EU: US Auto Tariffs in the Balance

Published on October 4, 2019

News coverage of the escalating trade dispute between the European Union and United States this week has focused on a WTO ruling giving Washington the go-ahead to impose $7.5 billion in tariffs on EU imports in retaliation for years of EU state subsidies to their aerospace giant, Airbus.

But a key date looms ahead for a potentially far more economically consequential battle with the EU over auto tariffs: 

** On November 17, President Donald Trump will decide whether to use his statutory powers under Section 232 of the Trade Expansion Act of 1962 to “adjust imports” through tariffs or quotas on auto shipments from the EU, on “national security” grounds. Any tit for tats over Airbus and Boeing, in the meantime, are mere pawns in this war over autos.

** We believe the most likely outcome on November 17 will be for the White House to extend the deadline for the imposition of auto tariffs on the EU, but to keep maximum pressure on Germany’s Chancellor Angela Merkel for a much more difficult, broader deal that would include, as the US has demanded, agricultural products as well as autos and industrial goods.

** While avoiding an immediate clash, the spirit of any such extension, we believe, would be quite different than the “goodwill cease-fire” over additional auto tariffs that was announced between Trump and Japan’s Prime Minister Shinzo Abe on the sidelines of the UN General Assembly last month. Rather than a sheathing of the swords in peace, the proverbial sword of additional tariffs on EU auto imports will, in this case, be left dangling over the negotiating process with Europe.

** Similarly, a decision by the EU not to retaliate immediately to the WTO ruling on Airbus and US tariffs should in no way be interpreted as an end to hostilities. Rather, it is a placeholder until early next year for when the WTO is expected to rule in the EU’s favor against Boeing, and a leverage point for the EU to be kept in the pocket in the broader fight against the US on autos.

** In the meantime, with the November deadline looming, EU Trade Commissioner Cecilia Malmstrom met with US Trade Representative Robert Lighthizer in New York last week to restart negotiations on industrial goods – excluding agricultural products. But the two sides, from want we understand, continue to tread water. The only areas of progress to date appear to have been in discussions over EU imports of Liquefied Natural Gas (LNG) from the US, and in the pharmaceutical sector.

** EU officials complain that talks continue to be hampered exactly by Lighthizer and Trump’s insistence on including agriculture in the negotiations, despite what they claim was an “explicit mandate” from the July 2018 meeting between Trump and outgoing European Commission President Jean-Claude Juncker to pursue a deal on industrial goods that would exclude agricultural products. To add insult to injury, since then, Lighthizer has vowed before Congress that he would not submit any EU trade proposal to the Hill that does not include agriculture.

** For the EU, any inclusion of agriculture in negotiations with the US remains an absolute red line – at least for now. While a relatively small sector of the overall economy, the political clout of the agricultural lobby in the EU is legendary, as witnessed in the brutal negotiations with Latin America to strike a Mercosur deal affecting mainly beef. With the US, negotiations would be much broader than over beef, and one official warns that even with a new Commission taking the helm on November 1, the political price of opening negotiations to agricultural products is simply too high.

** But behind that absolutist position, there may be hints that the EU could, eventually, soften its position on AGs, sources hint, ever so cautiously, in the deepest of privacy. The EU could, for example, consider discussing AGs if the US were to agree, in turn, to throw in topics of political sensitivity to Washington. Those, we are told, could include negotiations over maritime services, “geographical indication” (e.g., trademark protections for labels like feta cheese, Champagne sparkling wine), and the granting of access for EU companies to public procurement tenders on all levels of US government contracts.

** Facing a ferocious manufacturing slowdown at home, Germany’s Chancellor Merkel has also been putting the heat on Juncker to find a solution with the US on industrial goods. And with supply chains in Europe so complex and intertwined, it is not just Germany or France that stand to suffer from auto tariffs, but even peripherally involved nations like Portugal. There is already some grumbling within the EU that US retaliation in the WTO case will include items like Italian cheese and Irish butter, impacting constituencies that had little to do with the US dispute over the largely Franco-German Airbus.

** Even so, the majority of EU officials remain reticent to opening the negotiations to agricultural products with the US under any circumstance. “The US,” complains one official, “is not in the business of giving stuff. For them there is no win-win, no reciprocity. They say I need this, I need to win, and I do not care about its impact on you.”

** And on November 1, Ursula van der Leyden will take over from Juncker as EC President, and Ireland’s Phil Hogan will take the trade commissioner position from Malmstrom. Hogan, it is expected, may prove more of a match for Lighthizer and his team, who EU officials admit are “very well prepared, very tough, and know their stuff inside and out.” Hogan, observes one official, does not blink, and is not easily impressed. We are sure that will really make a difference to the Trump negotiators…

** Van der Leyden, for her part, seemed, to have found “some common language” with Trump back in July of 2018, as one EU officials puts it. But by and large, the leadership change at the Commission is not expected to usher in a fundamental shift in the EU approach to these negotiations. And in the meantime, Brussels fully expects the Trump administration to use the Airbus ruling to bludgeon the EU ahead of the ruling early next year on Boeing, and to keep the pressure high on the industrial and auto negotiations that they now expect will go deep into the US election cycle.

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