Euro Rallies Amid Rumors of Auto Tariff Delays from Trump Administration

Alan Penny

16 May 2019

3 min read

Euro rallies

Thursday’s trading saw the euro rally on the back of rumors that the Trump administration would delay auto traffics for up to six months.

On Wednesday, officials stated that they expect President Donald Trump will delay making a decision on whether to implement tariffs on imported cars and auto parts for as long as six months. This statement boosted optimism slightly as the delay would prevent global trade tensions from escalating even further.

Thus, the euro was trading at $1.1207, representing a gain of 0.05%. This slight recovery took place after the euro reached a seven-day low of $1.1178. This decline was in large part owed to criticisms levied against EU rules by Matteo Salvini, the Deputy Prime Minister of Italy.

Auto Tariffs Could Devastate the US Auto Industry

The White House has until Saturday to decide whether they will be imposing tariffs on imports of cars and parts. The administration does have the option to delay their decision by another 180 days after Saturday’s deadline, and officials expect that is what will happen.

President Donald Trump is using a report stating these imports are a threat to national security to justify the rise in tariffs. Trump, though, is using these tariffs as a bargaining chip in trade talks with Japan and the European Union.

The risk, though, is that these actions could lead to more global trade tensions. The EU, for example, already has a list of duties they will impose in retaliation.

Another massive problem, according to experts, is that the U.S. auto industry will suffer as a result. Already the higher tariffs Trump has implemented on steel and aluminum have resulted in increased production costs of billions of dollars, which has squeezed margins considerably.

Hiking the tariffs on imported cars and parts could lead to an increase in price to the consumer of approximately $7,000 on imported vehicles and around $3,000 on domestically produced cars. This increase in price is predicted to reduce the sale of cars and trucks by 2 – 4 million units per year, which experts claim would be “cataclysmic” for auto producers.

The U.S. Auto Industry Needs More Trade Agreements

One of the promises President Donald Trump made during his campaign was to bring back more auto jobs to the United States. The Alliance of Automobile Manufacturers certainly supports this goal but feels that the best way to achieve it is to stimulate exports. In other words, the group supports the idea of more trade agreements instead of imposing greater tariffs.

For the United States to increase exports of domestically produced vehicles, their pricing would need to be competitive, especially against local producers in the target countries. However, a raise in tariffs would make it almost impossible to achieve.

Both the Republicans and Democrats have urged Trump not to impose these tariffs. They’ve also criticized the motives being used to impose tariffs on products imported from friendly countries like Canada.

How Could the Increase in Tariffs Affect the USD and EUR?

If Trump does go ahead and increase tariffs on imported cars and parts, the EU will likely retaliate. This would make U.S. imports more expensive, which could eventually lead to a weakening of the dollar.

Furthermore, the possible decline in vehicle sales, along with a decrease in exports, could force the Fed’s hand into cutting rates.

However, the euro is unlikely to strengthen significantly when one considers the soft fundamentals of the EU.

A lot hinges on the outcome of the U.S. – China trade war. If the two largest economies in the world do come to a mutually satisfactory agreement, tensions would ease and confidence would return.

Written By
Alan Penny

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