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In an interview with the German newspaper Bild, published on Monday, president-elect Donald Trump again resorted to protectionist, populist rhetoric, threatening German car companies that he would impose a border tax of 35 percent on vehicles imported to the U.S. market because they weren’t producing enough cars in America.
Trump blustered, “If you want to build cars in the world, then I wish you all the best. You can build cars for the United States, but for every car that comes to the USA, you will pay 35 percent tax . . . I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35 percent tax, then you can forget that.”
German carmakers such as BMW (BMWG.DE), Daimler (DAIGn.DE) and Volkswagen (VOWG_p.DE) were Trump’s targets; predictably, by roughly 7 a.m. EST on Monday, BMW shares slumped 2.2%; Volkswagen’s (VW) and Daimler’s dropped 2%. All three German carmakers have invested in Mexico, but they also manufacture in the United States.
Unruffled by Trump’s threats, BMW executive Peter Schwarzenbauer said BMW would still invest roughly $1 billion in a new plant in Mexico, due to go into production in 2019 with an attendant 1,500 jobs.
Trump’s protectionist rhetoric may play well with Americans unfamiliar with how economically dangerous the reality of such a policy can be, but here are five reasons that Trump’s attack on German automakers is ill-considered:
1. The carmakers already build a great number of cars in the U.S. As Germany’s deputy chancellor and minister for the economy Sigmar Gabriel pointed out, “I believe BMW’s biggest factory is already in the US, in Spartanburg [South Carolina].” The Spartanburg factory employs 8,800 people, and built 411,000 vehicles in 2016; BMW had planned to invest another $1 billion in the factory. As The Wall Street Journal has noted, “BMW is a net exporter, thanks to its huge base in South Carolina, while the number of cars Mercedes-owner Daimler makes in the U.S. amounts to 86% of its U.S. sales.” employing 8,800 people and manufacturing 411,000 vehicles in 2016. The company plans to invest another $1 billion there as it begins production of the BMW X7 sport utility vehicle in 2018.
2. Putting tariffs on the German automakers would hurt U.S. automakers. As Gabriel stated succinctly, “The US car industry would have a bad awakening if all the supply parts that aren’t being built in the US were to suddenly come with a 35% tariff. I believe it would make the US car industry weaker, worse and above all more expensive. I would wait and see what the Congress has to say about that, which is mostly full of people who want the opposite of Trump.”
3. The trend has been for German automakers to make more and more cars in the United States; Trump would cripple those efforts. As Matthias Wissmann, head of the German Association of the Automotive Industry automakers, reported, German manufacturers and suppliers increased their production of cars in the United States from 214,000 to 850,000 between 2009 and 2016. He added that 41% percent of those cars are sold in the United States.
4. As is normal when tariffs are applied to foreign products, the victim will be the American consumer; the automakers would likely simply pass on the additional costs to the consumer. As an example of how tariffs could hurt American producers as well, in 2002, President George W. Bush imposed tariffs of up to 30 percent on imported steel. That triggered American steel producers to raise their own prices, which hurt U.S. industrial companies that buy steel. The Consuming Industries Trade Action Coalition reported the tariffs cost thousands of U.S. jobs.
5. Trump’s rhetoric could trigger a trade war, which could weaken the alliance between the United States and Germany, which is the leading economic power in Europe and a stalwart member of the NATO alliance. Trump’s remarks denigrating NATO and his effusive rhetoric regarding Russian President Vladimir Putin have frightened countries throughout Europe; Germany’s Angela Merkel responded to Trump’s remarks about NATO by asserting, “We Europeans have our fate in our own hands,” while Germany’s foreign minister Frank-Walter Steinmeier added, “The interview statements of the American president-elect… caused, indeed here in Brussels, astonishment and agitation.”
“The US car industry would have a bad awakening if all the supply parts that aren’t being built in the US were to suddenly come with a 35% tariff.”
Germany’s deputy chancellor and minister for the economy, Sigmar Gabriel
Trump’s consistent protectionist rhetoric and its populist appeal may play well for the moment, but as is always the case, when the chickens come home to roost, Americans will discover that any approval they gush over Trump’s rhetoric will likely have been short-sighted.