Imminent ‘Car Wars’: Proposed Tariffs on Car Imports from the EU to Protect Automobile Manufacturing in America

 President Trump is angry with the EU, the world’s largest trading bloc, and predictably so. Although the US is the second-largest manufacturer of automobiles in the world after China, it is also the second-largest destination for EU-made cars after the UK. On 3 February 2025, Trump thus informed journalists that “they don’t take our cars, they don’t take our farm products, they take almost nothing and we take everything from them. Millions of cars, tremendous amounts of food and farm products.”

 During 2023, the EU-US trade in goods and services amounted to 1.5 trillion euros. The EU exported 503 billion euros’ worth of goods to the US and imported 347 billion euros in return, thereby creating a trade surplus in goods for the EU to the tune of 156 billion euros. This surplus was primarily accounted for by European exports of cars, chemicals, and medicines to the US. The trade imbalance can be partly attributed to the fact that European consumers mostly prefer locally manufactured cars. Larger and more powerful American motor vehicles can be difficult to manoeuvre on Europe’s narrower and winding roads, as well as inconvenient to park in restricted spaces. Smaller, lighter, aesthetically appealing, and fuel-efficient petrol cars, and increasingly electric vehicles, are preferred by European purchasers of local brands.

Exports of US-made cars to the EU are subject to shipping costs, import duties, and VAT, in addition to regulatory controls to ensure conformity with EU construction, environmental, and safety standards, all of which add to the purchase price. Within the protectionist EU, car production has continued to increase with the gradual restoration of global supply chains interrupted by the COVID pandemic, but has yet to reach pre-pandemic levels. The EU’s 255 automotive plants produced 14.8 million vehicles in 2023, including 12.2 million cars. However, Europe has lagged behind in the transition to electric and hybrid-electric car production, and in the digitalisation of production. A shortages of batteries for electric cars has particularly hit production of EVs.

The motor car is a European innovation, whose origins can be traced back to Gottlieb Daimler and Karl Benz in 1885. But it was the Americans who greatly expanded automobile manufacturing to service the growing love affair of Americans with their cars. Mass production was achieved by Henry Ford’s adoption of the assembly line to manufacture his Model T in 1908, and furthered speeded up by the moving conveyor belt in 1913. Subsequent American innovations included automatic transmission, air conditioning, power steering, and safety tyres. American lifestyles were transformed by the car as people migrated from inner cities to the suburbs, and large out-of-town shopping malls, drive-in cinemas and restaurants, and roadside motels proliferated. Under the Eisenhower administration, a national network of interstate highways emerged. Supporting businesses and industries, including steel plants, service stations, car maintenance and repair outlets, car parks, car dealerships, and automobile insurers thrived with the spread of car usage. America’s economy remains heavily dependent on the car.

American car manufacturing faced early challenges from Japanese automakers. Toyota and Datsun vehicles were first imported in 1958. In the 1970s, large American cars with tailfins gave way to smaller, affordable, and fuel-efficient Japanese cars. The Clean Air Act 1970 and the oil embargo of 1973 speeded up the demise of so-called “gas guzzlers.” By 1980, Japanese car production had overtaken that of the US. Globalisation and offshoring of vehicle production led to a further decline in American manufacturing. From the early 1980s, high-riding four-wheel-drive sports utility vehicles became increasingly popular in America, thanks to the Toyota Land Cruiser, an offshoot of the Jeep. Most recently, electric vehicles have been rising to the forefront, just as Tesla has come to dominate domestic car production.

Car manufacturing in America has been steadily declining since 1970. In 2007, Ford posted an annual loss of $38 billion, and Chrysler and GM declared bankruptcy, although both Chrysler and GM recovered sufficiently to repay their government loans by February 2012, while Ford dipped into its own reserve fund.  The domestic car industry has been shifting from the Rust Belt in the upper Midwest (Michigan, Indiana, Ohio) to the southeast (Kentucky, Tennessee, Alabama, Georgia, South Carolina), the south (Texas), and the west coast (California).

Domestic production has not kept up with the demand for cars within the US, leading European carmakers to target the American market at a time when demand is falling closer to home because of inflation and the cost-of-living crisis. For those who prefer to buy American, there is, unfortunately, no completely American-made car. Complex interlinked integrated supply chains mean that vehicle components may cross borders as many as seven or eight times before the finished product emerges. Onshoring supply chains in a bid to return all aspects of car production back to the US is likely to take much investment, both by American and foreign carmakers, over many years.

Many American car manufacturers currently outsource production. The Big Three (General Motors-Chevrolet, Buick, GMC; Ford; and Stellantis-Chrysler, Dodge, Jeep) have significant operations both north and south of the border, in Canada and Mexico, respectively. In 2018, GM closed four of its American plants, and became Mexico’s biggest automaker, lured by lower taxes and cheaper labour costs. Japanese (Toyota, Honda, Nissan), Korean (Hyundai), and German (VW, BMW, Mercedes) carmakers have meanwhile set up production facilities within the US. The National Traffic Highway Safety Administration (NHTSA)’s American Automobile Labelling Act (AALA) Reports require brands to identify the source of the vehicle body, chassis, electrical components, engines, transmission, seats, and where the vehicle was finally assembled to inform consumers who seek to drive American-made vehicles.

Punitive import tariffs on cars from the EU will inevitably punish American consumers. Threats of punitive import tariffs to correct trade imbalances are probably not the best way to conduct trade with political and military allies. We seem to be rapidly heading towards a lose-lose situation, in which American consumers will be hit with higher prices and crisis-stricken EU auto industries will struggle to keep competitive just as they are struggling to adapt to change. It can never be too late to return to a system of mutually beneficial exchange of goods which once underpinned international trade.

Ashis Banerjee