In this article published by Reuters, the author discusses the repercussions of the US raising import tariffs on cars from the European Union. That is, the Trump administration has commissioned a study to determine the effects raising these tariffs from 2.5% to somewhere between 20 and 25% (Para. 13). Essentially, this means that it is more expensive for European nations to sell their cars in US, as they would have to pay a tax to the US government for doing so, thus forcing them to raise their prices. This has spurred countless debates, as the effects of doing so are relatively unknown.
On one hand, the Trump administration believes that this will balance the trade deficit with European nations, especially Germany, as the manufacturing base in the US has largely been outsourced. Trump himself has claimed that this can be considered a matter of national security. However, on the other hand, many experts have claimed that this will raise the price of cars for consumers in the US. In fact, the Alliance of Automobile Manufacturers, which represents several major players in the automotive industry, claims that it will result in a $45 billion dollar bill per year for Americans (Para. 5). Other opponents claim this is an obvious example of protectionist policies, in that it forces a roll back of globalism.
Looking at the diagram below, the reasons for the cost increase can clearly be seen. More specifically, this diagram represents the relationship between the cost of tariffs, the quantity of cars, and the price of the cars. That is, as the tariffs are increased the equilibrium point is forced upwards, resulting in a more expensive car. The equilibrium is found where the price (Pe) and the quantity (Qe) intersect, as dictated by the law of supply and demand. The curve called Seu represents the supply of cars imported from the Eu with no tariff imposed, causing price Peu. With a tariff of 2.5%, this jumps up to Seu+tariff 1, the corresponding Peu+tariff 1. Of course, the tariff increase of 17.5-22.5% is shown in Seu+tariff 2, with a price of Peu+tariff 2.
Furthermore, this diagram shows the amount of revenue that both American and European car manufacturers could obtain. Before any tariffs were introduced, US car manufacturers earned area A in revenue, while cars manufacturers in the EU earned areas A+B+C+D+E+F+G in revenue. After the first tariff of 2.5% was introduced, US manufacturers earned A+B+H, while EU manufacturers earned C+D+E+F and paid I+J+K+L in taxes to the US government. If the increase in tariffs of 20-25% is introduced, US manufacturers will earn A+B+C+H+I+N+O, EU manufacturers will earn D+E and pay J+K+P+Q in taxes. According to this, the amount of revenue for US manufacturers is likely to increase.
However, as noted above, the implications of this are mixed. One of the benefits of this is that it would boost US manufacturing, as it would make it more profitable for US based car manufacturers and it would make make cars made in the EU more expensive. This would also return jobs to the US as it is likely that more cars are going to be made at home. Another benefit is that it would bring in more money for the government. This could be invested back into the country, which would raise the standard of living for most Americans, as it could be spent on schools, hospitals, better roads, etc.
One of the negative sides of this is that it would make cars far more expensive for American consumers, as they would have to pay for the increased price due to the tariffs. Also, foreign manufacturers such as BMW already employ thousands of workers in the US, meaning the jobs are already here, and, if these tariffs are imposed, then this could result in the loss of American jobs. Furthermore, the windfall of cash to government will not counteract the increase in spending to the American consumer because their standard of living will certainly decrease as a result.
Therefore, these tariffs on EU cars will have a negative effect on both the US and the EU. US consumers will end up paying more for EU manufactured cars, thus hurting their sales, and they may lose jobs because they are employed by EU based manufacturers.