Trump trade war: EU car tariff threats could cost $75 billion

Reuters/Carlos Barria

• Barclays estimates that US tariffs on the European
  automotive sector could knock as much as $75 billion from
  growth in the Eurozone next year.
• Trump has threatened
  to impose 25% tariffs on all autos and auto parts
  coming into the US to extract concessions from trading partners
  including the European Union and Canada.
• He is yet to follow through on such threats, but with
  trade set to dominate the agenda at this weekend’s G20
  conference in Buenos Aires, Argentina, discussion of auto
  tariffs is set to resurface.
• A 25% tariffs on autos could see euro area growth from
  1.6% to 1.2%.

An escalation of the global trade conflict which saw US President
Donald Trump levy increased tariffs on the European automotive
sector could knock as much as $75 billion from growth in the
eurozone next year, according to analysts at Barclays.

Writing this week, a Barclays team led by Francois Cabau
estimated that if Trump were to impose 25% tariffs on the import
of European cars into the US, it could knock as much as 0.4
percentage points off growth in the single currency area in 2019.
That would equate to around $75 billion of lost output.

Trump has threatened
to impose 25% tariffs on all autos and auto
parts coming into the US to extract concessions from trading
partners including the European Union and Canada.

He is yet to follow through on such threats, but earlier this
month it was reported that the
White House was circulating a report discussing the prospect of
auto tariffs, and
with trade set to dominate the agenda at this weekend’s G20
conference in Buenos Aires, Argentina, the threat of auto
tariffs is set to resurface.

Read more:
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“Higher tariffs on EU automobiles have been directly cited and
thus remain a serious threat ahead of the G20 meetings,”
Barclays’ team said on Thursday.

“We explore a scenario in which the US increases tariffs on EU
passenger cars from 2.5% to 25%.”

“We estimate an increase of US tariffs on European cars from the
current 2.5% to 25% would result in a drop in euro-area net
exports of roughly 2.0%, lowering EA GDP growth about 0.1pp
through the direct impact of trade on growth,” the note said.

Combining a traditional mechanical analysis, and a Barclays
specific value at risk model, the bank estimates that this would
subsequently lower estimated growth in the euro area from 1.6% to
1.2% in 2019.

Barclays

Such a fall in GDP growth, Barclays’ team says, could force the
European Central Bank into a “policy response.”

Although it doesn’t specify what form of response, it would
likely come in the form of either the restarting of quantitative
easing — which is set to come to an end at the end of December —
or a further cut in interest rates, below their current level of
-0.4%.

Barclays’ team was keen to stress that a 0.4 percentage point
drop in GDP growth is not its base case, but added that the
“potential ramifications are serious enough to warrant a deep
exploration of the issue.”

It added however, that the initial 0.4 percentage point estimate
could increase “as the US-China trade dispute escalates, putting
further stress on the Chinese economy, and rippling into Europe.”