EU Calls Trump’s Bluff on Auto Tariffs as Trump Tries Dead on Arrival WTO Exit Plan

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“Nice car industry you have. Shame if anything happened to it.”

Readers may recall that Trump was all gung ho to give China an even bigger bop on the nose when China threatened to make a tit-for-tat response to Trump’s scheduling $50 billion of Chinese goods for tariffs. Trump claimed he was going to up the ante to as much as $400 billion in Chinese goods, with the centerpiece being the high-tech sectors given prime billing in the Made in China 2015 plan.

US soyabeans, one of the Chinese targets, swooned, and the US stock market wasn’t too happy either, although the averages eked out a meager gain despite the trade headwinds (due perhaps to tax cut fueled buybacks).

But have no fear! Trump’s response is to double down, and say that his next big trade idea is to slap 25% tariffs on auto and auto parts imports. And he probably likes that Asian markets, including China’s highly leveraged stock market, are taking a nose dive. From the Financial Times:

A key index of major stocks in Shanghai and Shenzhen tumbled in one of its worst days this year on Monday, leading broad declines across Asia amid rising fears the US-China trade dispute could spread into a global trade war.

The CSI 300 shed 2.9 per cent with the financials segment taking the biggest hit, dropping 4.1 per cent, as all market sectors lost ground. The fall was the fifth worst day for the index this year, according to Reuters data, and more than wiped its 2.6 per gain on Friday — a rally that softened the index’s sell-off last week but left it still off 2.7 per cent in the period.

The Topix in Tokyo fell 2.1 per cent and in Seoul the Kospi sank 2.4 per cent…

The Chinese currency also continued to weaken on Monday. By 3.00pm in Hong Kong, the onshore renminbi was down 0.5 per cent at Rmb6.6497 against the dollar and heading for its worst close since November. 

Now Trump does have a point, even though he’s not been articulating it very well. The US has lower tariffs on many EU and Chinese goods than they do on ours, such as on cars. As Wolf Richter explained:

Another purpose [of tariffs] is to persuade other countries to lower their own tariffs. It has been an uneven playing field for decades, stacked against US workers.

The EU imposes a 10% tariff on all cars, SUVs, compact SUVs, vans, and pickups imported from the US. The US imposes a 2.5% tariff on imported passenger cars, SUVs, compact SUVs, and vans from the EU and a 25% tariff on imported pickups (a tiny segment of the EU market).

China imposes a 25% tariff on all imported vehicles but offered to cut this to 15% as a goodwill gesture in the trade war. To get around the Chinese tariffs and sell vehicles to the 1.3 billion Chinese consumers, all global automakers have invested billions of dollars in China, have set up large manufacturing facilities in required joint ventures with often state-controlled Chinese companies, and have submitted to the required technology transfers. GM now makes and sells more vehicles in China than it does in the US.

The problem with slapping tariffs on any good that are important to extended supply chains is that it’s like using a sledgehammer to try to defuse a bomb. The results are not likely to be pretty.

GM made clear last week that it was Not Happy about Trump’s plans to increase tariffs on cars and car parts. From the Financial Times on Friday:

General Motors has joined the corporate backlash against Donald Trump’s trade wars, warning that the US president’s threatened tariffs on imports of cars and parts would hurt the US economy and could lead it to reduce its manufacturing in the country.

In a letter to the US Commerce Department filed on Friday, the US carmaker said the tariffs being contemplated by the Trump administration would raise the prices of its vehicles by thousands of dollars, undermine its competitiveness against foreign producers and lead to a loss of US jobs….

The US imported more than $300bn in cars and parts last year, more than 10 times the value of the steel brought into the country.

A study by economists at the Peterson Institute for International Economics said if the Trump administration goes ahead with its auto tariffs it would lead to the direct loss of 195,000 US jobs. If that escalated and other countries retaliated in kind, more than 600,000 jobs would be lost, it found.

Today, the Financial Times reports that the EU plans to strike back:

Donald Trump’s threat to hit car imports with punitive tariffs risks sparking global retaliation against as much as $300bn of US products, Brussels has warned.

The warning is the first time that the European Commission, in a written submission to the US Department of Commerce seen by the Financial Times, has set out a detailed response to Mr Trump’s threat to slam punitive tariffs on imported vehicles, with EU capitals increasingly convinced that the unpredictable US president will act soon…

EU officials stressed that no decision had yet been made on how to retaliate. But the document warned that the EU and other major economies would be “likely” to apply countermeasures to “a significant volume of trade”, with as much as $294bn — accounting for 19 per cent of US goods exports in 2017 — potentially in the line of fire. The measures could apply “across sectors of the US economy”….

This week global automakers warned that imposing the tariffs on car imports would raise prices of imported vehicles by up to $6,000 per car and lift prices of locally made cars.

The commission document said that, according to its “internal analysis” and other expert studies, the tariffs would be an “own goal” for the US economy even before other economies retaliated. The interconnectedness of the car industry, and its high degree of regional specialisation, mean that imposing additional 25 per cent tariffs on imports would cause a hit to US gross domestic product “in the order of” $13bn-$14bn, according to the document.

Apparently trying to drown out reports on the EU submission, Trump is defending his approach, as the Journal recounts in Trump Cites Car-Tariff Threat as Biggest Trade Leverage:

President Donald Trump said he sees his threat to impose global auto tariffs as his biggest weapon to extract concessions from trading partners, shedding more light on his broader trade policy strategy.

“You know, the cars are the big one,” Mr. Trump told Fox News in an interview broadcast Sunday. “We can talk steel, we talk everything. The big thing is cars.”…

Mr. Trump has repeatedly complained about Europe’s 10% tariff on car imports compared with the 2.5% imposed by the U.S., but he hasn’t mentioned the 25% tariff the U.S. imposes on imports of light trucks…

The Trump trade team has tried to use the metals tariffs as broad leverage—to get big concessions on Nafta, to get Europe to slash its autos tariffs and boost military spending, and to get Japan to promise to buy more U.S. goods.

But so far, those countries have called the U.S. bluff, absorbing the U.S. tariffs and, in the case of Canada and Europe, fighting back with penalties of their own.

Canadian retaliatory tariffs took effect Sunday. And Europe has claimed a victory of sorts in that tiff, when Harley-Davidson Inc., the Milwaukee-based motorcycle maker, said last week it would shift some production outside the U.S. to avoid the cost of European tariffs.

And if that isn’t enough excitement for you, Trump is trying to get out of the WTO too. From Axios (hat tip John C):

Axios has obtained a leaked draft of a Trump administration bill — ordered by the president himself — that would declare America’s abandonment of fundamental World Trade Organization rules.

Why it matters: The draft legislation is stunning. The bill essentially provides Trump a license to raise U.S. tariffs at will, without congressional consent and international rules be damned.

The details: The bill, titled the “United States Fair and Reciprocal Tariff Act,” would give Trump unilateral power to ignore the two most basic principles of the WTO and negotiate one-on-one with any country:

  1. The “Most Favored Nation” (MFN) principle that countries can’t set different tariff rates for different countries outside of free trade agreements;
  2. “Bound tariff rates” — the tariff ceilings that each WTO country has already agreed to in previous negotiations.

“It would be the equivalent of walking away from the WTO and our commitments there without us actually notifying our withdrawal,” said a source familiar with the bill.

  • “The good news is Congress would never give this authority to the president,” the source added, describing the bill as “insane.”

Trump is so fabulously unpredictable that it’s futile to try to game out his antics out. At a minimum, he wants to have something he can spin as a accomplishment by the midterms. The wee problem he has is various US businesses like lobstermen, are already taking hits. US automakers and foreign firms with US operations can and will get plenty of press coverage as they make noise about how much Trump tariffs on cars would cost in terms of US jobs. So it isn’t clear how he gets what he wants out of this sparring, unless he deescalated and declares victory, taking credit for things that didn’t happen or weren’t related to his theatrics.

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  1. vlade

    TBH, I think this may really be an attempt to move even more power than Bushes and Obama did to executive.

    Start with something ridiculous, so that they settle for something that wouldn’t be acceptable at the start as it seems “more reasonable” now.

    That is the problem I see with the last decade – US congress is so deadlocked, it’s handing more and more power to executive. Sounds like the last days of Roman republic..

    1. marku52

      Since the congress can barely agree on post office names, that leaves the Exectutive and the SC as the last men standing.

      And yes, it does have that “last days” feel to it.

      Since neither party dealt with the destruction of 3-5 million manufacturing jobs (and most of the middle class to boot), this was like leaving an armed hand grenade in the road for just about any yahoo to pick up.

      And surprise, surprise, one yahoo did.

      1. drumlin woodchuckles

        Actually, the Republican Party and the Clintocratic Faction did “deal with” the destruction of 3-5 million” manufacturing jobs . . . in the sense that they deliberately and on purpose conspired to destroy those jobs. Deliberately and on purpose. That was the whole point of Free Trade Agreements.

  2. Ignacio

    Regarding WTO i wonder if this could spur some kind of interesting debate on its functions.

  3. timotheus

    “United States Fair and Reciprocal Tariff Act,” or USFART. Wags are going to have a field day.

  4. Larry Coffield

    I’m not a fan of world government via the WTO, TPP or other ploys to feudalize us. We can barely manage city-hall corruption, yet the secular religion of neoliberalism wishes to expand faith-based governance. At this point it is political masochism to want more austerity via odious debt. Even a mid-functioning monkey has enough sense to protect its possessions from strangers chatting up privatization.

    Support Bernie and hence MMT or come to terms with Stockholm Syndrome, This is the reality-based TINA if people are more important than rent-seeking profiteers.

    1. SocraticGadfly

      One of those people, eh? MMT is nowhere near a cure-all, though belief in it seems semi-cultish.

  5. The Rev Kev

    Apt scene that from the “Hurt Locker”. Apart from the damage that Trump is causing by his bull-in-a-China-shop act, I wonder about the long term effects for America. From what I see, modern businesses depend on reliability and this is especially true of a global chain of suppliers & manufacturers with a thin edge of reserves due to the just-in-time supply system. This is not looking good.
    So what happens if America is notching itself up a reputation as an unreliable partner? What if foreign countries find that they are no longer sure of what the regulatory structure is going to be from month to month? What happens if international payments are no longer assured because you can never tell if a country may fall foul of sanctions instigated by US domestic politics? What happens if a vital part that a manufacturer needs is suddenly cut off (ZTE)? What if you cannot sell a product because it contains US parts because the US has a dislike to your customer (Airbus)?
    Someone was mentioning here that shipping lines were adapting to a post-Brexit UK and I wonder if we may not see the equivalent happen to US products and services. Maybe a US company misses out on a few more contracts. Maybe not so many trade agreements are signed. You get the idea. Other countries have already had to bullet-proof themselves against the US which was why Russia and China built out their own SWIFT equivalents so as not to be knee-capped here. We are now back in a multi-polar world so this is all till shaking out but I do not think that Trump has done the US that many favours.

    1. fajensen

      I know of one case of a Danish tobacco vendor who got his 14 kEUR confiscated by the US because his Danish bank connection sent the payment for some Cuban Cigars via SWIFT. The worst part is that Danske Bank got off refunding it since they screwed it up to begin with by routing the money via a US bank and of course should have known what would happen with the US -> Cuba transfer.

      It would be neat if some of those intrepid digital disruptors stood up to this and set up a more accessible version of the Hawala networks that can route around blockades, but, it won’t happen because Terrorism (Actual terrorists of course can always use the analogue version of Hawala).

      I notice that “Transferwise” does not “do” Cuba or Iran – the business costs of having a US-presence, I guess.

      1. Jim Haygood

        Before imposing a trade embargo on Cuba in the early 1960s, President Kennedy ordered a thousand of his favorite Cuban cigars.

        It’s good to be king POTUS. Emperor Trump enthusiastically agrees.

    2. rd

      This is why the Jones Act exists! We have a ready-made merchant marine just waiting to leap into action to provide America with all the shipping it needs!

      Just ask Puerto Rico how that worked out over the past few years, especially after the hurricanes. They will provide very loud and euphemistic responses.

    3. Left in Wisconsin

      So what happens if America is notching itself up a reputation as an unreliable partner?

      First, notice the tariff rates above and the actual trade figures. Damage can and probably will be done all around but the notion that the US needs these countries more than they need the US is simply false. Trump may well blink first but it is mistaken to think that he doesn’t have the upper hand.

      Except… “America” has no trade relations – though you would never know that from reading the FT (The US imported more than $300bn in cars and parts last year). Companies, not countries, import, often from related companies in other countries with lower labor and environmental costs. Notice that not a one of them has come to Trump’s defense on this. That is how a class that understands its class interests operates.

      This is Brexit all over again. The global corporate interests that run all US multinationals, having used NAFTA and the WTO to integrate their operations with low-cost labor from all over the world, now scream that “You can’t do that. Think of the children.” Sometimes a sledgehammer is the only tool you have. I don’t trust Trump to do anything well. But I believe this issue is absolutely an electoral winner for him. And all of the Dems coming to the aid of global capitalism simply do not get that.

    4. drumlin woodchuckles

      In the short run it means a partial “boycott” by foreign supply-chainers against an “unpredictable and unreliable” America.

      In the long run, if it is allowed to play out over the long run, it means a smaller but more balanced semi-autarkian economy for the US, wherein we don’t have as many foreign supply chainers because we make more of our own parts to supply more of our own multi-part-assembling industries. It also means we have far less trade. We export much less and we import much less.

  6. Nick B.

    Re: “The wee problem he has is various US businesses like lobstermen, are already taking hits.”

    I’m wondering whether Trump’s plan isn’t to spin the negative impacts that the trade war will have on the US economy as another instance of “X is killing us!” Turning himself into a ‘conflict president’, any amount of small businesses complaining about rising prices fits perfectly into this narrative that there’s an “other” out there that needs to be fought against, and who would want to change the commander in chief while in the midst of a war? Given how huge his base is, I wonder how many of them will actually interpret the consequences of his actions as mismanagement, rather than an assault on the country from outside invaders.

    My consolation is that in many swing states, his margin was in the tens of thousands, so maybe it’ll be enough there, but who knows.

    1. Jim Haygood

      ‘Given how huge [Trump’s] base is, I wonder how many of them will actually interpret the consequences of his actions as mismanagement.’

      Not many for now, as the US economy remains strong (through stronger in Clintonville than in Deploraburg). But traditionally the highly cyclical auto sector is a leading indicator of the economy.

      As the triple whammy of rising interest interest rates, rising oil prices, and escalating trade barriers ratchets up, the Big Three are headed for a world of hurt. Their pain will be felt all through the heartland, from the midwest down through the south.

      Flake-o-nomics don’t pay, though it may take a year or two for this sad fact to become unmistakable to all, after Herbert Hoover Trump’s shiv to the stomach leaves the US economy crumpled on the floor.

  7. Eureka Springs

    The only lobster this flyover deplorable sees in stores are frozen from places like Honduras. I can’t read the WSJ link to understand details Jerri-Lynn may want us to before commenting, but I would love to have Maine lobster as a splurge option in my grocery store. I go to high end grocers as well for a few ingredients I can’t get elsewhere. It’s (Maine lobster) not an option even for the well to do.

  8. Samuel Conner

    Color me cynical, but my first thought on reading this was that POTUS verbal antics and the market responses must be creating some enormous opportunities for front-running. Am I being unreasonable to suspect this?

    1. fajensen

      No. What would Goldman Sachs perhaps pay Twitter (or the rogue system operator) if it could be somehow arranged that Donald Trump’s teeets arrived in front of their robots slightly before they hit the internet (and all the other robots)?

      Some tens of milliseconds is all what’s needed, those can easily happen for perfectly reasonable technical reasons. Very hard to spot without an insider ratting out the business.

  9. doug

    “The good news is Congress would never give this authority to the president,” the source added, describing the bill as “insane.”

    I am not so sure of that, given recent antics…
    I have seen right many ‘nevers’ happen in the last 24 months…

    1. Other JL

      I’ve often wondered just how far this president could push executive authority before Congress actually takes action to reign it in, i.e. impeachment and conviction. TBH I can’t see it happening at all.

    1. ChrisPacific

      It sounds to me like someone is trolling. Probably Trump, but possibly the anonymous leaker.

  10. Procopius

    The Chinese currency also continued to weaken on Monday.

    I must be missing something. In the context, this seems to be treated as a good thing, which puzzles me bigly. If the yuan (or renminbi) is weaker, that means Chinese goods are cheaper, and hence more competitive. This is what they want? I feel like I’m being gaslighted all the time.

  11. sally

    the author of this post seems to believe that trump is “fabulously unpredictable” and completely wrong. It’s a performance meant to make you confused and think he is unpredictable.

    Guys like Zeinke, Pruitt, Trump himself and gals like elaine chao arent confused or unpredictable; they’ve been waiting for this and now theyre in.

    This is an elite war.

    Also, the quality of this appregated article is shoddy; I dont need a meanigless youtube clip in the middle of an article. I was surprised to see this tack on this site and it is insulting and juvenile.

    Stop the infantilization.

    1. Yves Smith Post author

      With all due respect, you do not know what you are talking about. There are regular reports from the various factions within the White House about how Trump has no clear goals on key topics like trade (as in he states multiple not consistent goals and his actions reflect the muddled aims), much the less any notion as to how to get there. As we have said, tariffs are a blunt instrument, and are going to cause lots of friendly fire casualties and resulting political blowback if Trump persists.

      He was all over the map on Obamacare and tax reform, two key Republican initiatives. I will spare you the details on Obamacare. On taxes, the draft that Treasury produced for the tax bill, already late in the game, was ridiculed as shockingly thin, as in a napkin doodle, rather than an outline of draft legislation or a partial draft (sections written out, other sections with a header only). The bill was such a mess (as a result of being rushed through) that it’s producing unintended bad effects due to the poor drafting (most big tax law changes require a cleanup bill, but this one has more damaging and/or far too ambiguous sections than the 1986 Tax Reform Act, as in the sense I have is this is an order of magnitude worse).

      And you appear also to have missed that Trump is constantly elevating and marginalizing (and firing) members of his team, so even though individual players have clear agendas, they are subject to being marginalized and with them, what they wanted done. You appear to have missed that Trump was letting Steve Mnuchin act as one of his key power players on trade, and now he’s been shoved aside on this topic. Similarly, Rex Tillerson, among other things, has strong personal relations with the top players in Russia (oil majors conduct their own foreign policy) and one of his objectives (despite being shrewd enough to take a somewhat different line) was to improve relations with Russia. Tillerson got booted and Trump was poking Russia in the eye. Now Trump is gonna talk to Putin. That’s another waffle. IMHO on that one, Trump probably does want better Russian relations (if nothing else because if he’s going to keep after China, he wants Russia on his side, not theirs). but isn’t clear on how much RussiaRussia heat he wants to take. But even if he actually does want better relations with Russia, that’s inconsistent with his increased belligerence with Iran, when Russia is not going to abandon Iran.

      I could go on….

      Oh, and while we are at it, saying that Trump is fabulously unpredictable is not infantilizing. It’s the core of his approach (as in it is analogous to how Amar Bhide described the “strategy” of the securities industry in the 1980s: they had no fixed strategy but were adept at exploiting fleeting profit opportunities and had an organizational approach that was radically different than industries that had strategies in the way MBAs used the term). Trump almost certainly regards his unpredictability as a strength, that he uses it to get opponents off balance and exploit opportunities that that creates. But that requires not having terribly set goals, which is at odds with your depiction.

      We said as soon as Trump won that underestimating his was a mistake. But he does not have a grand design. He grabs onto bog standard Republican hobbyhorses that are served up to him, and often a changing menu of them due to infighting among his advisers.

      Better trolls, please.

      1. otto

        Smith, I had a similar reaction to your description of Trump as “fabulously unpredictable.” I took it as naively off the mark in what was otherwise the best rundown of this topic I’ve read recently. On reading your clarification here, my misunderstanding is cleared up and see better what you mean–and it is, as always, excellent observation by you.

        However, there may be some things that support the claim that Trump’s behavior in this regard is a predictable performance with deliberate malice aforethought. His public rhetoric seems to support this: On the surface it appears as nonsense word salad, but there is an effective method and pattern to his word choice and delivery. He knows how to talk to his particular audience and wound up Jeb Bush a time or two in their debates with his rhetorical tricks. Or note the change in his public speaking in recent years–the appeal of reality TV and professional wrestling works in a society where mastering one’s TV image is paramount to getting in the White house. He didn’t use to speak in public like this. Either this rhetorical change is deliberate–and it has certainly worked well with both his supporters as well as fooling his opponents–or he has become retarded, which may be the case. But if it is the former, then he is not so unpredictable. Also, if “fabulously unpredictable” is “the core of his approach,” might it be advantageous for there to be a method to the madness, to promote such an environment for exploitation? And while “constantly elevating and marginalizing (and firing) members of his team” may be a poor way to run a country, it is a classic tactic of many dictators in that it is effective in maintaining their unchallenged dominance. We might expect this management strategy from someone as egomaniacal and sociopathic as Trump. Lastly, from the perspective of critique as President, he does comes across as “fabulously unpredictable” in that he indeed “does not have a grand design” beyond the vague, borrowed notion of MAGA. But evaluated as get-rich-quick, self-promoting confidence man it appears that he does (and he was a student of Roy Cohn, after all).

        The reason I mention all this is because it may be useful in figuring out your final question: “So it isn’t clear how he gets what he wants out of this sparring, unless he deescalated and declares victory, taking credit for things that didn’t happen or weren’t related to his theatrics.” Judging by the language of the draft bill and the comments from Lindsay Walters, I suspect it is your latter guess. If we see this as an effort to gin up support from his base for midterms, then that suggests that Trump is a bit more deliberate and predictable. It may even work best for him on this account if the proposals in the draft bill go nowhere (again, see Walters)–a la the very effective, “I tried to close GITMO, but those nasty Republicans wouldn’t let me.” Sure. His strength is in the swindle . . . er, art of the deal, and that is often hugely dependent upon a performance.

  12. Schofield

    Large corporations now work together in de facto manner like a despotic world government deciding which part of the planet and its citizens shall have good well-being and which poor!

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