July 26, 2018 / 3:02 PM / 8 months ago

Breakingviews - Tariff truce leaves EU carmakers stuck in low gear

U.S. President Donald Trump and President of the European Commission Jean-Claude Juncker speak about trade relations in the Rose Garden of the White House in Washington, U.S., July 25, 2018

LONDON (Reuters Breakingviews) - European carmakers need to know whether Donald Trump is a pragmatic dealmaker or a hardcore protectionist ideologue. Even though the U.S. president has seemingly relented on potential auto tariffs following a meeting with European Commission President Jean-Claude Juncker, they are still none the wiser.

Trump and Juncker on Wednesday agreed to work towards eliminating tariffs and subsidies on industrial goods other than cars. U.S. steel and aluminium duties, levied earlier this year, will stay in place during the talks. But potential auto tariffs of around 20 or 25 percent – as Trump previously threatened to address a perceived imbalance – are on hold.

Juncker is right to call that a “major concession”. German carmakers sold almost 1 million imported vehicles in the United States last year, industry body VDA estimates, and would struggle to do so profitably with the higher duties.

Investors nonetheless view the latest development with scepticism. Volkswagen, BMW and Daimler’s combined market value went up about 6 billion euros ($7.1 billion) or 3.3 percent on Thursday. Assuming a 10 times capitalisation rate and 30 percent tax rate, that’s equivalent to annual pre-tax cost savings of about 290 million euros each. Since that’s well below the roughly 1.5 billion euro hit from possible U.S. tariffs, as estimated by Evercore ISI analysts, the shares probably still contain a trade-war discount. The trio are on average valued at about six times 2018 earnings, compared with eight times in mid-January.

Caution is needed. It’s not clear Europe is ready to slash its own 10 percent duty on auto imports, which may be a prerequisite for a longer-lasting auto agreement with Trump. Initial pledges to increase purchases of U.S. liquefied natural gas and reduce trade barriers to American soybeans are small fry. The last round of U.S.-EU free-trade agreement negotiations broke down.

Even if America and Europe’s truce lasts, Trump could simply focus his attention on China. The People’s Republic retaliated to U.S. tariffs by slapping an extra 25 percent duty on American car imports, taking the total to 40 percent. BMW and Daimler, which sell U.S.-made SUVs in China, can avoid a long-term hit by shifting production locally. But that will cost money. And for now, they’re still caught in the Trump crossfire.


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