Opinion

Transatlantic policy impacts of the US-EU trade conflict

By Chad P. Bown for Peterson Institute for international economics (PIIE)

Statement at the hearing “Transatlantic Policy Impacts of the US–EU Trade Conflict” before the Subcommittee on Europe, Eurasia, Energy, and the Environment, Committee on Foreign Affairs, United States House of Representatives

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Several actions taken by the Trump administration over the last two years have severely strained trade relations between Europe and the United States, weakening the transatlantic backbone of the global, rules-based trading system. But an even more worrisome threat to that relationship may be in the offing. It comes in the form of the president’s warning that he may impose trade restrictions on tens of billions of dollars of imports from Europe of automobiles and automobile parts, contending that they threaten America’s national security. The national security threat is fanciful, and Congress should amend existing statutes to constrain the executive branch’s abuse of power on trade.

No evidence supports the argument that imports of automobiles and parts from our closest European allies—Germany, United Kingdom, Italy, Sweden, and others—threaten national security. In fact, invoking Section 232 of the Trade Expansion Act of 1962 by declaring such a threat to justify trade restrictions would damage the US economy, create uncertainty, poison trust, and sow massive disruptions through both retaliation and copycat behavior relying on the same flimsy rationale.

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IMMEDIATE IMPACTS ON THE US ECONOMY

Three reasons demonstrate why imposing trade restrictions on European automobiles and parts would disrupt the American economy.

First, American consumers would be hit by price hikes. Fiats, Volkswagens, and Volvos, among other brands, would become more expensive. The reduced competition would inevitably raise prices of all cars, regardless of the make and model.

Second, the American manufacturing base would lose access to imported auto parts it needs to produce cars for both domestic consumption and export. Imported parts are vital for American-based auto plants to keep costs low for high-quality cars made in states like Alabama, Tennessee, and South Carolina. The facilities in these and other states make some of America’s most successful exports. Restricting trade in parts would hurt these factories and their workers.

Third, Europe will retaliate. The European Union has announced it would impose countertariffs on US exports—a credible threat because it did so last year when President Trump imposed tariffs on their exports of steel and aluminum, also under Section 232 of the Trade Expansion Act of 1962.

Those European tariffs hit more than $3 billion of US exports, hurting American farmers and businesses. It would be surprising if you haven’t already heard complaints from your districts. Among those suffering are corn farmers and makers of bourbon and whiskey, cosmetics, motorboats and yachts, peanut butter, playing cards, and motorcycles. I could name dozens of other products affected by that retaliation.

The example of Harley Davidson illustrates the futility of the Trump administration’s tariffs. Harley has announced in a Securities and Exchange Commission filing that Europe’s countertariffs mean it can no longer afford to produce motorcycles in the United States for sale in Europe. Harley Davidson and many other US manufacturers know that 95 percent of their customers live outside the United States. By making it more expensive to make products for those customers, the Trump administration is forcing these companies to transfer manufacturing to some other country not hit by these cost increases.

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