Are car makers the first victims of trade war?

Since the referendum and even before it, Leavers and Remainers alike have been hopeful that the EU would not seek to ‘punish’ the UK for its vote, but work to come up with a constructive trading partnership following Brexit.

Integral to that has been the expectation that Germany’s mighty car-making sector would bring its influence to bear.

As David Davis, now Brexit Secretary but then a Conservative backbencher, put it in February 2016: “We are too valuable a market for Europe to shut off. Within minutes of a vote for Brexit, the CEOs of Mercedes, BMW, VW and Audi will be knocking down Angela Merkel’s door demanding that there be no barriers to German access to the British market.”
However, the German carmakers may have to put their Brexit lobbying on hold as they now have other concerns, chiefly the burgeoning trade war between China and the United States.
Of the $11bn worth of cars exported from America to China, which has just slapped 25% tariffs on US-made vehicles, some $7bn worth are made by German companies.
Daimler, the owner of Mercedes Benz, admitted on Wednesday night that it expects higher import tariffs on US car exports to China would hit its sales and profits.
The company, which exports SUVs made in Alabama to China, said: “Fewer-than-expected SUV sales and higher-than-expected costs not completely passed on to customers must be assumed because of increased import tariffs for US vehicles into the Chinese market.”
Daimler has not put a figure on the likely shortfall but Wall Street analyst think it could suffer a hit to sales of around €250m. Shares of the company have fallen by more than 6% since the beginning of the week.
Also potentially looking at lower sales is BMW, whose shares have fallen by almost 5% this week, although it put out a statement this morning insisting its business outlook was “unchanged”. It added that it was “evaluating various scenarios and possible strategic options” in the context of the extra tariffs being applied.
Volkswagen, which also owns the Audi brand, may be less vulnerable because more of the cars it sells in China are actually made in China. That has not stopped its shares falling by 6% so far this week.
But there are likely to be longer-term implications as a result of what is happening now.
It is likely that, in the short term, Daimler and BMW may respond by trying to sell vehicles previously destined for China into the European market instead. Longer term, they may choose to base more manufacturing in China itself, which would potentially hit US jobs.

BMW, Daimler and Volkswagen together employ more than 36,000 people in the US and, when their supply chains are taken into account, support more 116,500 US jobs.
Another, more optimistic, scenario is that tariffs between the US and the EU come down over time as the US looks to bolster exports elsewhere.
The Wall Street Journal reported this morning that Richard Grenell, the US ambassador to Germany, has met the CEOs of Daimler, BMW and Volkswagen in recent days ahead of proposing to the Trump administration a broad industry trade pact that would see the abolition of all import tariffs on cars sold between the EU and the US.
Currently, US cars sold to the EU are hit with a 10% tariff, while the US imposes a 2.5% tariff on cars imported from the EU.
Yet such a deal is far from certain. It would need agreement from across the EU and France, whose main carmakers do not export to the US, would have no incentive to back it – especially if it fears a removal of tariffs on both sides would result in a glut of cheap US car imports.
In the meantime, ironically, China’s actions will also hurt its own carmakers. Volvo, which was bought by Chinese company Geely in 2010, has only this week opened a new plant in Charleston, South Carolina, with the specific aim of avoiding tariffs on cars sold to the US market.
However, cars exported from there to China will incur tariffs imposed by Beijing. Volvo is now warning that the trade row will hamper plans to create 4,000 US jobs.
Haakon Samuelssoon, Volvo’s chief executive, said: “If you have trade barriers and restrictions, we cannot create as many jobs as we are planning to.”