United States, EU Agree to Keep Agreeing on Auto Tariffs

In an unexpected press conference yesterday afternoon, President Trump promises to hold off on auto tariffs and EU president pledges to buy more American soy beans.

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The wild rollercoaster ride that is Trump administration trade policy suddenly lurched in another direction on Wednesday, when European Commission president Jean-Claude Juncker participated in an unexpected press conference with the president during a visit to the White House. Less than one week after representatives from across the auto industry pleaded their cases against tariffs to officials from the Department of Commerce, Donald Trump and his EU-level counterpart agreed to make an agreement, at some future date, regarding imports and exports between the United States and the European Union.

Chances are good that this news, which resulted in an immediate sigh of relief from industry interests eager to see talk of tariffs disappear, will result in a yawn amongst some readers. But in the wake of steel and aluminum tariffs imposed last month (and considering the Trump administration had just announced what was essentially a $12 billion bailout for soybean farmers affected by retaliatory tariffs levied by China, the EU, Canada, and Mexico), the clamor by auto industry players against further tariffs has reached a crescendo. At last week's hearing—in which the tariffs proposed by the Trump administration were justified by posing automobile and parts imports as a potential national security threat—a range of organizations from the Auto Alliance and SEMA to the Korean Automobile Manufacturers Association and the EU itself said that tariffs would cut jobs, disrupt the global economy, and isolate the US auto market at a time when technological changes are barreling down the pike at lightning speed. The administration's national security argument was also widely questioned.

Yesterday's détente, likely brought on by a rising tide of discontent among Republican lawmakers regarding the direction of the Trump administration's trade policy, resulted in a promise by Juncker that the EU would buy more soybeans—a product near and dear to the most fervent parts of Trump Country. The announcement was, however, light on details.

"This seems to be an ongoing pattern where the administration—specifically the president—talks about negotiating deals, but no one has any idea what the objectives are," Erik Autor, president of the National Association of Foreign-Trade Zones, said in an interview. "I guess it boils down to whether the president is more interested in negotiating a deal or picking a fight."

Trade groups were quick to respond to the late afternoon announcement. The American International Automobile Dealers Association, which represents dealers for overseas-based brands, and the Auto Alliance, which includes all three American automakers among its membership, praised the agreement on Wednesday evening, soon after it was announced.

“We are pleased to hear that the US and EU have reached an agreement to work together to facilitate trade on both sides of the Atlantic, and we look forward to learning more," the Auto Alliance said in its statement. "Today’s announcement demonstrates that bilateral negotiations are a more effective approach to resolving trade barriers, not increasing tariffs."

The lynchpin of the Trump administration's tariff proposal is a component of the Trade Expansion Act of 1962 called Section 232. It gives federal agencies the power to prompt the Department of Commerce to investigate the national security implications of specific imports. Section 232 was invoked as justification for the steel and aluminum tariffs levied last month, and if automotive tariffs are pursued by the administration, it will be the basis for that trade policy shift as well.

Not many in the industry were convinced that the national security hook was justified. Speaking to a panel of Commerce officials at last week's hearing, Autor was among those to question the administration's tack.

"There is simply no evidence that the US auto and auto parts sectors face an imminent crisis so profound as to imperil their continued existence and ability to supply vehicles and parts to the U.S. military,” he said, adding that protective tariffs would harm a strong, healthy multi-national auto industry. "These are costs the country can ill afford, all to address a nonexistent problem.”

Among the automakers, trade groups, and foreign governments that spoke at the hearing, there was widespread agreement that tariffs would hit consumers hardest. This is in large part because the idea of an "American" versus a "foreign" car is antiquated in the modern global economy—imported cars contain American parts and vice versa, and many import brands are built at US factories by American workers—but estimates for price increases on new cars averaged a couple thousand dollars for domestic marques and several thousand dollars more for import brands. It's a difference many Americans would likely notice at bill-paying time.

Sam Abuelsamid, senior analyst for Navigant Research, said the administration was pandering to the Trump base—that great swath of America disillusioned with the steady, decades-long flow of formerly US-based manufacturing jobs to overseas locations.

"The administration is looking for simplistic solutions to complex problems," he said. "The goal of trying to bring manufacturing jobs back to the US is a laudable one, but this approach is wrong-headed and will more likely to lead to a recession than any significant amount of job growth in the near to mid-term."

Abuelsamid contended that addressing low wages and poor safety and environmental protections in countries to which manufacturing has been relocated would do more to help domestic manufacturing than would tariffs.

"As for the whole national security argument, that is a sham to come up with some legal justification for an economically negative policy that is purely politically motivated," he said. "They probably had interns searching through the law books for months trying to come up with something."

Abuelsamid's comments on suppressed laborer wages echoed the testimony offered by the United Auto Workers union at Commerce last week. Among those who spoke at the hearing, UAW was alone in its support of the Section 232 investigation, panning automakers' use of low-wage foreign workers that, the union said, killed American manufacturing jobs.

"Decades of disinvestments and offshoring of US jobs by multinational corporations has weakened our economic security as a nation and has inflicted great harm on American workers and communities," Jennifer Kelly, director of UAW's research department, said in her testimony. "Massive job losses have had ripple effects throughout our communities, idling able-bodied workers, tearing apart families and communities, and diminishing tax revenues."

Autor countered that, as manufacturing in countries like Mexico and China has blossomed, economic benefits have boosted wages. When he visited China in 2000, he said, average manufacturing wages were $1,700; when he returned in 2009, that figure had risen to $7,000. Still, he said, wages and worker benefits in developing countries are always a concern.

"It's a thorny issue, but you don't address it through trade restrictions," he said. "That isn't going to help workers. As the economy grows, wages increase."

As Abuelsamid noted, trade relationships are complex. Beneath the roiled surface of the Trump administration's tumultuous handling of trade policy lies a cry for help from a system many say needs fixing. But if Trump's bullying and blustery rhetoric tends to obscure what's really going on, keep in mind that talk of modifying trade policy is nothing new. Several years ago, everyone from Elizabeth Warren to the libertarian policy wonks at the Cato Institute offered their views on the subject.

What we're seeing now could be the cracks in a free trade system that has been based upon cheap labor provided by workers who haven't yet called for better wages and conditions. When David Ricardo published the original free trade manifesto, On the Principles of Political Economy and Taxation, in 1817, free trade consisted of imperial nations specializing in manufacturing that made use of cheap domestic labor and natural resources extracted from subordinate states. Mistreatment of laborers and use of slavery to reduce costs was glossed over. As Zach Carter pointed out in a recent piece in the Huffington Post, this modus operandi still existed nearly two centuries later. Flying the banners of free trade and corporate responsibility, the Reagan administration tried—unsuccessfully—to block regulations aimed at US-based companies building profits upon the backs of exploited laborers in apartheid South Africa.

The UAW's comments about low-wage foreign workers may be less in the foreign workers' interests than in the interests of the dwindling cadre of American auto workers that form its membership (and who, as Paul Ingrassia suggested in his 2011 book "Crash Course: The American Auto Industry's Road to Bankruptcy and Bailout—and Beyond," may have been given too much at the peak of the US auto industry) but it acknowledges the impacts that worker exploitation abroad can have at home.

A recent study published by David Autor, an economist at MIT, says that the Clinton administration was aware that negative short-term impacts would hit US manufacturing when it lowered trade barriers with China in the 1990s. Low wages and cheap Chinese currency were irresistible incentives to many US-based companies that ended up moving production and research overseas, crippling US manufacturing. There have been repeated calls in recent years to renegotiate trade deals with China and others.

Erik Autor, of NAFTZ, said that although his organization would like to see some NAFTA policies adjusted to remove disadvantages from US manufacturing, international trade and foreign investment have been a good thing in North America. Autor said that as increased manufacturing has boosted the economy in Mexico, the US and Canada have become more competitive globally.

But the the hollowed-out middle of America—the former core of US-based manufacturing—formed the basis of the populist wave that propelled Donald Trump to victory in the 2016 election.

Details on what the agreement would accomplish were sparse. The announcement may have sounded resolute, but the EU is comprised of many sovereign nations, all of which have a different angle in the trade game at a time when nationalist politics are on the rise across the world. The focus has already moved, if ever so slightly, from the auto import track into the Byzantine warren of trade issues that surround it.

"Overall, the agreement seems mostly to benefit Germany, and the French seem unhappy about the agricultural goods component, which includes EU imports of American soy," Abuelsamid said. "If the Europeans can’t agree amongst themselves, it could be a problem for the whole deal."

An EU decision may have moved a little further off, but trade relationships with China, Canada and Mexico—toward whom the president's language has been bellicose of late—still loom.

"Where this goes is anyone's guess at this point," Erik Autor said. "We just hang onto our seats and see what the next round of tweets brings us."