A worker passes the production line for Mercedes-Benz AG Sprinter vans during assembly at the Gaz auto plant, operated by Gaz Group, in Nizhny Novgorod, Russia, on Tuesday, June 16, 2015. The economy may shrink for two years in a row for the first time under Putin if oil stays at $60 through 2016, the central bank says. Photographer: Andrey Rudakov/Bloomberg
London (CNN Business) US tariffs could cost German automakers $7 billion a year, but they will hurt more than just car factories.
President Donald Trump has less than 90 days to decide whether to impose tariffs of up to 25% on vehicle imports, a threat that has unnerved automakers in the industrial powerhouse of Germany.
The tariffs would cost Volkswagen €2.5 billion ($2.8 billion) a year in profit, according to Evercore ISI. BMW earnings would be reduced by €1.7 billion ($1.9 billion) and Daimler would take a €2 billion ($2.3 billion) hit.
Volkswagen CEO Herbert Dies told the Financial Times the estimate is about right.
“In the worst-case situation, that would probably be close to the real figure,” he told the newspaper in an interview. BMW and Daimler, the owner of Mercedes-Benz, declined to comment on the figures.
With cars making up roughly 30% of all German exports to the United States, the broader economic impact promises to be severe.
Germany’s Ifo Institute for Economic Research said last week that 25% tariffs would send annual German car exports to the United States plummeting by about 50% within a decade, from €34 billion ($38 billion) to €17 billion ($19 billion). Last year, the institute calculated that the tariffs would knock 0.16% of Germany’s GDP.
Global pain
Other countries would also be hurt. Almost half of all cars sold in the United States are made outside the country, mostly in Mexico, Canada and Japan.
Ifo estimated that Mexico would see its GDP decline by 0.39% as a result of the US tariffs. Canada’s GDP would drop 0.23% while Japan’s would fall 0.1%.
Auto tariffs would probably spark a much bigger conflict between Europe and the United States, because of the importance of the sector to the European economy.
Vehicles currently accounts for 10% of total trade between the two regions, according to ACEA, the European Automobile Manufacturers Association. The jobs of more than 13 million people, or 6% of all employees in the European Union, depend on the industry.
“Such tariffs, to which the European Union would respond in kind, would be a massive escalation of the trade tensions between the two biggest economic powers of the world,” said Holger Schmieding, chief economist at Berenberg. “They could severely damage economic growth on both sides of the Atlantic.”
US consequences
Trump has threatened tariffs on not just foreign-made vehicles, but auto parts made abroad, too. American automakers, who use imported parts in almost every model, say the cost of production would go up.
Research from the Center for Automotive Research based on figures from the National Highway Traffic Safety Administration shows that a typical car made in the United States has 40% to 50% of its parts imported.
The tariffs would increase the price of an American-made vehicle by an average by $2,750, according to the Center for Automotive Research.
American consumers could also face higher prices on other goods as the result of EU retaliation. Trade between the European Union and the United States is bigger than between the United States and China.
“In commercial terms, the European Union could hit back at the United States much harder than China could,” Schmieding said.
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