In a move that sent shockwaves through the global automotive industry, US President Donald Trump has vowed to slap a 10% tariff on all goods imported from the European Union. And few are more exposed to the looming trade battle than Germany’s formidable carmakers.
The share prices of Volkswagen, BMW, Mercedes-Benz and Porsche tumbled by 4-7% as the reality of a Trump victory sank in. According to industry experts, if the threatened tariffs were fully passed on to American consumers, popular models like Audi’s Q5 SUV would see a jarring $4,500 price hike.
Trump’s affinity for tariffs as a tool to protect American manufacturing is no secret. “To me the most beautiful word in the dictionary is tariff,” he recently proclaimed to Bloomberg News. And he’s been unequivocal about his plans to target EU imports, which he labels “a mini-China situation.”
A Precarious Position for German Automakers
The US ranks as the second biggest export market for Germany’s auto giants, behind only China. Volkswagen alone shipped 400,000 vehicles to American shores last year. An overnight 10% tariff would be a massive blow, compounding the pain of deep cost cuts already underway at VW.
“The US has been increasingly focusing on its own interests for several years now, and this trend will probably continue,” lamented Hildegard Müller, president of the German Association of the Automotive Industry (VDA). She implored Berlin and Brussels to “build on their joint strengths with the US in economic policy” to foster prosperity for allies on both sides of the Atlantic.
Racing to Ramp Up US Production
Anticipating rising protectionism, German carmakers have been investing heavily to expand their American manufacturing footprint. A record 908,000 German-branded vehicles rolled off US assembly lines last year, half of which were exported abroad.
Still, rapidly shifting more production from Germany may prove challenging. According to auto industry data, Volkswagen’s sole US plant in Tennessee has capacity to build just 20,000 additional cars on top of the 160,000 made last year. Mercedes-Benz and BMW face similarly modest spare capacity to absorb production from overseas.
It will lead to shifts in production. It may get more regionalized also from a strategic point of view. That’s not good news for the sector in Germany.
– Rico Luman, Economist at ING Bank
The tariff threat comes at an already perilous time for Germany’s car workers. With profits down amid anemic demand and surging competition from Chinese electric cars, job cuts loom large. Volkswagen is poised to close factories in its home market for the first time ever.
A Page from the 1960s Playbook?
Observers see parallels between Trump’s latest gambit and a trade dispute from 1964. Angered by European curbs on US chicken exports, then-President Lyndon Johnson retaliated with a 25% tariff on light trucks – the so-called “chicken tax.” That levy remains in force today, insulating American pickups from foreign competition for nearly 60 years.
The chicken tax demonstrates the lasting power of ostensibly narrow trade restrictions to reshape entire industries. It propelled Ford’s F-Series to a record 42-year streak as America’s bestselling vehicle by sidelining would-be European rivals. German executives are hoping history doesn’t repeat itself.
Bracing for Impact
As the automotive world anxiously awaits Trump’s next moves, German manufacturers are scrambling to adapt. “In the United States, I would think we almost have a perfect setup for the time to come,” declared BMW chief Oliver Zipse, touting his company’s flexible American factory network as a buffer against trade headwinds.
But not all automakers can easily rejigger supply chains that sprawl across borders. Pricier vehicle costs could ultimately fall on the shoulders of budget-conscious consumers. “Everybody hates taxes and tariffs,” bemoaned Adrian Mardell, CEO of UK-based Jaguar Land Rover. “Of course all of us would dislike an environment where we go into larger tariffs.”
With the global economy already teetering on the brink of recession, a transatlantic trade war sparked by auto tariffs is the last thing anyone needs. Yet given President Trump’s hardline “America First” agenda, compromise may be elusive. For Germany’s car titans, navigating the new landscape of protectionism is shaping up to be their biggest test yet.
