Delay of auto tariffs is a short-term relief for EU automakers

President Donald Trump's decision to delay imposing tariffs on the European Union's auto industry comes as a welcome relief to automakers, but the threat will hang over EU-US trade relations and business sentiment in the region this year.

According to Bloomberg Economics, 0.4% of all value produced in the euro area ends up in cars and car parts exported to the US, and 8.6% of the transport industry output.

The overall economic shock from US tariffs would be manageable, but at a time when Europe's car industry is struggling to recover from challenges including tougher fuel emission standards and slower global demand, another blow is the last thing it needs.

On Friday, Trump announced a delay in imposing tariffs on imported vehicles and parts from the EU, Japan and other nations for 180 days to pursue negotiations, avoiding opening another front in his tariff battle with some of America’s key allies. The delay comes as the administration faces a deepening trade war with China even as the two sides continue negotiations for a trade deal.

The move will allow more time for the Trump administration to continue ongoing negotiations for trade accords with the EU and Japan, major car exporters to the US who have staged lobbying campaigns against any tariffs. Trump has used the threat of auto tariffs of as much as 25% to gain leverage in those talks.

Trump said in a proclamation released in Washington that he agreed with the conclusion by Commerce Department  that imports of cars and their parts represent a national security threat.

His proclamation directs the US Trade Representative to pursue negotiations of agreements "to address the threatened impairment of the national security with respect to imported automobiles and certain automobile parts from the European Union, Japan, and any other country the Trade Representative deems appropriate."

"Domestic conditions of competition must be improved by reducing imports," the proclamation stated.

The Commerce Department started the investigation last year under Section 232 of a 1960s trade law, the same provision the administration used to slap tariffs on steel and aluminum. The car probe covered imports of vehicles including SUVs, vans and light trucks, as well as auto parts.

The order indicated that Canada, Mexico and South Korea would not face any tariffs because they had already negotiated deals with the Trump administration.

Canada and Mexico negotiated side letters to the US-Mexico-Canada Agreement that spare them from new U.S. duties on cars, subject to a cap. The US renegotiated a trade deal with South Korea last year, which included a provision to double the number of cars US automakers can sell in the Asian nation without restrictions from local safety standards.

EU, Japan

The EU and Japan have rejected the idea of quotas, even those that allow for some growth like the arrangements that Mexico and Canada negotiated with the US in the NAFTA talks.

Companies and governments from Europe to Asia have warned Trump that tariffs on car imports would hurt the US economy and disrupt the global auto industry.

"Current tariffs have added cost, reduced the industry’s global competitiveness, and created tremendous uncertainty resulting in slowed investment and growth," John Bozzella, president of the the Association of Global Automakers, the trade group that represents automakers and suppliers based outside the US, said in a statement on Thursday.

The US National Automobile Dealers Association estimates that the tariffs would add as much as $2,270 to the cost of US-built cars and $6,875 to the cost of imported cars and trucks.

In a sign of what are likely to be contentious negotiations ahead, the EU’s trade commissioner, Cecilia Malmstrom,  tweeted that the bloc would not accept any limits to trade that violated World Trade Organization rules such as quotas.

Trump renewed his complaints Friday about EU barriers to trade. The EU "treats us, I would say, worse than China, they are just smaller. Can you believe it?,” he said at an event. “They have trade barriers. They don’t want our farm products. They don’t want our cars. They send Mercedes-Benz in here like they are cookies. They send BMWs here. We hardly tax them at all."

The stakes in the fight over US levies on car imports and Europe’s anticipated retaliation could not be higher. "US-China trade is about 3% of global trade. Automobile trade globally is about 8% of global trade,” WTO’s Chief Economist Robert Koopman said in March. “So you can imagine that the impact of automobile tariffs are going to be bigger than the impact of the US-China trade conflict."