The US plans to raise EU car prices up to 25% will hit the top market | Stories of Trade Wars

The United States has said it will impose tariffs of up to 25 per cent on the European Union’s auto industry, which would change an agreement reached in August between Washington and the bloc.

US Trade Representative Jamieson Greer told CNBC on Monday that the White House is “moving forward with this”.

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Earlier this year, the Supreme Court of the United States ruled that President Donald Trump could not freeze his international tariffs through the International Emergency Economic Powers Act (IEEPA), reducing the President’s international taxes.

However, last year, Trump imposed a 25 percent tariff on global auto sales under Section 232, citing threats to national security. In August, the White House reached an agreement with the EU to reduce the tax to 15 percent.

“They have the power to do this. What is not clear is what the US case is. Europe needed the implementation of the EU agreement, which delayed the implementation,” Rachel Ziemba, senior adjunct at the Center for a New American Security, told Al Jazeera.

Why is Trump looking at Europe?

Trump said the bloc had not adhered to the agreement – a claim EU officials denied. Trump accused the countries of violating the agreement after European countries refused to send troops to help the US military open the Strait of Hormuz.

“This risk is a negotiation process, however, the US power is less after the IEEPA rulings,” said Ziemba.

Trump’s threat of tariffs could have a major impact on the German auto industry as BMW, Mercedes, and Volkswagen remain US based.

This comes as the White House announced on Friday that it plans to withdraw 5,000 troops from Germany after Chancellor Friedrich Merz said the US was “humiliation” in negotiations with Iran.

Which car companies will suffer the most?

European carmakers will be hit by tariffs. Car trade is a major part of the EU-US business, which makes up 8 percent of all trade, according to the European Automobile Manufacturers’ Association (ACEA), and the US is the first destination for EU-made cars, accounting for 29 percent of the total value of EU exports.

“The Trump administration continues to use threats of coercion. In this case, it would be Germany that would be the most difficult with the tax because of the importance of its car industry. Europe so far is still paying back the Trump tax, mainly because of security,” Gregory Shaffer, a professor of international law at Georgetown University, told Al Jazeera.

Prices can have a big impact on luxury and luxury cars.

“They (prices) have a significant impact on high-end cars because they are the ones that are exported mainly as finished products. European car manufacturers tend to produce medium-sized cars in the US given the incentives related to the USMCA,” said Ziemba, referring to the trade agreement between the US, Mexico and Canada that does not provide goods eligible for tax.

Germany’s Volkswagen is among the automakers with the largest presence in the US. The company operates a major manufacturing facility in Chattanooga, Tennessee, where it builds the Atlas, Atlas Cross Sport, and Volkswagen ID.4. Its Golf models are manufactured in Wolfsburg, Germany.

It is not yet clear how the auto industry will respond.

“We are reviewing the latest developments and waiting for further information,” a Volkswagen spokesperson told Al Jazeera.

Mercedes-Benz also maintains a U.S. manufacturing strategy, producing most of its SUVs at a plant in Alabama. However, several of its sedans – including the Mercedes-Benz S-Class – are made in Germany.

Similarly, BMW builds its X SUVs at a large facility in Spartanburg, South Carolina. Some models, such as the 3 Series and 4 Series, are made mainly in Germany.

BMW did not respond to Al Jazeera’s request for comment.

Mercedes referred Al Jazeera to ACEA, but the agency did not respond to a request for comment.

Stellantis also has a shape. Although it manufactures Jeep, Ram, and Chrysler vehicles stateside, it manufactures brands such as Fiat and Peugeot in Europe. Fiat has limited presence in the US, and Peugeot has none.

Some brands are more sensitive to pricing than others, especially at the higher end of the market. Porsche and Audi – both owned by Volkswagen – do not make cars in the US.

After the United Kingdom, the US is still the EU’s largest car market, and 25 percent of US cars imported worldwide by value come from the EU, according to ACEA, which forces car manufacturers to rethink their strategies.

In March, Automotive News reported that Porsche was considering expanding production in the US to address cost concerns.

High-end models tend to have larger models, including Ferrari and Lamborghini. Both brands make all their cars in Italy.

It would also affect companies that make parts made in the US, including manufacturers that make cables, exhausts and engine parts, according to Kyle Peacock, who runs Peacock Tariff Consulting.

“Manufacturers that make them overseas have stopped or delayed orders from the US, so they’re reducing production because they’re hoping that the volume won’t match those products because of the increased costs,” Peacock said.

“One of our customers manufactures clutches for Stellantis and Volkswagen which they ship to Germany and the UK for production. We have seen a drop in sales because they are not expecting to bring the products to the US.”

How will this affect consumers?

Trump’s tax bill has cost US families a $1,000 increase in taxes per household, according to an analysis from the nonpartisan Tax Foundation. With inflation on the back of the Supreme Court’s decision, this is expected to drop to $700 per US home this year.

With medium and high-end vehicles the most affected, the impact on consumers may be minimal.

“So this, according to my understanding, will be passed directly to the consumer, much more than other pricing methods that have been done in the past, because the people who buy these cars can take more money than the consumers who have low income or who are affected by the previous prices,” said Peacock.

“Companies can’t eat these prices; they just pass them on to consumers, (and) my signal from customers,” he said.

Politically, tariffs have burdened consumers. A Harris poll in March found that 72 percent of Americans said the tariffs had affected their lives, and that was dwarfed by a Pew Research Center poll in April, which found that 63 percent of Americans have no confidence in Trump’s handling of tariff policies.

“However, when it comes time for Europe to retaliate, it’s to hurt Trump by targeting US exports from major countries,” said Georgetown University’s Shaffer.

Peacock says in his advisory, European automakers like Volkswagen have been reluctant to buy from US manufacturers, many of which are located in states like Virginia and New Jersey.

The White House did not respond to Al Jazeera’s request for comment.