The Trump administration is considering tariffs on imported cars, citing national security concerns. If it happens, it endangers one of the most important German industries and could unleash a €20 billion list of counter-tariffs.

Source: Getty Images Add tariffs, subtract by half.

Those in the audience watching Angela Merkel give a provocative speech may not have realized that they were seeing the first shots fired in a trade war. At the Munich Security Conference last weekend, the German chancellor said US plans to impose tariffs on German auto imports because of national security were “frightening.”

The chancellor’s unusual outspokenness marks the beginning of a new and dangerous phase in European-US trade relations. Last week, a US Trade Department report apparently raised the possibility of imposing a 25 percent tariff on European car imports for reasons of “national security.” The US president, no fan of free trade, must decide on a course of action within 90 days.

Tariffs seen as inevitable

The EU Commission says it has no immediate plans to act. Last summer, a temporary arrangement — worked out between Trump and EU Commission President Jean-Claude Juncker — averted the risk of trade war. The two sides have since held talks about a new deal, covering industrial goods along with other aspects of EU-USA trade.

The “national security” justification only underlines the new chill in the trans-Atlantic relationship. After the release of the Trade Department report, some European diplomats played it down, saying the Washington had not made up its mind. But some now see new US tariffs of some sort as inevitable, possibly as early as May.

Tariffs at 25 percent could halve German car exports to the US, the Ifo Institute for Economic Research in Munich suggests. That would reduce Germany’s overall car exports by 7.7 percent, worth around 18.4 billion, Ifo economist Gabriel Felbermayr, an expert in international trade, told Handelsblatt.

This in turn would decrease the value of the auto sector in Germany by 5 percent, or around €7 billion. “The automobile sector is a leading sector for the national economy,” Michael Hüther, director of the Institute of the German Economy in Cologne, said, noting that 40 percent of all patents in the country come from the car business.

Merkel is not alone in not taking the US’ “national security” claims seriously either. Hüther says it’s “ludicrous.”

This is why: German carmakers account for about 7 percent of the US market (while US cars make up around 14 percent of the European market). But the Germans dominate in the premium sector, where they make up 40 percent of the market. However many so-called “German” cars are in fact manufactured in America. Over the last few years, the German auto industry has created 113,000 jobs in 300 US factories. And some 60 percent of those US-made German cars are exported, accounting for a quarter of all US auto exports.

Tariffs are also opposed by the US car industry, who say the policy is superficial and unnecessary, and threatens their supply chains: A lot of the parts they produce with are made in Germany and American cars would become $6,000 more expensive on average, if tariffs of 25 percent were imposed. Various US auto industry leaders have spoken out against tariffs, saying that nobody asked for this and that they would damage the entire US economy and will result in American job losses if they go ahead.

Should the US impose such tariffs, the EU Commission will likely break off trade negotiations, complain to the World Trade Organization, and impose counter-tariffs on US-made goods. A list of counter-tariffs worth around €20 billion annually already exists and the focus will be on hurting the congressional districts, which support Trump. The list is confidential but it is thought that it would be similar to the one made during steel and aluminum trade clashes last year — that is, they would involve similar kinds of products. But hitting back at US car exports is a bit more complicated because many German companies produce cars in the US that are then exported to Europe, for example high end BMW SUVs. Any counter tariffs to hurt US carmakers, and not German ones, would need to be carefully targeted.

There is still hope that a trade war can be averted. The Trump administration is said to be divided on the issue, and the US is already enmeshed in trade tensions with China. In this area, Europe could be a useful ally for the US against the Chinese. On the other hand, Trump might get tough on Europe, just to show China he means business. US industry insiders have told other media that there will almost certainly be tariffs, although nobody knows what kind they will be.

Over the weekend, German car industry bosses didn’t have any comment to make on the issue: They simply say negotiations are ongoing.

Last year, the German car industry launched a charm offensive, sending CEOs to the White House, where they emphasized their companies’ contribution to American life and the trade balance. But this may not be enough to avert a trade war, which would hit German automakers that lack US production facilities especially hard. That includes VW and Porsche. Researchers at ISI Evercore suggest that VW could lose €2.3 billion annually through tariffs, with BMW and Daimler in line to shave around €1.7 billion off their annual turnover.

If US tariffs do happen, it is just one more problem German car makers could do without. Chinese demand is down and Brexit is causing uncertainty across Europe. The industry is under pressure to invest billions in electric vehicles and autonomous driving. Worst-case scenario, and tariffs are brought to bear and the country’s car industry — and the wider German economy — could start feeling some serious pain.

Till Hoppe reports on EU politics for Handelsblatt from Brussels. Moritz Koch, formerly Handelsblatt's Washington correspondent, reports on politics from Berlin. Annett Meiritz is Handelsblatt's correspondent in Washington, Jens Münchrath reports on economy and financial politics and Torsten Riecke covers international economics and politics. To contact the authors: [email protected], [email protected], [email protected], [email protected].