Trade and Prosperity Effects of a “Zero Solution”- Abolishing EU and US Import Tariffs in the Automotive Sector

In the trade conflict between the EU and the USA the European Commission’s President, Jean-Claude Juncker, and US President Donald Trump agreed on a gradual reduction of tariffs in all sectors, with the exception of the automotive sector, at the end of July 2018. Less than three weeks previously, however, propositions had been floated to completely abolish tariffs. What would be the trade and prosperity effects of such a zero solution for Germany, the rest of the EU and the USA? Using a quantitative trade model Benjamin Jung and Timo Walter, University of Hohenheim, calculate these effects for three scenarios: scenario 1 assumes that Germany enjoys autonomy in its trade policy, meaning that a zero solution in the automotive sector can be bilaterally agreed by Germany and the USA. In scenario 2 auto tariffs between the USA and all EU member states are reduced to zero. In the third scenario the EU and the USA eliminate their tariffs in the automotive sector for all WTO members. Their simulations show that Germany, the EU and the USA stand to benefit the most in the third scenario. It would be less advantageous for Germany and the USA, or the EU and the USA, to go it alone.