the return of factory jobs that are being automated away. In fact, the biggest potential for the U.S. car industry lies in electric vehicles, in which U.S.-based Tesla is a global leader and German manufacturers are laggards. If Trump wasn’t so fixated on the trade battles of the past—and in denial about climate change—he could be championing increased research and development spending on the electric car industry and a more moderate and market-friendly version of the Democrats’ Green New Deal.

Unlike German cars, carbon emissions really are a threat to national security—and tackling them could create more jobs and prosperity in the United States and elsewhere.