As is becoming a theme now, it seems each passing week heralds a new chapter in the legacy of Donald Trump’s presidency. Having remained mostly inactive for the best part of his term this far, Trump has recently opened the floodgates and unleashed a tidal wave of policy adjustments. The main focus of his policy initiatives has of course, been on trade, as the world now stands back and watches the biggest economy going tit-for-tat with its understudy China.
However, Trump’s focus has not just been on China and the President has increasingly pitted the US against the Eurozone. After unveiling increased tariffs on EU steel and aluminium imports to the US, the President has now revealed, once again through Twitter, that his administration is looking to impose tariffs on EU cars being imported to the US.
Trump Strikes Again on Twitter
In a tweet sent out on Friday, the President said “Based on the tariffs and trade barriers long placed on the US and its great companies and workers by the European Union, if these tariffs and barriers are not soon broken down and removed, we will be placing a 20% tariff on all their cars coming into the US. Build them here!”
This tweet follows on from a tweet sent earlier in March when the President said “if the EU wants to further increase their already massive tariffs and barriers on US companies doing business there, we will simply apply a tax on their cars which freely pour into the US. They make it impossible for our cars (and more) to sell there. Big trade imbalance”.
National Security Investigation
In order to apply such tariffs, Trump requires the results of the national security investigation into automotive parts which commenced on 23rd may and initially sought to provide evidence for imposing a 25% tariff on vehicle imports. The investigation is looking at the import of cars, trucks and vehicle parts under section 232 of the trade act (1962), using the same provisions which allowed for the tariffs on steel and aluminium. Legally, the US Dept of Commerce has 270 days from the launch date to produce its report after which time the President will have 90 days to establish his conclusion based on the findings.
The decision on these proposed tariffs can come no later than May 2019 though it is likely that we could get a decision much earlier than that given the timing of the November mid-term elections. Once the decision has been made, key allies of the US could be granted an exemption period. For example, with the steel and aluminium tariffs, it took 12 months to be fully implemented and broken down into eight months to conclude the investigation, a month to announce the findings and a further three months to process the exemptions.
Trump Angered by Trade Deficit
Trump’s basis for imposing these tariffs rests on the large vehicle trade deficit that the US has with Europe where US imports from the EU outstrip exports to the EU by $44 billion, roughly 0.25% of GDP. The current tariffs in place are asymmetric with the US imposing a 2.5% tariffs on EU built cars whereas the EU tariff on US built cars is roughly 10%.
Harley Davidson Quits the US
For now, the tariffs are still some way off being implemented though the reaction in the business community can already be seen. Following Trump’s tariffs on EU steel and aluminium, the EU responded with tariffs of its own. Consequently, US motorcycle make Harley Davidson has announced its decisions to wind down its domestic operations and move offshore in order to protect itself against the EU tariffs which have raised the price of exporting their motorcycles to the EU to 31% from 6% prior which would raise costs for the company by $90 – $100 million, which it says it will bear itself in the short term rather than pass on to customers.
As uncertainty increases, risk sentiment has been rapidly dwindling, reflected in the US S&P500 which is currently printing a second consecutive bearish week. For now the next key support will be the rising trend line from 2018 lows while to the topside, the key levels are the 2787 – 2802 structural resistance.