US auto tariffs would be a gut punch to a reeling eurozone

The U.S. Commerce Department has now given President Trump the green light to impose punitive tariffs on European and Japanese automobile exports. President Trump would be well advised not to take to that bait.

U.S. automobile tariffs would risk disrupting global and U.S. automobile production supply chains and do little to cure the very large U.S.-German bilateral trade deficit. It would also invite European tariff retaliation and risk plunging Germany into an economic recession.

That in turn could reignite the eurozone sovereign debt crisis, which could have very untoward consequences for both the U.S. and the global economic recoveries.

In its recent Section 232 National Security Report, the Commerce Department has somehow managed to convince itself that automobile imports from long-time U.S. allies like Germany and Japan constitute a national strategic threat to the country.

This gives President Trump 90 days to decide whether or not to impose a 25-percent tariff on those countries’ automobile exports.

At the best of times, the imposition of U.S. automobile tariffs on Germany would be a major blow for Germany’s highly export-dependent economy. However, these are not the best of German economic times. In the last half of 2018, Germany very narrowly missed succumbing to an economic recession.

More recently, its export sector, which accounts for almost half of the German economy, is being especially hard hit by the Chinese economic slowdown and by fears of a no-deal Brexit at the end of March. That dims the prospect of any early German economic recovery.

Ahead of this May’s important European parliamentary elections, an economic recession in Germany, Europe’s principal economic growth engine, risks giving renewed impetus to Europe’s populist threat.

This would seem to be especially the case at a time that a highly indebted Italian economy is already, yet again, in recession; the French economy is on the cusp of recession in the wake of the disruptive “yellow-vest movement”; and the U.K. economy could soon be dealt a major body blow by a hard-Brexit.

If a principal objective of U.S. import tariffs is to reduce the U.S.-European bilateral trade deficit, it will prove to be a dismal failure. By helping push Europe into recession, U.S. tariffs will reduce European investment and increase the European saving rates.

By so doing, it will only serve to widen the European saving-investment imbalance, which is the underlying cause of Europe’s large bilateral U.S. trade surplus.

At the same time, a European recession would all too likely lead to further U.S. dollar strength as the prospect of a European Central Bank interest rate hike would be pushed into the indefinite future.

That in turn would be a disincentive to U.S. exports and an incentive to U.S. imports, which is hardly what is needed to help reduce the U.S. trade deficit.

A yet more serious risk of U.S. automobile tariffs is that it could precipitate another round of the eurozone sovereign debt crisis. That could shake the global and U.S. economies in much the same way as the Greek debt crisis did some 10 years ago.

This is especially the case in the context of a still very high public debt mountain and a shaky domestic banking system in Italy, an economy roughly 10-times the size of Greece.

Stuck in a euro straitjacket and saddled with a market-unfriendly populist government, it is difficult to see how Italy can avoid a debilitating public debt and banking sector crisis should the European economy indeed succumb to another recession.

Rather than applying tariff pressure on Europe, the U.S. should be using whatever leverage it has to get Germany to use its fiscal space to stimulate a moribund European economy. Such an approach might help spare the European economy from a protracted recession and another round of its sovereign debt crisis.

It might also help redress Europe’s saving-investment imbalance, which underlies its large bilateral trade surplus with the United States.

During the first two years of the Trump administration, the U.S. trade deficit has widened despite its “America First” trade policy. One has to hope that this fact will prompt the administration to recognizes that it is the savings-investment imbalance rather than trade policy that underlies the large U.S. trade deficit.

Maybe then we can hope that the global economy will be spared the fall out from an unwelcome European economic recession as a result of ill-conceived U.S. punitive automobile import tariffs.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

Πηγή: thehill.com