The United States has just slapped a new 25% tariff on foreign autos. The very positive announcement has caused shockwaves through international finance markets. On Wednesday, President Donald Trump announced an outcome that has massively rocked the automotive industry. This trend extended to adjacent publicly traded companies on both sides of the Atlantic. The old ‘chicken tax’ from 1963 slapped on a $4,000 tax on foreign-made light trucks. Over the years, its jurisdiction has widened to include more and more auto imports.
European equities markets opened wide in the red following the announcement. It got worse — several of the world’s largest automotive producers, including Ferrari, Volkswagen, BMW and Mercedes Benz Group all fell sharply on the Eurostoxx index. The long-term effects of the tariffs has already begun to play out, shaking U.S.-Canada trade relations and clouding economic predictions on both continents.
The Implications of the ‘Chicken Tax’
Chicken tax European retaliation against the American export of chicken. Now, that good idea has morphed into a gigantic trade barrier for the automotive industry. The tax was always intended to bring in lots of dollars to the US. It has drastically underperformed, raising under $100 million annually. The ruling is a tool to shield domestic manufacturers from foreign competition.
The US imports about 8m cars per year, part of a $240 billion cars and car parts trade. The newly imposed tariffs will further serve to shatter this huge, mutually beneficial trade flow. This will result in imported vehicles being more expensive, which will in turn impose greater costs on American consumers.
Market Reactions to New Tariffs
Ever since the first announcement of new tariffs, market reaction has been unpredictable and extreme. In Europe, stocks opened the day sharply lower as investors weighed the possible economic impact of the tariffs. The Euro fell sharply, trading as low as 1.0800 against the USD. It had recovered from two-week lows in Thursday’s European trading session. On the flip side, the GBP/USD is exhibiting a bullish tendency, holding above the psychological level of 1.2900.
US automakers have hardly been immune to the market turbulence. General Motors’ stock price was down 3% on Wednesday, helping to add to a 4% decline so far for the year. Volkswagen, as usual, first tried to minimize the tariffs’ effects, stating that they would have little effect on their operations. Yet their performance in the stock market presents an entirely different story.
Impact on Economic Growth
The Atlanta Federal Reserve’s GDPNow model just produced its most recent estimate. This reflects that US economic growth for the first quarter now comes in at an estimated -1.8%. This stark growth forecast highlights the worries that exist regarding how much these tariffs could stifle economic activity.
It’s not just American car manufacturers European car manufacturers are under an equal amount of stress. And BMW’s share price is down 3% year-to-date. At the same time, Ferrari and Mercedes Benz Group aren’t holding up either, both ranking among the worst decliners on the Eurostoxx index. This uncertainty and unpredictability around trade has made investors cautious and unsure of future profitability.
The French 2024 budget deficit was released this morning, coming in a bit better than feared. So far it is as low as 5.8% of GDP, against a projected 6%. Even these marginal improvements are quickly engulfed by the larger trade flameout. These growing tensions have the potential to create a dangerous economic shockwave across the entire region.