With little apparent progress in U.S.-China trade talks, the Trump administration could be about to open up a new front in the trade wars by taking on the European auto industry — and that could spook markets.
U.S. negotiators head to China next week, and while there are few signs any kind of deal is near, many strategists expect to see some signs that talks will continue and an eventual agreement will be reached, even if a March 1 deadline on new tariffs is pushed back.
But while the market has focused on those talks, another battle is brewing. The Commerce Department by Feb. 17 is expected to release a broad report on auto imports and national security, and experts say a part of that report could recommend tariffs on European autos.
The White House would then have 90 days to respond.
Dan Clifton, head of policy research at Strategas, said Trump could be using the threat of auto tariffs as a way to get the EU to cooperate on other matters. The EU has been resisting efforts to include U.S. agriculture in a trade deal. "Just because there's a report does not mean tariffs will go into effect," he notes.
But some economists expect the administration to move on the auto tariffs, specifically on European cars. For instance, UBS economists said they expect 25 percent tariffs to be placed on finished vehicles, not parts. The administration then could grant exemptions to other countries that have cooperated, like Korea, Canada and Mexico, but the European Union would not be exempted.
"It just seems like if people had been worried about the tariff war with China, this would be another reason for people to worry. In our view, this is not a macro event for the U.S. because the auto industry seems to be pretty tariff savvy and can get around them," said Seth Carpenter, chief U.S. economist at UBS.
Some strategists fear investors are keenly focused on China, and expect a resolution, but could be surprised by ramped-up trade friction with Europe.
"The market would tank," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "The market has spoken loud and clear that it's had enough of these tariffs. ... The market is fed up with this. Global growth is slowing dramatically because of trade. You want to put another bullet in it's head?"
Read more: Trade war headlines could get much worse before they get better
