Imposing tariffs on European cars - Slovakia is the most vulnerable
Imposing tariffs on European cars - Slovakia is the most vulnerable
Fierce trade wars are a reality after the imposition of tariffs on Mexico and Canada. With Donald Trump's latest moves, the likelihood of a sharp crackdown on Europe is also growing. Tariffs of around 25% on European automotive products are at stake - reportedly on both final production and intermediate production going from Europe to the US. Using international input-output tables, we have therefore carried out an analysis simulating the introduction of such tariffs, which shows that the most vulnerable economy in Europe is Slovakia (direct effect of -0.5 percentage points to GDP), followed by Germany and Hungary in second and third place by a considerable margin (-0.2 to -0.3 percentage points to GDP), and then Sweden (-0.2 pp.The direct impacts on the Czech (-0.15 pp) and Polish (-0.1 pp) economies are estimated to be considerably lower.
Why Slovakia stands out among all European economies. Based on our data, it is the result of an unfortunate combination of the high share of the auto sector in GDP and its heavier dependence on the US market (as measured by the input-output tables). Of the cars that are produced in Slovakia and shipped in significant volumes to the US market, the Porsche Cayenne (bodywork is built in Bratislava), the Audi Q7 and Q8 (also Bratislava), as well as Jaguar Land Rover production are probably the most important. Although the Czech Republic has a similarly significant share of automotive production in GDP compared to Slovakia, its orientation towards the US market is significantly lower. The final production produced in the Czech Republic is practically not directed to the American market - Škoda auto is primarily oriented to Europe (secondarily to Asia), as are Toyota of Kolín and Hyundai of Nosovice. In the Czech Republic, subcontractors that have high exposure to European automakers producing in Europe and exporting to the US will eventually be hit the hardest - Porsche and Swedish Volvo in the first place (which is why Sweden comes out worse than the Czech Republic in our simulation, despite the apparently lower share of the automotive sector in GDP).
It is important to note, however, that the overall costs of trade wars may be much higher for European economies than this analysis predicts. It assumes 'only' a direct reduction in exports of the automotive segment (production and intermediate production) to the US market (including all inter-sectoral effects) and its secondary negative impact on household income and demand. However, the duties may not be imposed only on automotive - the list of sectors may ultimately be much broader. Moreover, trade uncertainty itself can significantly dampen investment activity in the most export-oriented economies.
