Explained: Why Germany is vulnerable to US car tariffs

AFP - [email protected]
Explained: Why Germany is vulnerable to US car tariffs
A traffic jam in Munich in August. Photo: DPA

German automakers, already pounded by weak global growth and a costly shift to electric vehicles, stand to lose the most if US President Donald Trump makes good on fresh threats to slap crippling tariffs on European cars.


Here's a look at what's at stake.

Mammoth exports

The United States is the top destination for EU-built cars, accounting for 29 percent of the total value of all EU car exports in 2018.

In 2018, that amounted to 37 billion -- with German exports accounting for almost half.

READ ALSO: 'The threat exists': Germany confirms possibility of higher European car tariffs from US

Giants Volkswagen, BMW and Mercedes-Benz parent Daimler exported 470,000 cars from Germany to the US in 2018, more than any other EU country.

"Germany is the biggest exporters of cars to the US," Pictet economist Nadia Gharbi noted, well ahead of the United Kingdom, Italy and Slovakia.

Therefore, "Germany remains the most exposed European country to car tariffs."

US exposure

Trump has repeatedly mooted tariffs of 25 percent on EU-built cars in his trade spat with the bloc, which has raged on and off for the past three years.

A drastic hike could potentially put high-end brands like VW subsidiaries Audi and Porsche beyond the means of many US drivers.

US demand for European cars "declines by around 1.5 to 3.0 percent when prices rise by one percent," Pictet has calculated.

German manufacturers have already tried to cushion the potential blow by producing more at their huge US plants -- where VW, BMW, Daimler and German car suppliers employ nearly 120,000 people.

"The relocation of automobile production to the US is already happening," said Gabriel Felbermayr of the IfW economic institute, as German exports to the US are forecast to have fallen by around 10 percent in 2019.

"This is how companies are trying to protect themselves," he added.

Over the long term, tariffs of 25 percent could halve the number of German cars shipped to the US, the Munich-based Ifo institute has predicted.

Cars in a Bremen port in northern Germany waiting to be exported. Photo: DPA

Ripple effect

The timing of the flare-up in trade tensions could scarcely be worse for German manufacturers.

The German auto industry employs 800,000 people in Europe's top economy and contributes around five percent to German gross domestic product (GDP).

But its multi-national supply chains and reliance on foreign markets have made the sector highly vulnerable to external upsets.

The US-China trade war, ongoing fallout from the diesel emissions cheating scandal and uncertainties surrounding Brexit have all taken a toll -- pushing 2019 German car production to its lowest level in 22 years.

READ ALSO: Why has German car production hit a 22-year low?

At the same time as earnings are being squeezed, companies must invest billions in electric cars to comply with tough new EU pollution standards.

To lower costs, German carmakers and suppliers have announced 40,000 job cuts for the coming years -- partly because electric engines are less complex to make than traditional combustion engines.

"The industry is very connected" to the rest of the German economy, said Felbermayr, meaning the knock-on effects of car tariffs would also impact other industries such as toolmakers and the chemical sector.

Rating agency Moody's has estimated that tariffs could prove a drag of around 0.2 percentage points on German GDP.

Foreign companies that supply parts used in German cars could likewise suffer, Felbermayr warned.

"Germany will be harder hit compared with other European countries, but because of the supply chain, everyone could end up in the same boat."

READ ALSO: Protests as Tesla receives approval for factory purchase near Berlin



Join the conversation in our comments section below. Share your own views and experience and if you have a question or suggestion for our journalists then email us at [email protected].
Please keep comments civil, constructive and on topic – and make sure to read our terms of use before getting involved.

Please log in to leave a comment.

See Also