A BMW factory in Leipzig
A BMW factory in Leipzig. Germany exported €27.2 billion of cars and car parts in 2018. Image Credit: Bloomberg

Brussels, Washington: Even though President Donald Trump held fire earlier this month on auto tariffs, a litany of domestic dilemmas on both sides of the Atlantic threaten to frustrate efforts at a trade pact before they’ve even begun.

Ten months after Trump and European Commission President Jean-Claude Juncker struck a truce meant to clear the way for negotiations to reduce tariffs on industrial goods and eliminate regulatory hurdles, those talks are showing few signs of going anywhere meaningful.

European officials have blamed a Trump administration that has had little time for dealing with a bureaucracy in Brussels already held in low regard by many in the US president’s orbit. Distracting Trump has been a breakdown in talks with China and a need for a quick deal with Japan to assuage American agricultural interests.

“I don’t think the US is ready to start on the tariff negotiations,” Cecilia Malmstrom, the EU’s trade commissioner, said in Paris earlier this month after meeting with US Trade Representative Robert Lighthizer.

Yet it is the growing polarization in Europe evident in the recent elections that saw a fragmentation of the mainstream centre-right and centre-left parties that some in Washington see as a sign of the bigger structural obstacles to a deal. With the Brexit process thrown into turmoil after Prime Minister Theresa May announced her resignation, eastern nations testing the limits of “illiberal’’ democratic reforms, an assertive Russia threatening pillars of European Union security and an increasingly fragile economic backdrop, the 28-nation bloc faces plenty of its own distractions.

“You’re seeing an EU that is fighting fires on so many fronts that I just don’t think they are going to be confident and able to negotiate that deal,” with the US, said Heather Conley, head of the Europe programme at the Center for Strategic and International Studies.

Auto industry bracing for maximum impact

The auto deadline will hit just as a new European Commission, the bloc’s executive arm, is due to take over from the Juncker-led one that has governed for the past five years. Germany, which exported 27.2 billion euros of cars and car parts in 2018, is more concerned about Trump’s threat of automobile tariffs.

The home of Mercedes-Benz, BMW and Porsche generated a surplus of 22 billion euros in automotive trade with US last year.

Recent rounds of bilateral talks have yielded little progress and US officials have resisted even broaching the subject of autos, according to people close to the negotiations. European officials last year proposed a plan to reduce auto tariffs on both sides of the Atlantic to zero, a concession already made to Japan as part of an EU-Japan trade pact that went into effect earlier this year.

But that was rejected by Trump, according to people close to the negotiations.

EU officials have made clear any auto tariffs would be met with retaliation, as were steel and aluminum duties introduced on similar national security grounds last year. The EU said in January that it would hit 20 billion euros of US products should Trump impose auto tariffs.

With the current European Commission entering a lame duck phase, the global auto sector facing falling sales in markets like the US and China, and fears of a slowdown in the world economy looming large, muddling through may be the most likely option.

US auto tariffs also would bite at home where they are opposed by General Motors Co. and Ford Motor Co. and that may be a cost Trump is unwilling to bear going into the 2020 election with key states like South Carolina home to major European carmakers like BMW AG and Volvo AB.

Tariffs would “rebound very painfully on American workers and the American economy as much as the European economy,” Conley said. “It’s a choice. But it certainly could be a painful one.”

US has more give and take with Japan in trade talks
The 180-day deadline that Trump set for a negotiation with the EU and Japan over reducing their exports of cars and parts to the US holds to President Trump’s pattern of steadily increasing pressure on trading partners to cut a deal more to his liking. As he made clear during his recent trip to Japan, Trump is eager to see at least some rapid deals going into his 2020 re-election run.
With Japan he may have some luck. People close to those talks see the very real possibility of a deal being struck by the end of the year with negotiations due to accelerate after Upper House elections in Japan in July.