Will Trump kill VW?

President Trump has been threatening massive import duties on European cars. We look at the reasons, and whether this could be disastrous for the VW Group.

There’s a risk writing anything about President Trump’s trade policy: by the time you publish it, it could well be out of date. That holds true about Trump and the Volkswagen Group. Though it’s only a few days until this article goes live, we could well be overtaken by the Tweeter-in-Chief.

If you haven’t been following this story, here’s a quick recap. Earlier this year, Trump introduced a number of new tariffs on certain US imports, most notably steel and aluminium. Some affected countries have hit back with their own tariffs on selected US exports. Undeterred, Trump has threatened much wider tariffs, including a hefty tax on cars imported from the EU. And as a major exporter to the US, that could be bad news for the Volkswagen Group.

Why is he doing it?

One of Donald Trump’s election promises was to pursue an agenda of ‘America First’. He has used this as justification for major shifts in international policy, including withdrawal from the Paris Climate Accord, rejecting joint actions by the G7 countries and threatening reductions to foreign aid programmes.

Applying this thinking to trade, Trump has repeatedly complained about the ‘unfair’ trading practices of other countries. In particular, he seems infuriated by the trade deficit (i.e. the US imports far more than it exports). He has repeatedly claimed that the USA’s long-term trading partners, such as the EU, are taking Americans for a ride.

Trump’s favoured tactic for addressing this is to add a tariff to imported goods. This makes them more expensive for consumers, leading to:

  • greater sales of comparable USA-manufactured goods
  • lower profits for foreign competition
  • renegotiation of more favourable trading agreements with the foreign government

Well, that’s the theory anyway.

What does everyone else think?

Trump’s tariffs have been particularly divisive. Reaction to them tends to fall into three main camps.

For Trump supporters, tariffs are a much-needed correction to an unfair system. They’re also a brilliant negotiating tactic from a master deal-maker. For a second group, tariffs are a damaging and heavy-handed solution to a genuine problem. And for Trump’s critics, they are yet more evidence of the President’s malice, egotism and incompetence.

One thing’s certain: tariffs can have major impacts on the world economy, and they’re not to be taken lightly.

What’s Trump’s beef with EU car manufacturers?

When it comes to cars, Trump has regularly pointed out that the US adds just 2.5% import tax on EU cars, whereas the EU slaps a 10% import tax on American cars. At first sight, this does seem a bit skewed, until you realise that:

  • the USA taxes European SUVs and light trucks at 25%, whereas the EU only adds 10% import duty
  • In the USA, SUVs and light trucks dominate the market
  • In any case, only about 15% of exported US cars attract the import tax. The rest have sufficient parts made in Europe to be exempt.

Be that as it may, Trump is annoyed by all the German cars he sees on American roads. The equivalent American models are missing in action, which Trump sees as evidence of unfair European trading practice.

What’s Trump been threatening?

Since early March this year, Trump has been threatening to tax European cars . Threats have been repeated periodically, with the President demanding that Europe lowers barriers to the US. At first he mentioned 25% — or as high as 35% for German manufacturers building in Mexico — but by late June it was down to 20%.

By early July,  increased rhetoric from Trump was making tariffs look inevitable. Then, on the 25th of that month, there was a surprise announcement: Trump and EU Commissioner Jean-Claude Juncker had reached a deal. Details were sketchy — it was essentially an agreement to talk some more — but there was general relief that Trump had stepped back from the precipice.

Sceptics were keen to point out that this might be motivated by the President’s short-term priorities: mid-term elections are close by, and Trump might be cautious in launching yet another assault at such a sensitive time. But who knows if we’ll be back to tariffs again once these have passed.

All of which means that, as usual with this most unpredictable president, no one quite knows where we are.

What could Trump do to VW?

If Trump renews his plans to impose tariffs, there’s no question that VW will suffer.  The USA is a major export market for German manufacturers, including Volkswagen. In the early summer, shareholders reacted to the worrying news and VW’s stock values, along with BMW and Daimler, quickly went southward.

VW Group’s CEO Matthias Mueller was frank, telling CNBC that “for the German motor industry this is possibly a big problem, even for VW…we now need to consider whether these protective tariffs will be introduced and how German politicians will react and what the rules of the game will be.”

However, we think that regardless of what The Donald does next, there are good reasons to be optimistic about the Volkswagen Group’s future:

  • If tariffs are enacted, the hit on VW profits has been estimated at 10%. That’s substantial, but it’s not a mortal blow. VW is a big, profitable company that has proved its resilience through the Dieselgate episode.
  • VW already operates a large manufacturing facility in Chatanooga, Tennessee. American-built cars are not subject to export duties and, as Mueller noted, there is potential to expand the facility.
  • VW is developing other markets. In particular, it has been ramping up production in China for distribution throughout the East Asian markets.
  • VW is embracing the future. As European countries scrabble to meet their climate and pollution targets, the electric car market is set to explode. And, as we’ve blogged before, VW has ambitious plans to meet these demands, opening up new vistas for profitability.

So for all Trump’s bluster, it seems to us that the worst he will do is dent VW. Maybe badly, but not fatally.

Just build better cars

As an alternative to his trade tariffs, we can’t do better than repeat the advice of German Vice-Chancellor Sigmar Gabriel. If the USA wants to compete, he said, then their manufacturers need to “build better cars.”

The Welsh VW Specialist blog covers a wide range of automotive topics, from the contentious to the light-hearted. We are an independent garage specialising (as the name suggests!) in all the VW group marques, including Audi, Volkswagen, Skoda and SEAT. Welsh VW Specialists provide services, repairs and MOTs, delivering a main dealer level of care at affordable prices. To book your vehicle in, or for any enquiries, get in touch.