Funny stuff amid headlines discussing the likelihood of President Trump postponing a 25% tariff on European autos.  What the pundits are missing is how President Trump has positioned a myriad of trade dynamics that make EU action unavoidable.   This is the fun stuff, so let’s enjoy the details.

The current headlines surround President Trump “postponing” a 25% tariff on EU automobiles as an outcome of the major EU manufacturers (mostly Germany) promising increased investment in their U.S. operations.  By itself this would be considered a win for President Trump, but that’s not the whole picture, not even close.

What the more broad trade and manufacturing dynamic includes will explain what EU economists are only just now starting to realize.  Yes, the major European auto-makers will put more investment into the United States (thereby lessening the EU industrial economy); however, the auto decision is not because they are presenting a magnanimous benefit of sorts, but rather it is a foregone conclusion; an unavoidable reality due to a previous trade agreement construct.

Within the USMCA agreement President Trump negotiated a win-win-win for Mexico, Canada and the U.S. through a requirement that 75 percent of North American auto content must originate from manufacturing within North America.  Failure to reach that threshold means the auto company will be subject to a 25 percent tariff to bring the product to the U.S. market.

Example: Seeking to exploit the previous NAFTA loophole BMW recently opened a $2 billion assembly plant in Mexico.  However, as soon as the USMCA was announced; and once they saw the loophole closure; BMW also had to announce they would open up a new engine and transmission manufacturing/production facility in the United States.

The USMCA deal meant BMW could not bring German transmissions and engines into Mexico for assembly.  The origination requirements changed the dynamic of their production plan; and as a consequence their investment plan.

Keep in mind the steel and aluminum tariffs already exist.  Most trade partners with the U.S. are operating under exemptions, waivers, provided by President Trump and his trade team.  Those waivers can be withdrawn at any time.

The only time the Steel and Aluminum tariffs are gone permanently, is when the nation signs into an official trade agreement with the United States. [Keep this nugget in mind]  All U.S. trade agreements also forbid the partner country from participating in transnational shipping of steel and aluminum.

Additionally, President Trump instructed USTR Lighthizer and Commerce Secretary Ross to use the leverage created within the USMCA (auto sector), in combination with the Steel and Aluminum tariffs, as pressure points -leverage- in all trade agreements with Korea, Japan, China and the EU.  [Auto sector 232 tariffs]

Does it work?

Well, two examples: (1) South Korea opened up the KORUS deal to renegotiation specifically to avoid those tariffs (think Hyundai and Kia).  The new KORUS deal positioned greater benefit to the US.  (2) Japan opened up their market to U.S. agriculture exports in large part to avoid those tariffs (think Nissan, Toyota, Mazda etc.); and that became the framework for the recently signed U.S-Japan trade agreement.

So yes, it works.

That same leverage principle is at play with the EU.  Germany must avoid U.S. auto tariffs at all costs.  Additionally, Germany and the EU industrial companies, writ large, want to keep their waivers from Steel and Aluminum tariffs. However, Germany cannot avoid the tariff structure within the USMCA. President Trump has the EU over a barrel.

As an outcome of the USMCA, Germany was already going to have to manufacture content in the U.S. in order to avoid auto tariffs.  Germany is not going to be able to bring German parts into the U.S. and assemble in U.S. made vehicles. They are going to have to produce more auto parts inside the U.S.   The issue is a matter of timing.

As soon as the USMCA is ratified, Germany is going to have to make their U.S. investment.  However, with the USMCA not yet ratified, President Trump has deployed the 25% auto tariff threat directly.  This forces the EU to make their already unavoidable auto investment in U.S. manufacturing faster than they would like.

So there’s some nuggets of truth within the New York Times article:

The president has not yet announced a decision, and there is no guarantee that dangling new investments will stop him from imposing levies. Mr. Trump has repeatedly criticized Europe for flooding the American market with cars while limiting imports of United States vehicles.

[…]  Some analysts say Mr. Trump and his advisers are more interested in the leverage the specter of auto tariffs creates than in actually imposing the levies. They have been willing to threaten tariffs to extract concessions in negotiations with Japan, South Korea and Europe.

Mr. Trump could decide to try to preserve his leverage by extending the deadline to make a decision. That would be frustrating for European officials, who say the trade war’s uncertainty has been dragging down economic growth. Germany, whose economy depends on car making, is on the brink of recession. (read more)

The major industrial economies of the European Union (U.K., France, Germany) have been the beneficiaries of a decades-long system which allowed one-sided benefits -via tariffs- against U.S. products.

With President Trump demanding reciprocity, and with less industrial purchasing from China, the EU is now starting to contemplate a dramatically different economic future.

(Reuters) – Persistent weakness in euro zone manufacturing raises the risk of other sectors of the economy being infected, extending the currency bloc’s recent downturn, European Central Bank policymaker Yves Mersch said on Monday.

“The longer the weakness in manufacturing persists, the greater the risk that other sectors of the economy will be affected by the slowdown as well,” Mersch told a conference.

“Risks to the growth outlook remain on the downside overall.” (read more)

I think it is safe to say the majority of American voters have no idea how deeply the global economy is dependent on systems of trade that are based on the U.S. trade deficits.

The $500+ billion annual trade deficit the U.S. was running with China was the primary vault Beijing used to purchase industrial goods from the EU.  With President Trump reversing the outflow of dollars into China, the EU economy has been hit hard.

Simultaneously, President Trump has begun the process of confronting EU tariffs against U.S. products that have existed since the 1948 Marshall Plan was enacted.  Under the Trump administration USTR Robert Lighthizer and Commerce Secretary Wilbur Ross have put the EU on notice that U.S. trade agreements will no longer accept the one-sided benefit; the current U.S. position is reciprocity without compromise.

Against both standards of diminished Asian purchases and diminished protectionism for their collective economy, the EU is entering into a phase of severe economic consequence.

The social spending within the EU is heavily reliant on their ability to capture U.S. wealth through exports (China) and trade tariffs against the U.S.   As the EU central bank is starting to realize, a diminished influx of money into their system will likely have significant consequences that extends far beyond the simple lost revenue from global industrial purchases.

Combine that financial reality with a significant loss in revenue from the U.K. via Brexit; and then overlay the generous social payments to the mass influx of migrants; and you can see a storm cloud appearing that seems unavoidable.

NATO General Secretary Jens Stoltenberg is coming to the White House this week, and we can be sure his visit is directly related to this EU reality.

Interesting times…

President Trump held an impromptu presser prior to departing JBA for Alabama.  This is one of those mini-pressers that reveals important aspects to the *direction* of the U.S-China trade discussion from the POTUS perspective.  The financial pundits always miss these little tell-tale remarks.  President Trump is managing the trade and economic program at a granular level; this is his priority… every little part of it, he is directing.

President Trump notes the value of the tariff strategy, and infers (not so subtle) that no deal is preferred within his ongoing plan: “you’ll see what I’m going to be doing.”  This is what the financial pundits ignore. President Trump has gamed this out, he’s stringing the process slowly to keep boosting the stock market…. but his goal does not include a deal.

[Video and Transcript below]

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[Transcript] – THE PRESIDENT: I look forward to seeing a lot of things. But on Monday, in particular, our stock market has just broken another record, as you see. Our economy is doing phenomenally well. Our jobs numbers just broke yet another record. They’re higher than ever before. Our country is doing better than it’s ever done. Our military is rebuilt. It was a mess when I took over.

And a lot of good things are happening, and now I’m going to watch Alabama-LSU, and that’ll be a lot of fun. So, we look forward to it.

Do you have a question? Go ahead.

Q Mr. President, what’s your next step for China trade talks? There were some —

THE PRESIDENT: They’re moving along. They’re moving along. They’ve moved slowly. Much too slowly for me. But they want to make the deal much more than I do. But the trade talks with China are moving along, I think, very nicely. If we make the deal that we want, it’ll be a great deal. And if it’s not a great deal, I won’t make it.

But the trade deal is moving along, and China wants to be there.

Q And do you want to lift tariffs then? They said that there had been a —

THE PRESIDENT: Well, there was a lot of incorrect reporting, but you’ll see what I’m going to be doing.

Q Can you clarify that?

THE PRESIDENT: But we’ve taken in tens of billions of dollars of tariffs. I gave $28 billion — 16 and 12 — to our farmers. And it’s been pretty amazing what we’ve done. Our farmers are very happy. We have to make the right deal for the farmers, manufacturers, for everybody. And if we don’t make that right deal, we’re not going to make a deal.

Q But if you get the phase one deal, will some tariffs be lifted?

THE PRESIDENT: Well, you’ll see. There’s a difference on tariffs, but we’re going to always get tariffs. We never got anything. Just so you understand, China, forever, never paid us 10 cents. Now we have — literally, we will soon have, literally, hundreds of billions of dollars coming in from China. We never got anything from China. So, a lot of very positive things are happening. I think that people will be amazed.

Just to say, again: I’d like to make a deal, but it’s got to be the right deal. China very much wants to make a deal. They’re having the worst year they’ve had in 57 years. Their supply chain is all broken, like an egg. They want to make a deal. Perhaps they have to make a deal. I don’t know. I don’t care. That’s up to them.

But the reports were incorrect.

Q How about lifting tariffs?

THE PRESIDENT: The level of tariff lift is incorrect.

Q You said the impeachment hearings should not be held behind closed doors, but now you say you don’t want them to be public. So —

THE PRESIDENT: No, no. I don’t care if they’re public; they should be public. What I said — it was misreported, as usual. What I said is very simple: There shouldn’t be anything. There shouldn’t be impeachment hearings, is what I said. So maybe they misconstrued it.

But what I say is: Read the transcript. It’s all about the transcript. They’re having people — I never even heard of some of these people; I don’t know who they are. And, by the way, it’s all third-hand knowledge. But regardless of what anyone says, read the transcript.

Now, they want to have a transcript of the other call, the second call. And I’m willing to provide that. We’ll probably give it to you on Tuesday. Monday being a holiday, we’ll probably give it to you on Tuesday. But we have another transcript coming out, which is very important. They asked for it, and I gladly give it. There’s never been a President who’s been so transparent. This is a witch hunt at the highest level, and it’s so bad for our country.

But here’s the deal: Read the transcript. You’ll see the call. Now I’ll give you a second transcript, because I actually had two calls with the President of Ukraine. So you’ll read the second call and you’ll tell me if you think there’s anything wrong with it. But never in history has anybody gone through this. It’s a witch hunt, and it should never happen to another President.

Thank you. Thank you.

END 12:55 P.M. EST

I’ve said it before and I’ll emphasize it again, the global trade and economic reset is President Trump’s number one priority.  Everything else, including impeachment, is chaff and countermeasures… deployed to stop his priority.

President Trump knows the ‘impeachment’ agenda is a means to an end. His opposition, the sum total of his opposition, needs to stop him from deconstructing a global economic system that was created over decades to the benefit of an elite ruling class.

The Big Club, the multinational system, is throwing everything at him in an effort to stop his ‘America First’ economic program; but incredibly, Trump retains a focus on the big picture and keeps taking apart the globalist system bit-by-bit.  It is remarkable how focused President Trump is on this objective.