At the G-7 Summit in Quebec earlier this year, President Donald Trump made a surprising admission. He said he wanted to see trade that is free of tariffs, non-tariff barriers and subsidies. So why, when the European Union recently offered to do just that, did the president turn it down?
The U.S. and the EU agreed to eliminate all tariffs on non-auto industrial goods earlier this year, but an announcement by EU Trade Commissioner Cecilia Malmstrom late last month took the proposal one step further. Malmstrom said the EU is "willing to bring down even our car tariffs to zero, all tariffs to zero, if the U.S. does the same."
Tariffs between the U.S. and the EU are already relatively low, with their average tariff rates around 2.9 percent and 2.5 percent, respectively. But non-tariff barriers and subsidies on both sides of the Atlantic still remain. For example, the U.S. has lower barriers for car imports than the EU, at 2.5 percent, while the EU tariff on cars is 10 percent.
However, Trump fails to mention America's decades-old barriers to trade. America's 25 percent tariff on truck imports dates back to 1963 after a trade dispute with the EU. The EU tariff on trucks is similar: 22 percent.
In short, both sides in this relationship have things to offer in a negotiation. If these barriers can be eliminated, it will allow Americans and Europeans to have far greater options when purchasing a vehicle.
So why would the White House reject an offer to eliminate all industrial tariffs, including those on autos? Trump said the offer was "not good enough." He went on to say that EU "consumer habits are to buy their cars, not to buy our cars."
This is a serious mistake. A potential agreement of zero industrial tariffs between the two entities would allow America to become an even greater leader in manufacturing. In fact, the difference between the U.S. and the EU widens for average tariff rates on manufactured goods. The U.S. rate is 3.0 percent; the EU rate is 1.9 percent.
There is great potential for growth here. The U.S. should work to eliminate tariffs on all intermediate goods, including imports used to make other items in America. More than 40 percent of goods imported into the U.S. are intermediate goods used to produce finished products. The inclusion of capital goods like equipment and machinery boost that percentage to just over 60 percent of all U.S. imports.
In a 2013 report, Heritage Foundation experts stated that "imports such as steel for carmakers, wood for homebuilders, and sugar for candy manufacturers help these U.S. industries produce affordable, high-quality cars, homes, and food. Because tariffs increase the cost of many inputs, they make it harder for U.S. companies to compete with foreign companies."
Taking the EU up on its offer would be a positive first step in eliminating all barriers to trade and in reducing costs for U.S. manufacturers. When American businesses pay less for inputs, they can spend additional capital in areas such as hiring additional workers, increasing wages and benefits, and expanding their production facilities. Lower-priced inputs also allows for American manufacturers' exports to be sold at prices competitive with world markets.
Trump should instruct his negotiators to enter into these talks in good faith, and to take steps in achieving his vision of eliminating all barriers to trade. This change will not happen overnight, but each step closer is a win—not only for Trump's "forgotten" men and women, but for all Americans.