Mexico and Germany: The Most Affected Countries If Trump Levies Tariffs on Automobiles

The tax increase of 25 percent that the U.S. president is considering would cost Germany more than $5 million and Mexico more than $3.7 million.

Through Twitter. It couldn’t be otherwise. U.S. President Donald Trump has announced that he’s considering a unilateral increase of 25 percent import taxes on automobiles and automobile parts. This measure would have the biggest impact on countries like Germany, a major luxury vehicles exporter, or Mexico and Canada, the commercial partners with whom Trump is immersed in North American Free Trade Agreement negotiations. The prestigious Institute for Economic Research estimates the hit caused by the tax increase will cost more than $5 million to the German economy. The figures reach $8.5 million if we count the whole EU. But if we compare the losses to GDP, the most affected country is, without doubt, Mexico.

Imports in the automobile sector are one of the main factors contributing to the increasing U.S. commercial deficit. In 2017 the deficit amounted to $333 million according to Nomura, the Japanese bank. Reducing this deficit is one of Trump’s obsessions and the reason why he’s considering raising tariffs: In the Republican tycoon’s mind, commerce is a zero-sum game − some win and some lose, but in no way does every part involved end up benefiting − and tariffs on imports are the fastest way to adjust the imbalances. As was the case with aluminum and steel, a sector for which the threat crystalized last Thursday upon the approval of a full-fledged tariff, a potential tariff on the automobile sector puts many historic U.S. partners in the spotlight.

Mexico would be the most affected by this policy of commercial restrictions on cars and the components used in their manufacture. According to the half-dozen experts consulted, Trump intends to put pressure on the Latin American country in order for it to accept the White House’s demands in the NAFTA negotiations, the treaty that has connected the U.S., Canada and Mexico for a quarter century. Washington knows that the automobile industry is the Mexican economy’s Achilles’ heel; it is, at the same time, Mexico’s major manufacturing sector, the one depending the most on the first power’s investments, the one accumulating the greatest deficit in the commercial balance, and the main way foreign currency enters the country. This is also the reason why it has become one of the major hurdles during the NAFTA renegotiation process, which aims at updating the greatest commercial agreement on the planet.

The big American manufacturers, which have important investments in Mexico, have already shown their rejection of the tariffs proposed by Trump, since the measure would harm their production strategy, consisting of relocating production to their southern neighbor in order to cut back on wage costs − the average cost of a Mexican employee for an American enterprise is about 6 to 10 times lower than that for a worker doing the same tasks in the U.S. “If these tariffs are imposed, consumers are going to take a big hit because they will have fewer vehicle choices and higher car and truck prices,” warns John Bozzella, the head of Global Automakers, one of the major pressure groups advocating for foreign manufacturers selling in the American market. But with Trump, no one is completely sure; the president’s unpredictability leaves room for any possibility, including the application of a tariff that would harm both the businesses from Detroit and those in its southern neighbor, Washington’s main ally in the competition with Asia.

The hit for Mexico would be enormous: In 2017, it was the main country exporting automobiles to the U.S., with almost 2.5 million cars worth $47 million. If things were to continue this way during the second half of 2018, those figures would be easily surpassed this year. Almost six out of every 10 cars exported from Mexico to its northern neighbor are produced by the three major American manufacturers: General Motors, Fiat Chrysler Automobiles and Ford Motor Co. Regarding car parts, numbers are equally remarkable: The Mexican exports were valued at $53 million, compared to Canada’s $16 million or Japan’s $14 million. “I think this is posturing to put pressure on Canada and Mexico to agree with what the U.S. has on the table in NAFTA talks,” said, Kristin Dziczek, from the think tank Center for Automotive Research, with the data in hand.

The European Union would be the second most affected by the potential American tariff. In 2017, the 27 countries sold automobiles valued at almost $43 million and car parts valued at $18 million. Among the European countries, Germany is the one that has the most at stake: Almost half of European cars sold come from there. “Sixty thousand jobs could be lost in Germany […] It could reach up to 130,000 in all Europe,” estimates Gabriel Felbemayr, from the Institute for Economic Research, noting that these figures are the worst possible scenario. The tariffs would have a lesser impact on Italy, Spain or France, three countries in which car manufacturing carries significant weight, but whose sales end up, for the most part, in the EU itself. “They export virtually no cars to the U.S.,” Felbemayr adds.

He also points out which manufacturers could be the most affected: “Audi or Porsche, for example.” Both brands, which belong to the Volkswagen Group, produce luxury automobiles. Following this logic, there are other brands like Daimler AG or BMW that would also be affected. What’s different about the German case is that its companies don’t produce in Germany alone, but also in third countries, like Brazil or Mexico. This is why national figures don’t reveal the whole scope the tariffs’ potential hit would have.

Japan, too, for whom the IFO estimates an impact of $4.26 million, is in a similar situation, since Daimler and Nissan Motor Co., Ltd. have a plant in Aguascalientes, Mexico. Mazda Motor Corp. and Toyota Motor Corp. have a plant there as well. The Japanese businesses, which are the ones who have suffered the most in the stock market after Trump’s tweet, produce on the other side of the border almost 30 percent of all the vehicles that Mexico sends north.

Last year, more than $17.3 million cars were sold in the U.S., out of which 8.7 million were assembled elsewhere. Even among those finished on the American territory, a large portion of their car parts was coming from other countries. “There are no longer 100 percent American vehicles and a tariff of 25 percent would harm manufacturers and many of their suppliers,”* adds Dziczek. A new shot in Trump’s foot that all the parts involved, inside and outside the U.S., want to avoid at all cost.

*Editor’s note: The original quotation, accurately translated, could not be verified.