RESEARCH » New Studies » $ 21.9 billion – That’s how much US tariffs on German cars could cost the German car industry

$ 21.9 billion - That's how much US tariffs on German cars could cost the German car industry
Auto Executives around the world wait to see if imported car parts harm U.S. national security

With the United States on the verge of imposing US tariffs on German cars, we take a closer look at the German car industry’s exposure to the US market. To paint a more nuanced picture of the economic relationship, we apply a supply chain or added value approach. Our analysis shows that the German car industry could lose up to $ 21.9 billion in added value.

Looming US tariffs on German cars

If the fallout of the U.S. government shutdown does not result in any more delays, February 17 is the date to watch for automotive executives around the world. By then, the U.S. Department of Commerce will have to issue a report assessing whether imported car parts harm U.S. national security.
The car industry is hardly the first branch to become a target of the Trump administration’s protectionist industrial policy. In March 2018, a similar report induced President Trump to introduce punitive tariffs for steel and aluminum imports. However, given the size and strategic importanceof the car industry for the German economy, the effect of these tariffs are likely to pale in comparison to possible U.S. actions on automotive parts.

Feel free to also take a look at our take on the question: Is China Systematically Buying Up German Key Technologies?

How big could the price tag possibly be?

The key question for the German car industry and Germany’s overall economy is then: How big could the price tag of us tariffs on German cars possibly be ? The common approach to answer this puzzle is to consider the immediate goods that Germany sells to the United States, that is the sum total of the German car industry’s exports to the United States.

However, this is a rather imprecise indicator for the actual contribution and thus exposure of Germany’s economy. This approach overvalues the contribution or exposure of the final supplier, as it does not correctly reflect the actual (indirect and direct) added value contributions of all the upstream suppliers involved. In other words, it does not adequately take into account that we live in a global value chain world.

US tariffs on German cars: Consider The Aluminum Rim

To understand why consider the following example: An imported car part from Germany, such as an aluminum rim might have a total value of USD$200. However, the actual contribution of the German car industry to the value of the rim might just be only $60, since the aluminum with a value of $ 50 has been mined in China, reprocessed in Poland for another $60 and the rim was then pre-manufactured in Italy for another $30 (see Figure 1). This is a rather simple example of the increasingly sophisticated division of labor of the global economy where it is common that more than just four parts or countries are involved in the production of a final good.

Crunching the Added Value Numbers for German Exports to the U.S.

By calculating the sum total of its added value share, it is possible to better estimate how big the economic damage will be for Germany if demand from the United States were to entirely collapse. Although such a radical development is unlikely, even in the case of 25 percent import duties on German cars in the US, this shock illustrates the added value at stake in Germany. In 2014, the final demand for products of the German car industry totaled about $270 billion.
The United States accounted for$31.5 billion or 11.6 percent. The added value from Germany to these exports amounts to $21.9 billion. The other $9.6 billion would be borne by upstream suppliers, with about $600 million, for instance, going to U.S. suppliers.

The Global Value Chains as the “Nervous System” of the World Economy

In our accompanying Policy Brief and Focus Paper we not only detail the methodology of this added value approach and take a closer look at Germany’s dependence on automotive imports from around the world. We also deduce some general policy implications of global value chains, for instance the need for more attention toward governance along the entire added value chain or at central interfaces of global value chains.

In the upcoming weeks, we will continue to take a closer look at other industries and crucial bilateral or regional global value chain networks. So stay tuned for a closer inspection of the crucial links which channel supply and demand through the world economy.

You might also be interested in
Comments

Discuss with us on this article on Twitter and Facebook