Earlier today, EU trade chief Cecilia Malmström surprised pundits and sent shares of European automakers higher when she said that Brussels was willing to scrap tariffs on autos, among all other industrial products, if the US would reciprocate.
"We said that we are ready from the EU side to go to zero tariffs on all industrial goods, of course if the U.S. does the same, so it would be on a reciprocal basis,” Malmström told the European Parliament’s trade committee. Sending the ball in the Trump's court, she said that "we are willing to bring down even our car tariffs down to zero … if the U.S. does the same,” adding that “it would be good for us economically, and for them."
As a reminder, while the EU’s car tariff of 10% is higher than the general U.S. auto tariff of 2.5%, America imposes a 25% duty on light trucks and pick-ups.
So with Europe offering a trade olive branch to Trump, what was the US president's response?
Simple: "It’s not good enough," Trump told Bloomberg News during his extended interview, in response to the EU proposal. The reason: "their consumer habits are to buy their cars, not to buy our cars."
Trump then said that the "the European Union is almost as bad as China, just smaller."
Trump had previously ordered his Commerce Department to investigate whether car imports imperil national security, under the same provision he invoked to impose global tariffs on steel and aluminum earlier this year. The president has indicated he could impose tariffs of as much as 25 percent on the foreign-made autos. The findings of the auto study are due by February, though the president could decide to act before then. This week, Trump threatened Canada with auto tariffs if the country failed to join his trade deal with Mexico to replace Nafta.
As Bloomberg notes, eliminating tariffs on U.S. auto imports "would do little for General Motors Co. and Ford Motor Co., but would lend a major boost to Germany’s BMW AG and Daimler AG." SUVs assembled by the German carmakers in the American South dominate the models exported to Europe from the U.S.
BMW for example is projected to sell nearly 70,000 X3 SUVs in Europe made in its South Carolina factory this year, according to data from LMC Automotive. Compare that to roughly 15,000 units of Tesla Inc.’s Model S sedan, which LMC, an industry data consultancy, projects will be the top-selling model in Europe assembled in the U.S. by an American automaker.
What is odd is that it was Trump who originally proposed a trade policy without tariffs, barriers or subsidies on either side.
The European Union is coming to Washington tomorrow to negotiate a deal on Trade. I have an idea for them. Both the U.S. and the E.U. drop all Tariffs, Barriers and Subsidies! That would finally be called Free Market and Fair Trade! Hope they do it, we are ready - but they won’t!— Donald J. Trump (@realDonaldTrump) July 25, 2018
On the other hand, as Politico reported earlier, Trump's rejection is probably not a big surprise, as during a first meeting in Washington last week, an EU proposal for including cars in the discussions was rejected by the U.S.
With Trump's rejection it is now unclear if there is any de-escalation path available to Europe; furthermore with Trump set to enact $200BN in additional Chinese tariffs, the president may feel especially empowered to press Europe harder, a gambit which has a high probability of failing. Then again, until something in the market "cracks", there is no reason to expect Trump to change his negotiating tactic which so far - looking at the S&P at all time highs - has given him the impression that he is winning.