Introduction

Tariffs are never a sustainable solution.

Trump is up to his old tricks again.

Upon returning to the White House, he recently convened his first cabinet meeting, attended by Musk, the head of the Government Efficiency Department (DOGE), and others. At the meeting, Trump announced his plan to impose a 25% tariff on automobiles and other goods imported from the EU, with the decision expected to be made public soon.

According to foreign media reports, Trump appears highly resolute this time, leaving little room for negotiation. He not only criticized numerous European policies that disadvantage American food and automotive exports but also aired his grievances to the media about a trade deficit of roughly $300 billion between the US and the EU, stating:

“The EU was established to mess with the US. Let's be honest, it's all about dealing with the US. That's its purpose. But now, I'm the president!”

Trump's latest policies are reverberating through the global automotive industry. If high tariffs are imposed, European automakers will face even greater challenges. French Minister of Economy and Finance Bruno Le Maire recently retaliated by stating that if the US chooses to impose additional tariffs, the EU will respond in kind and warned that a tariff war will lead to inflation and slower economic growth.

The Tariff 'Club' Targets Europe

Using tariffs to bolster the manufacturing industry has been Trump's consistent policy approach. However, it is widely recognized that the White House's imposition of tariffs and trade protectionism, which advocates 'preventing workers in other countries from stealing American jobs' or alleviating the so-called trade deficit, are primarily political excuses.

Take the trade deficit, for instance.

In reality, the US-EU trade deficit is not as large as Trump claims. US media has cited EU data showing that in 2023, the EU had a goods trade deficit of approximately €155.8 billion with the US but achieved a surplus of €104 billion in services trade. This means that, overall, the trade deficit between the two entities is only around €50 billion.

Nevertheless, Trump has had his sights set on the EU for quite some time.

Just three days after taking office as President of the United States, Trump directly "blasted" the EU at a forum, exclaiming, "Europe is very, very unfair to the US. It's terrible!"

Trump has always been a staunch supporter of trade protectionism and a textbook example of a political figure representing this ideology. Using tariffs to boost the manufacturing industry, increase employment, and leverage them as bargaining chips in political and economic negotiations is something he has always advocated and excelled at.

Earlier this month, he announced a 25% tariff on all steel and aluminum imported into the US, excluding raw materials like iron ore. It is evident that the White House's true intention is to encourage more steel and aluminum companies to establish factories in the US, thereby increasing American employment.

Imposing a 25% tariff on EU products such as automobiles serves the same purpose. However, after the news broke, industry insiders were unperturbed by the 25% figure, as Trump has repeatedly emphasized his determination to impose high tariffs on the EU, whether through interest threats or political maneuvering.

What Does a 25% Tariff Entail?

Considering the automotive sector, Germany, as the most populous country and largest economy in the EU, exemplifies the current state of the European automotive manufacturing industry. About three-quarters of the cars produced in Germany are exported, making the automotive industry highly susceptible to trade barriers. Trump's decision to impose high tariffs on steel and aluminum imports, and even threaten to do the same for Canada and Mexico (where factories for Volkswagen, BMW, and Mercedes are located), has significantly impacted the automotive supply chain.

European media has commented that for most European automakers, a 25% tariff is indeed excessive and difficult to pass on to consumers. With automobile profit margins already razor-thin, European manufacturers have limited capacity to absorb the impact of tariffs and can only passively adjust or expand existing production capacity in the US to maintain market share.

Automakers who foresaw the risk have already increased production investment in the US. Volkswagen has announced plans to double its market share in the US, investing up to $5.8 billion in its cooperation project with Rivian and approximately $2 billion in the production of the Scout brand. These actions will more than double the company's production in the US.

A Temporary Fix, Not a Lasting Solution

'Tariff is the most beautiful word in the dictionary.'

Trump has made this remark publicly on numerous occasions. Less than a month into his presidency, the White House's tariff club has not only swung at the EU but also at Mexico, Canada, and China.

Trump announced on Thursday that his proposed tariff plan on imports from Mexico and Canada will take effect on March 4, and tariffs on Chinese goods will also increase by an additional 10% on the same day. In the past year alone, 76% of Mexico's 3.5 million vehicle exports were sold to the US.

Ford CEO Jim Farley has warned that long-term tariffs will 'erase' automakers' profits and force management to make 'significant decision shifts,' including relocating manufacturing plants to the US. However, building new facilities is a lengthy process, and companies remain vulnerable to cost impacts.

Although some German automakers/suppliers have localized production in the US and will not be directly negatively impacted by tariffs, high tariffs will still affect prices due to the multiple crossings of automotive parts across Mexican and Canadian borders, inadvertently pushing up costs. Many people's fears may soon materialize as Trump's series of measures could exacerbate inflation. As US commodity prices rise, related companies may choose to pass on some or all of the tariff costs to consumers.

Since 2018, every time the Biden and Trump administrations initiated a trade war or formulated tariff policies, they claimed to 'create more jobs for American workers' and attributed the root causes of many problems to external factors, namely international competition or external threats.

However, this is not the case.

The current reality of the US manufacturing industry is that the glory of Detroit has faded, and the industry's revival faces a series of profound and daunting challenges. From the 'reindustrialization' strategy of the Obama era to Trump's previous 'America First' policy and Biden's 'supply chain resilience' strategy, policies have escalated over the past decade, yet the results have been minimal.

Trump's approach remains one of attracting internally and restricting externally. The series of policies recently introduced are essentially upgraded versions of those from past years:

More aggressive tariff policies - Increased game pressure - 'Shakedowns' of more countries and companies - Forcing the gradual transfer of production lines and supply chains - Protecting more local jobs - Attempting to accelerate the revival of the manufacturing industry.

However, the current manufacturing industry in the US faces several challenges: First, infrastructure urgently needs upgrading, but overall renovation poses a severe test for national investment and time; second, the industrial structure is difficult to change, with the service industry accounting for over 80% of the country's GDP, significantly deviating from manufacturing; third, labor costs remain a shortcoming in the manufacturing industry, and there is a shortage of technical talent.

Tariffs are never a fundamental solution.

In the short term, for European automakers, Trump's tariff sword will indeed hang over their heads. And for Merkel, who just led the Union Party to victory in the German general election, every new policy indicator will influence the new direction of the German automotive industry. Now, she must also contend with Trump's tariff club.