Trump Is Right about Trade, But Only at 1st Glance

Trade deficit? Is Europe levying higher taxes on U.S. automobiles? The U.S. president is using half-truths to justify his new trade measures to target European cars. His plan will disrupt global supply chains.

Proclaiming the date America’s “Liberation Day,” the U.S. president is planning to impose a new 25% tariff on car imports beginning April 2. If this takes effect, it will bring the world to the brink of a trade war.* It’s the kind of war without laws or rules, least of all those set by the World Trade Organization. Donald Trump couldn’t care less. He despises the rules-based, global free trading system his predecessors built over decades. He calls himself “Tariff Man.” To his mind, the only kind of law that counts is the type conveyed by strength.

And, as he sees it, the grounds for the project are simple. The United States is, by virtue of its economic heft, in a position to strong arm others, and for Trump, tariffs are a means to an end. In that spirit, he has extended an invitation to the world’s automakers that effectively reads, “Come over to our side of the Atlantic and build your vehicles in the Good Ol’ U.S. of A.” All those cars produced in the U.S. will remain exempt from customs duties. Meanwhile, the message for all the other vehicles reads, “You’ll pay on entry!”

1 Labor Union Is Celebrating. But Will the Good Times Roll?

Trump’s main objectives are two-fold: First, he seeks to bolster the U.S. domestic car industry, including the electric car maker Tesla owned by his adviser, Elon Musk. Second, he wants to ensure that foreign manufacturers shift their production to the United States and thus add jobs to the U.S. economy. Since both these aims accord fully with the United Auto Workers’ agenda, the powerful labor union is in a duly celebratory mood.

Nevertheless, Trump’s project does not augur well. The 25% tariff is supposed to apply not only to finished cars, but also to vehicle parts, like engines, gearboxes and drive shafts. The tax would disrupt international supply chains, and ultimately, U.S. car manufacturers which rely on parts from abroad. It is no wonder that Ford, General Motors and even Tesla stock all edged down after Trump first announced his tariff plan.

European Commission President Ursula von der Leyen is right to point out that tariffs only make goods more expensive on both sides of the Atlantic. The only problem is that the European Union’s planned WTO-compliant retaliatory tariffs don’t matter much to Trump. This was also the case when Trump introduced import duties on steel and aluminum. The moment the EU imposes a 50% import duty on bourbon whiskey, the U.S. reciprocates with a 200% tariff on champagne. Who is the stronger player here?

The EU Trading Bloc Is Anathema to Trump

Trump considers Europeans to be freeloaders who are taking advantage of the United States. In his view, Europeans want to keep the security guarantee and nuclear umbrella the U.S. provides, and all they do to repay the favor is get rich from high-volume car sales in the United States. Trump may be right to bemoan America’s $169 billion goods trade deficit with the EU. Yet, for all his complaining, he quietly overlooks the fact that the United States has a trade surplus in services with the EU of some $118 billion, thanks to its digital technology corporations.

With respect to the auto industry, the EU currently applies a 10% import duty on cars from the United States, whereas the U.S. only levies a 2.5% tariff on many vehicles imported from the EU. Thus, at first glance, Trump is right to insist that the EU should lower its tariffs to the same level as U.S. import duties. However, he fails to mention that the U.S. applies a longstanding 25% tariff on SUVs and pick-up trucks from Europe, as many as 15 percentage points more than the Europeans levy in return.

If you take Trump’s argument at face value, he only wants to bill the Europeans the same amount they ask the United States to pay. And he would much rather deal with individual member states and thereby cause division within the European Union. The trading bloc is anathema to him because the European single market is a powerful factor in world trade. The question is whether the EU is strong enough to forestall Trump’s tariffs. It is not as though Brussels has ruled out negotiating any deals with the Americans. Such a scenario is still possible. It’s equally possible, however, that Trump will allow the tariffs to take effect and simply wait to see what happens.

Germany’s Chancellor-in-Waiting and Its Auto Bosses Must Visit Washington

In Europe, the German economy will be most affected. Last year, Germany exported far more cars to the United States than any other European country. Although it is true that Volkswagen, BMW and Mercedes have plants in the United States, many models are built in Europe and then exported to the U.S. market. It’s clear that Trump’s auto tariffs would deal a blow to the German car industry. Moreover, this comes at a time when the sector is already in severe crisis.

What can we do about it all? Working closely with Brussels, Germany’s Chancellor-in-waiting Friedrich Merz and the CEOs of the country’s major car makers must visit Washington as soon as possible. Whether anything will be gained by such a visit is anyone’s guess. At the very least, supreme dealmaker Trump will feel flattered. It wouldn’t be the worst development in a trade conflict characterized by an individual so narcissistic as to think that calling oneself “Tariff Man” is something people would seek.

*Editor’s Note: The 25% tariffs on vehicles went into effect on April 3, 2025 and the tariffs on parts will come into effect on May 3, 2025.