In recent months, several new tariff proposals have been floated in US campaign speeches and interviews, including a general tariff of 10% to 20% on imported goods, a tariff of 60% on imports from China and a tariff of 200% on vehicles manufactured in Mexico. National security and anti-dumping arguments have been made in favor of imposing bilateral tariffs, which could be used under either a Democratic or Republican administration. A general tariff could face opposition in Congress, especially given the likely impact on geostrategic partners in Europe and elsewhere. Nonetheless, the threat of tariffs to European companies cannot be entirely dismissed, especially in the context of a Republican presidency.
The European Union (EU) is highly affected by US tariffs as it is very trade-intensive and the US is the main destination for EU exports. Bilateral trade and investment relations between the EU and the US are the largest in the world; in 2023, 20% of EU exports went to the US, 13% to the UK and 9% to China. In addition, the EU achieved a bilateral trade surplus with the US of €157 billion in goods in 2023 - although the surplus is much smaller when services are included.
Pharmaceutical products, motor vehicles and chemical products are the most affected by potential US tariffs, as they account for the lion's share of EU exports to the US. However, smaller industries such as aluminum, steel and even Scotch whiskey, which were affected between 2017 and 2021, are also affected by potential sales losses.
From a corporate finance perspective, the direct impact of US tariffs would lead to a decline in EU export volumes. Higher trade costs could be partially offset by a weaker euro, but it is unlikely that international or domestic demand would be able to compensate for the negative impact of US tariffs. There could also be second-order effects, such as retaliatory tariffs from the EU, which could increase costs or reduce the availability of imports for European businesses and households, further dampening domestic demand. Over time, greater trade fragmentation could also lead to some EU export industries shifting investment and production to the US - and away from Europe - to avoid higher trade costs.
European automotive and pharmaceutical industries at high risk, but some mitigation measures are in place
The largest European automotive and pharmaceutical companies generate a high proportion of their sales in the USA, and the value of exports to the USA has more than doubled in the last 10 years.
However, not all cars sold by European automakers are made in Europe, and many companies that also produce vehicles in the US would likely be exempt from the tariffs. This will somewhat limit the impact of tariffs on the automotive sector in general; nevertheless, production capacity in the US is not sufficient to meet all demand in the country, leaving exports from EU plants vulnerable to trade tensions.
In the short term, higher tariffs will therefore impact the profitability of original equipment manufacturers (OEMs) at a time when revenue capacity is already under pressure. In the premium OEM space, Mercedes-Benz Group MBG (rated "A" by Morningstar DBRS with a stable trend) and BMW (rated A (high) and with a stable trend by Morningstar DBRS) have strong production capacities in the US, while higher-value models, such as those of the Mercedes subsidiary AMG, are mainly produced in the EU. Volkswagen VOW3 (rated A (low) and stable trend by Morningstar DBRS) is a notable exception, as neither Porsche nor Audi (two Volkswagen brands) are produced in the US. In the medium term, this could lead to a greater proportion of production being shifted to the US: a transition that would likely be costly and take years.
The short-term impact of US tariffs on the European pharmaceutical sector would probably be somewhat different. Due to the critical nature of the industry and inelastic demand, the impact on sales could be comparatively small. It is also possible that the tariffs imposed by the US government would be aimed more at stopping imports of medical devices and consumables from China than from the EU, especially as imports from China have increased significantly since the COVID-19 pandemic. However, a similar conclusion can be drawn for the pharmaceutical industry when it comes to shifting production and investment to the US over time. The pharmaceutical sector has even more flexibility in deciding where to invest in research and development, particularly in the development of new drugs. These potential tariffs, coupled with more favorable regulation in the US compared to the EU, could result in investment and production shifting from Europe to North America in the future.
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