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Tariffs threat on European cars and its impact on Central European Economies

Tariffs threat on European cars is not null.

On Sunday 17 February, the U.S. Commerce Department sent to the White House the conclusions of the investigation conducted under Section 232 of the Trade Expansion Act of 1962 into whether the import of European cars poses a threat to US national security. Trump has 90 days to decide whether to act upon the recommendations, which auto industry officials expect to include at least some tariffs on fully assembled vehicles or on technologies and components related to electric, automated, connected and shared vehicles.

Administration officials have said tariff threats on autos are a way to win concessions from Japan and the EU. Last year, Trump agreed not to impose tariffs as long as talks with the two trading partners were proceeding in a productive manner, as he said, “I love tariffs, but I also love them to negotiate”.

However, France and Germany have very different levels of priority attached to car exports to the United States, which could lead to disagreements. The risk of broad tariffs of up to 20 percent to 25 percent on assembled cars and parts, or narrower tariffs targeting components and technologies related to new energy cars, autonomous, internet-connected and shared vehicles to be implemented by the US is not null.

What does it mean for Central European Economies (CEEs)?

US economy represents a negligible export’s market share for CEEs car industry in terms of direct flows. Nevertheless, these countries are very integrated in the chain of production of the EU car industry and most of their exports of cars to EU are likely re-exported. It is difficult to estimate the part that is re-exported especially towards the US market.

Nevertheless, let us assume the worst scenario where all exports of cars to EU are re-exported to the US market. In some countries such as Slovakia, car industry can represent up to 22.5% of total exports which most of them oriented towards EU (see chart 1). If we assume that a 25% increase of tariffs in car industry results in a cut of the same amount of car industry exports than the impact on total exports could be substantive up to more than 4% such as in Slovakia for instance (see chart 2).

Considering investment and employment, car industry is also very important. Indeed, it can represent up to 8% of fixed investment in country such as Hungary and 5% of total employment as in Slovakia (see chart 3).  Again if we assume that a 25% increase of tariffs in car industry results in a cut of a same amount in fixed investment realized in the car industry and similarly for employment than fixed investment and employment could deteriorate by up to 2% and 1.25% respectively (see chart 4).

What will this tariffs rise mean in terms of real GDP growth? According to the data, car industry can amount 5% of Total Value Added (see chart 5). Assuming once again that a 25% increase of tariffs in car industry results in a cut of 25% of cars ‘production than the decrease of total value added could be significant, up to 1.25% in Czech Republic for instance (see chart 6). Taking our central scenario’s GDP growth rates (2019F in the table below) and supposed this shock on tariffs to materialize than we would get much lower figures (2019F bis). Be aware that those estimations have to be taken very carefully as they are based on strong assumption and might be a bit overvalued.

HERVE Karine , PhD, Senior Economist
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Tariffs threat on European cars and its impact on Central European Economies
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