A worker handle parts for Fiat Chrysler Automobiles as they come off the press at the FCA Sterling Stamping Plant in Sterling Heights, Michigan. Bill Pugliano | Getty Images

The Trump administration may keep upping the ante in a trade dispute with China for now, but if it can manage to steer clear of a bigger battle over the global auto sector, it may avoid a more serious blow to the economy. This week, there were signs that European leaders may be willing to negotiate a deal that would actually cut existing European tariffs on American cars in an effort to head off a trade war. President Donald Trump has said he may slap tariffs of 20 percent or 25 percent on auto imports, and he has asked the Commerce Department to study whether vehicle imports threaten national security, the same argument the U.S. used to impose steel and aluminum tariffs. At the same time, the U.S. has imposed 25 percent tariffs on $34 billion in Chinese goods, including the automotive sector, and China has retaliated with its own tariffs. China raised its tariffs on the U.S. automotive sector, and they are now 40 percent on vehicles that are mostly built by BMW, Daimler and Ford.

The U.S. exported 267,000 autos to China last year and has a trade surplus of $6.4 billion in the auto sector with China, but it has a deficit of about $32 billion in the automotive sector with Europe. “The Trump Administration knows that it needs a win on trade as the battle with China escalates,” says Dan Clifton, head of Policy Research at Strategas. Clifton said there are two possible options: a new agreement on the North American Free Trade Agreement being renegotiated with Canada and Mexico, or a deal on European autos. The tit-for-tat tariffs lobbed by the U.S. on Chinese goods Friday are not expected to affect the economy, but they could grow. So far there is not expected to be a major change in the prices of goods that consumers would feel broadly. Both the U.S. and China are expected to follow up with another $16 billion for a first round of tariffs, for a total of $50 billion. Trump has said he could put tariffs on as much as $500 billion in Chinese goods. However, if the Trump administration could show a victory on one front, it could help ease concerns about the Chinese tariff escalation. An auto deal with Europe would be a positive, since it could also include eliminating existing tariffs — a win for Trump. ”When you look at primary exports out of a lot of countries, it really is autos,” said Dec Mullarkey, managing director, investment strategies, Sun Life Investment Management. “If they could get resolution on that, it would go a long way to calming markets and calming a lot of the rhetoric around this, and getting cooperation going among certain allies.” Clifton said European policymakers seem to be looking for a solution, though there are obstacles. “Germany seems to support the move to zero tariffs, although other parts of the EU are less certain. Additionally, the procedural roadblocks are significant. But momentum is building in this respect,” Clifton wrote in a note. When criticizing the unfairness of European auto tariffs, Trump has called out Germany's Daimler, which makes Mercedes-Benz vehicles. U.S. cars are subject to 10 percent tariffs when they are exported to Europe, compared with a U.S. tariff of 2.5 percent. The U.S., however, has a special tariff on pickup trucks of 25 percent. Analysts note that the irony is that Daimler and BMW manufacture vehicles in the U.S., as do Japanese manufacturers Honda, Toyota and Subaru. Mercedes-Benz U.S. International says on its website that it manufactures 286,000 vehicles at its Tuscaloosa, Alabama, plant, exporting them to 135 countries last year. It says it exported 70 percent of the SUVs it produces, making it the second largest exporter in the U.S. Daimler has warned that its profits could be hurt by the tariffs. General Motors spoke out against the tariffs, warning if implemented they would lead to a "smaller GM." It said if automakers did not pass on the higher costs, it could result in less investment, fewer jobs and lower wages. GM has 47 U.S. manufacturing facilities and employs about 110,000 people.