With his decision to begin a national security investigation into automotive imports, President Donald Trump is aiming his fire at one of the biggest components of global trade. Some $1.4tn worth of cars and automotive parts are traded around the world each year.
If his announcement earlier this year of new tariffs on steel and aluminium based on a similar national security rationale angered European and Japanese allies, he is now targeting a far bigger part of the economic relationship. The value of passenger vehicles and parts imported by the US last year ($324.3bn) was more than ten times that of the value of steel ($29bn).
Taking aim at cars amplifies the danger of a retaliatory trade war, trade experts said. “If you do this then everybody else in the world is going to go down the same road,” said Jennifer Hillman, a former US trade negotiator and World Trade Organisation judge now at Georgetown Law School in Washington.
Ms Hillman added that by invoking national security over vehicles there was an even greater chance that Mr Trump may blow up the WTO itself by forcing a test of a decades-old exception that allows countries to apply tariffs and other trade barriers in times of war.
Mr Trump’s stated rationale is simple. For too long low US tariffs (2.5 per cent on passenger vehicles) have been exploited by other countries who charge far higher duties on US auto imports.
"The stupidity is that we let ourselves get into this box of extremely low [tariff] rates," Wilbur Ross, the US commerce secretary, told CNBC on Thursday.
The result, the president and likeminded economic nationalists contend, has been the loss of American jobs. He now wants to bring them home.
But in attempting to do so, he would unpick the delicately balanced trade-offs on tariffs between the world’s economic powers that have for decades governed global commerce.
Mr Trump’s negotiating tactics on trade are becoming familiar. He threatens tariffs or chaos by ripping up trade agreements in large part to gain leverage in negotiations, his aides readily admit.
The latest move may be connected to the negotiations underway to rewrite the North American Free Trade Agreement with Canada and Mexico which have become bogged down in recent months over content rules for cars.
Robert Lighthizer, US trade representative, has become frustrated that US carmakers with operations in Canada and Mexico— and Canadian and Mexican negotiators — would rather swallow a 2.5 per cent tariff when exporting into the American market than comply with the Trump administration far-reaching demands aimed at reshoring the auto supply chain, say people familiar with the negotiaitons.
The threat of tariffs on cars is also aimed at the EU. US negotiators have been trying to use the steel and aluminium tariffs as leverage to get other concessions, including a lowering of the EU’s 10 per cent tariff on passenger vehicles.
Also in the cross-hairs is Japan, which has so far resisted Mr Trump’s push to open bilateral trade negotiations.
The problem is that these trading partners have read Mr Trump’s “Art of the Deal” and learnt his tricks. ‘The Trump negotiating strategy may have worked in the first iteration but people have figured it out,” said Rod Hunter, who served on George W Bush’s National Security Council and is now at law firm Baker McKenzie.
Mr Trump will also face stiff opposition at home to higher import tariffs on cars, including from his own Republican party.
Orrin Hatch, the Republican chairman of the powerful Senate Finance Committee, called the launch of the investigation “deeply misguided”.
“For most Americans, cars are the second largest purchase they make, after their homes. Taxing cars, trucks and auto parts coming into the country would directly hit American families who need a dependable vehicle, whether they choose a domestic or a global brand,” he said.
Unlike tariffs on steel and aluminium, which as input materials are hard to discern for most Amerixcans, or the distant threat of a collapse of Nafta, a tax on car imports would hurt.
Some experts said auto tariffs — like many of Mr Trump’s threats — may never happen.
“Everyone was in on the joke that 232 tariffs on steel were thinly veiled protectionist measures. There's not even a veil on this one — just naked protectionism,” said John Veroneau, who served as a senior trade official in the George W Bush administration and is now at law firm Covington & Burling.
“Because it would unleash retaliation and me-too protectionism around the world and because US consumers will rise up, I expect the administration will ultimately hit the brakes on this one.”
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