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Auto tariffs are still a problem for Germany and Japan

The suspension of auto tariffs is a relief for Europe but the issue isn’t going away, the fight is postponed as the China trade dispute accelerates.

The suspension of auto tariffs is a relief for Europe but the issue isn’t going away, the fight is postponed as the China trade dispute accelerates.
Garry white employee

by
Garry White

in Features

20.05.2019

Last week was positive for Berlin. After flirting with recession at the end of last year, the German economy returned to growth in the first quarter of 2019, beating expectations. But the best news for both Brussels and Tokyo came from Donald Trump, after the US administration postponed any decision on auto tariffs. However, last week’s announcement is merely a stay of execution, not a presidential pardon. German carmakers remain under a significant threat because they are important to his re-election strategy, with the main prize in Europe being better access to its markets for US farmers.

Following news on Wednesday that the auto-tariffs had been kicked down the road, German carmakers roared to the top of the Frankfurt Stock Exchange. Germany has a $24bn (£18.7bn) vehicle trade surplus with the US and a 25% tariff would add about €10,000 (£8,740) to the listing price of European vehicles exported to America, according to the European Commission. Reviving US vehicle manufacturing is important for Donald Trump, but auto tariffs will almost certainly be used as leverage in the president’s attempt to get US agricultural products into the EU. Smashing the bloc’s ultra-protective stance in farming is a key aim of Trump’s trade team – and the fight will help the president’s re-election chances. It will be used as a rallying cry to show his agricultural base he is fighting in their corner.

Farmers under pressure

US farmers are have been hit particularly hard by the trade war. Soya bean farmers have suffered most, as China previously bought one out of every three rows that American farmers grew. The Bloomberg Agriculture Subindex, which tracks futures contracts on coffee, corn, cotton, soya beans, soya bean oil, sugar and wheat, has fallen to its lowest level since the early 1970s. The index is down 20.3% over the last year and has fallen by a third in the last three years. The Congressional Research Service, dubbed Congress’s “think tank”, has calculated that US national net farm income dropped by more than $9bn, or 12%, in 2018.

As a result, Washington has been forced to launch an aid package to prevent losing support from an important part of Trump’s base. Rural Americans were among the most enthusiastic supporters of Donald Trump in the 2016 election, but support has been waning as farm finances suffered. On Wednesday, US Agriculture secretary Sonny Perdue said the Trump administration could make as much as $20bn available to farmers in a another round of assistance to offset China’s retaliatory tariffs. This will be the second instalment of aid from the US Department of Agriculture (USDA), which pledged up to $12bn in payments to farmers stung by retaliatory duties last year. The aid is expected to be funded from money raised from the elevated tariffs on Chinese goods. However, the aid has been difficult to administer and farmers have complained about the slow pace of payouts from last year’s package, with the deadline for applications for payments was extended last month. The new aid package needs to be delivered with more care, if it is to keep farmers on-side.

US concerted action

Agriculture is a central part of the Trump trade world view. Indeed, when Britain finally leaves the EU, any trade deal between London and Washington is certain to have an agricultural element. Writing in the Daily Telegraph in March, Woody Johnson, the US ambassador to Britain, argued that the UK should embrace American farming methods to ensure a transatlantic trade deal will be agreed. He argued that US practices such as chlorine-washing chicken and feeding growth hormones to cattle were “the future of farming” and the EU’s traditional approach was essentially a “museum of agriculture”.

This means the sense of relief will not last for long, especially in Germany. The country’s two major trading partners are the US and China, with 47% of the country’s GDP generated by exports, according to World Bank data. The German car industry has already been hit by the slowdown in China caused by the trade war, as well as desires in the Chinese hierarchy to reduce conspicuous consumption from the West. In the first four months of this year, Chinese sales of passenger vehicles fell almost 12%, according to the China Passenger Car Association. April saw particularly large year-on-year fall of 17. An escalation of the China-US dispute will also hit Germany’s economy, so the delay in any auto tariff decision because the spat remains unresolved is not really a positive for the EU either.  

On Tuesday, President Trump said that the nation’s farmers would be among the biggest winners of a new round of tariffs levied against China, despite falling incomes and the need for another mass bailout. “Our great Patriot Farmers will be one of the biggest beneficiaries of what is happening now. Hopefully China will do us the honor of continuing to buy our great farm product, the best, but if not your Country will be making up the difference,” the president Tweeted. “This money will come from the massive Tariffs being paid to the United States for allowing China, and others, to do business with us. The Farmers have been “forgotten” for many years. Their time is now!”

Europe insists that discussions on auto tariffs should be distinct from any talks about farm products, but for the US, autos and agriculture will be inextricably intertwined if a deal is to be agreed. This is unlikely to change, whatever Brussels wants.

A version of this article appeared in Friday’s Daily Telegraph

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