How Germany's car industry is bracing for Donald Trump's tariffs

Euronews

07-03-2025

Europe's biggest, export-oriented economy is exposed to Trump's tariffs, with German automakers in Mexico likely to see knock-on effects of a potential trade war.
ADVERTISEMENT
US President Donald Trump on Tuesday sparked a tariff war with the US' three largest trading partners, slapping 25% tariffs on Canada and Mexico, and doubling an already imposed import tariff on China to 20%.
On Thursday, he backtracked and postponed the tariffs on multiple imports from Mexico and some from Canada, but emphasised he would impose additional tariffs at the start of April.
The prospect of an international trade war sparked by Trump's tariffs comes at a bad time for the German economy, which shrunk for the second year in a row in 2024.
Once an economic powerhouse, Germany is projected to be the bloc's weakest performer in 2025.
Yet experts suggest that the impact of a tariff war between China, Mexico, and Canada would have a limited effect on Germany— at least for the time being — aside from impacting German manufacturers and suppliers in these three countries.
'At least in the medium run, one would expect some trade diversion in the sense that products that were designed to go to the US, for example from China, would now end up on the European markets,' Julian Hinz, Professor of International Economics at Bielefeld University and head of the Research Group Trade Policy at the Kiel Institute for the World Economy, told Euronews.
The US could however also import slightly more from Europe in place of China, Mexico and Canada. 'The effects blur the overall picture, abit' Hinz says.
German car companies, including Audi, produce cars in Mexico. According to data from the German Car Association (VDA), German carmakers produced 716,000 cars in the country — primarily for the US market.
If Trump's tariffs mean German cars produced in Mexico cannot be sold as easily, or are much more expensive now in the US then this 'could have a bigger effect,' Hinz says.
On Thursday, Trump granted automakers in Mexico and Canada a one-month tariff exemption after negotiating with leading industry figures.
However, once the month is over, German economist Thomas Hutzschenreuter says that tariffs and subsequent decreased demand for German cars from Mexico would impact German, European, Mexican workforce.
'Unemployment rates will be affected' Hutzschenreuter told Euronews.
Tariffs on the European Union
Experts warn that the picture changes dramatically if Trump decides to slap tariffs on the European Union — a proposal he threatened in late February.
'It means that individual companies will have to diversify their sales throughout the world. In other words, they have to deprioritise the US market and higher prioritise other markets. That is currently being discussed in most German companies,' Hutzschenreuter said.
'However, the problem is that you cannot react as quickly as tariffs are being imposed. Reaction takes more time. And therefore you will be affected short term.'
ADVERTISEMENT
One sector particularly exposed is the country's automotive industry, which in 2023 made up 17% of Germany's total exports, according to figures from the Germany Trade and Invest (GTAI) office.
Germany's automotive industry entered crisis mode last year, with once-might carmakers such as Volkswagen closing factories and cutting thousands of jobs.
The head of the VDA, Hildegard Müller, commented in February that Trump's tariff threats of 25% on the European Union were a 'provocation'.
"Tariffs are the wrong negotiating tool," Müller said. "The risk of a global trade conflict with negative effects on the world economy is high."
ADVERTISEMENT
According to simulations undertaken by the Kiel Institute for World Economy, increased tariffs would lead to economic losses and inflation in both the EU and the US.
In Germany, this would impact the automotive and mechanical engineering industries, with the Kiel Institute showing that total production would decrease by up to 4% for cars.
'That's a big number for an industry that is already struggling,' Hinz says.
One thing that needs to be emphasised for Germany however, and the EU as a whole, is that although the US is an important trading partner, roughly 10% of exports go there, Hinz said.
ADVERTISEMENT
'Even in the worst case scenario of dramatic tariffs imposed by the US, most EU imports stay in the EU, and there are plenty of other trading partners with which trade under WTO rules and free trade agreements works perfectly well, will continue to work as before.'
'The US hurts itself most here,' Hinz concludes.