European carmakers could see their revenues seriously impacted if President Donald Trump presses ahead with new tariffs, analysts said.
“New tariffs on EU cars would have a significant impact … The United States is the biggest and highest margin market for them. It could mean a significant 7 to 10 percent hit on 2019 earnings estimates to the main automakers in Europe,” Daniel Lacalle, chief economist at Tressis Gestion, said on Wednesday.
The EU is the largest exporter of motor vehicles in the world, whereas the United States is the largest importer of motor vehicles in the world. According to the European statistics office, Eurostat, the US imported cars amounting to 254 billion euros ($296.12 billion) in 2016, while Europe imported only 77 billion euros.
To reduce the US’s trade deficit, Trump has threatened multiple times that there could be new duties applied to European cars. “We are finishing our study of tariffs on cars from the EU in that they have long taken advantage of the US,” Trump said Tuesday, “In the end it will all even out and it won’t take long.”
Analysts believe that there is no policy that Europe could implement to offset such an impact.
Car tariffs are particularly painful for Germany compared to all the other 27 European countries. Germany alone represented 55 percent of the total EU car exports in 2017. Lower profits are not only negative for these firms but also for equity investors, given that it is less likely they will receive dividends. Potential investment from car companies could also be curbed if revenues are hit.
Earlier this year, the EU proposed a small investment agreement to the US to reduce tariffs in goods, including cars. But the proposal was taken away when Trump slapped new metal tariffs on the bloc at the start of June.
“It is true we have a slightly higher tariff on cars then the Americans … But they have much higher (tariffs), for instance, on trucks, on lorries, they have higher on shoes, on clothing,” Cecilia Malmstrom, the EU’s trade chief said Wednesday.
She told reporters in Brussels that the EU cannot simply remove the tariff on US cars (10 percent) overnight, because under World Trade Organization (WTO) rules, the EU would have to do the same for every country in the world. “And I don’t think member states are willing to do that,” she added.
Calculations from Bank of America Merrill Lynch showed Monday that if the US dollar were to appreciate 7.5 percent, this could offset the entire impact of US car tariffs. The research assumed that the new duties would increase from the current level of 2.5 percent to 25 percent, as Trump has signalled.
Though such a dollar appreciation is not the baseline scenario of the investment bank, it is one that its says “is not completely unimaginable.” Many expect the greenback to rise on the back of tightening interest rates in the US, financial stimulus and the repatriation of funds.
Nonetheless, others believe that even if the dollar strengthens significantly, it is not going to help with tariffs because the euro is likely to remain strong too. Broadly speaking, the lower a currency is, the higher the appetite to buy goods in that currency given that they will be cheaper.
Shares of BMW are down 10 percent and Volkwagen’s are off by 24 percent since a January peak.