There were a couple of articles and one podcast I came across over the last few days which are topical, so I thought I would summarise each of them and also provide you with the links to read the articles or listen to the podcast if the topics interest you. The three topics are tariffs on European automotive imports, social security “fraud”, and reciprocal tariffs focused on steel and aluminium. Below are the links to each article/podcast, as well as summaries of each.
This is a good article that sheds light on the trade deficit the US suffers involving one particular and very visible product – passenger vehicles – with a key trading partner, the European Union. Both the US and EU are major global manufacturers of automobiles. Here are the principal points I took away from the BBC article:
There is a significant trade deficit in the US involving European vehicles, but it is nowhere near the level that Mr Trump inaccurately stated when he said that “the US has "millions of cars coming in - BMW, Mercedes, Volkswagen and many others". In reality according to the article, the EU exported 692,334 vehicles to the US in 2022 worth €36 bln / $37 bln(e), and the US exported 116,207 cars to the EU worth €5.2 bln / $5.3 bln(e).
The tariffs imposed by each country – Mr Trump’s focus – are indeed skewed in favour of Europe and against the US. The EU charges US imported vehicles a 10% tariff, and the US only charges EU imported vehicles a tariff of 2.5%. In line with his approach, President Trump wants to equalise the tariffs to reduce the trade deficit associated with this product category. In other words, he is angling for reciprocal tariffs so that the US and Europe pay the same on imported vehicles. It is hard to argue with that approach, although the effects are far from clear.
Both American and European automobile manufacturers have embraced an international strategy involving building production and assembly facilities in local markets, so that they can manufacture vehicles near their customer base. For example, Mercedes, BMW and Audi all have manufacturing plants in the US (that in fact also export some products back to the EU), and GM, Ford and Tesla all have manufacturing plants in the EU.
Supply chains, especially components of under-attack steel and aluminium in terms of higher tariffs, complicate matters greatly, meaning US automotive manufacturers are not necessarily supportive of higher tariffs on many component products that they must import to manufacture a finished automobile in the US for sale in the US.
The BBC article begins by saying that Americans generally prefer large vehicles (including vans, SUVs and pick-up trucks) that generally are less fuel efficient, mainly because of the vastness of the US. Europe is much different, especially when you get into cities (think about old Spanish, Italian or French towns) that are hundreds of years old, and simply do not have the wide roads to accommodate SUVs and other large vehicles. Europeans are also more fuel efficient, simply because petrol (gasoline) is so much more expensive in Europe due to taxes. The average cost per gallon of gasoline in the US is currently $3.16/gallon (source AAA), and the similar cost of petrol in the EU (although varies by country) is around €1.70/litre (source cargopedia), or $6.68/gallon equivalent, more than double the cost of a gallon of gasoline in the US.
The article does not refer to quality or brand, but I will go out on a limb and add that – in my opinion – European car makers simply make better cars. This is certainly true for German manufacturers of vehicles focused on the high end of the market. I doubt that many well-off Americans will trade their Mercedes or BMWs for lower-priced American brands because of modest price increases due to tariffs, although the tariffs are likely to be inflationary.
Apologies in that you might need to be a Bloomberg subscriber to read this article in full, but I will summarise the key points. Let me begin with the extract below from the article, which more or less sums up the author’s view:
“So when newly minted government-efficiency expert Elon Musk hints — without providing any evidence — that there is serious fraud at the Social Security Administration, I must say I’m extremely dubious. Sure, checks sometimes go out to recipients who shouldn’t receive them, with the SSA estimating that it made $13.6 billion in overpayments in the 2023 fiscal year. But that was out of $1.3 trillion in disbursements. Even if the actual overpayment amount is several times larger, it’s still not much relative to the huge scale of Social Security.”
The efficiency of Old-Age and Survivors Insurance (“OASI”), or social security, is very good, with administrative costs of 0.4% of total spending (down from 1.6% 50 years ago), compared to (interestingly) administrative expenses of 4.6% of revenues at Tesla (admittedly not apples-to-apples but this provides some perspective).
The article notes that fraud is much more prevalent in the disability and survivor components of social security, analogous to high levels of fraud in private sector disability and medial insurance. With social security retirement payments, it’s easier – you are either of retirement age or you’re not, and you are either alive or you’re dead. The table below, presented in the Bloomberg article, is from the US government website paymentaccuracy.gov. It clearly shows that fraud is much more of an issue with Medicare and Medicaid than with social security.
The social security system paid out just under $1.4 trillion to recipients in 2023, and according to the government website on payment accuracy, the amount of “improper” and “unknown” payments for Old-Age, Survivors and Disability Insurance was $68 billion (table above), or less than 0.5% of payments. Including Supplemental Social Security, the amount increases to $160 billion, or 1.1% of the total outflows.
The social security system apparently has 18.9 million people in its system born before 1920, when the Census Bureau estimates that there are only 86,000 people in the US that old. That’s a real discrepancy and certainly the headlines that Mr Musk likes to flash. However, the social security system is making payments to “only” 44,000 people of that age, a matter that needs to be addressed but is nowhere near the magnitude that Mr Musk writes and discusses ad nauseam.
The article concludes with an assertion that I agree with wholeheartedly and have written about in the past, which is Mr Musk/DOGE and the Trump Administration (and Congress) need to focus on the imminent demise (mid 2030s) of the social security trust fund, a real issue since two-thirds of Americans are under age 65 and might be counting on this programme for retirement. Sadly, I consider reforming social security a partisan political “no go” zone. The article ends this way:
“Social Security also has serious looming funding problems that are the product of its design and the aging of the US population, not its operations. Do Musk and his Department of Government Efficiency have ideas for dealing with either of those issues? So far they’ve given no sign of it."
For what it’s worth, I wrote about social security in 2023, in an article you can find on my website here: “Social Security: will it crash and burn”? It discusses the real issue ahead with social security, and the strain that demographics will present in the future.
“The other side of trade”, from Unhedged (podcast):
This is a 27 minute podcast regarding the threat of imposition of reciprocal tariffs on US imports, and a focus on higher (25%) tariffs on imported aluminium and steel. “Unhedged” is a joint production of the FT and Pushkin Industries. This podcast features hosts Katie Martin and Rob Armstrong discussing tariffs with Alan Beattie, a senior trade writer for the FT. The portion of the podcast dealing with tariffs is the first 23 minutes. Summary comments are below:
Tariffs are often discussed on steel. Why is this the case? Steel is a sign of manufacturing and industrial strength. In the US of course, steel production also happens to be important in several swing states.
From an economics perspective, it is often believed that whatever jobs you retain in the steel industry (by imposing tariffs) you lose in downstream industries that rely on a mix of domestic and foreign steel, the latter of which becomes more expensive (with higher tariffs). Think about the automotive and canning industries, both of which have supply chains that extend outside of the US. Politically, the issue is that benefits of tariffs are concentrated and highly visible, and the negative downstream effects are more defuse and less apparent.
Many CEOs have figured out that challenging the Trump Administration is fraught with risk, especially when much of what Mr Trump says never comes to pass. Recall how quickly the 25% tariffs on Canada and Mexico were deferred.
Reciprocal tariffs means setting US tariffs at the same level that are imposed by foreign countries on the same products. The issue here is that the amount of imports and exports of a particular product can vary sharply on a bilateral basis, making the tit-for-tat tariff strategy largely ineffective in many cases.
Americans believe that US tariffs are always lower. This is often, but not always, the case. For example, US processed sugar has protection from high tariffs on foreign imports, protecting an industry that – as an aside – is largely concentrated in a swing state Florida.
The US is also a large country that “makes and buys a lot of its own stuff”. The US only accounts for 15% to 16% of global exports, even though it is 25% of the total global economy. This lessens the sting of tit-for-tat reciprocal tariffs.
Investors have largely ignored the threat of reciprocal tariffs, at least so far. Assets are not pricing in tariffs, so they either don’t think they will happen in a significant sense, or they think the effects will be muted. Investors have learned to wait and see what happens rather than take President Trump at his word. Also, companies can be clever in dealing with tariffs, and economies transition and reconstitute themselves in a way that reflects the new reality. Higher tariffs would cause supply chains to reorganise themselves, for example by sending products to “connector countries” to avoid tariffs. Historically in fact, there have been numerous global economic shocks (e.g. 9/11, the GFC and the pandemic), but the global economy has always reorganised and sorted itself out without significant long term detrimental effects.
What should Europe do if reciprocal tariffs come to pass? They should have a response ready like Mexico and Canada, which responded immediately and had their tariffs deferred before they even were put in place.
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