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25% auto tariffs could cause EU and Japan to slip into recession, hit the financial markets

WHILE everyone's attention has been focused on the trade tensions between the United States and China, there is another trade hot potato that warrants close monitoring.

The issue that should be on everyone's radar is a possible 25 per cent tariff on car imports into the US from the Europe Union and Japan, said Stefan Hofer, managing director and chief investment strategist at LGT Bank Asia. At a media lunch on Wednesday, he flagged the implications of the import duty if there is no trade deal between the US and its trade counterparts Japan and the EU.

He said that the duty - if levied - might cause Europe and Japan to go into recession, and will also be "extremely negative for financial markets". 

He does not expect the 25 per cent tariff to materialise but should it happen, "this will probably cause recession in Europe and Japan". Risky assets would be "substantially" weaker. The financial markets will not be spared either.

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"If the US puts a 25 per cent tariff on imported cars from Europe and Japan, this will be extremely negatively for financial markets, " Mr Hofer cautioned.

One could expect a stronger US dollar, however.

He thinks that this issue warrants close monitoring. "Investors, ourselves, everybody, this is the issue that we have to watch, I think more closely than anything else. We really really need to avoid this 25 per cent tariff on cars. It is by far the most important issue, with the exception of US-China trade dialogue."

Mr Hofer expects Japan and the EU to reach a trade deal with the US as early as February 2019. 

The impact of the tariff on car makers varies. He cited Japanese auto manufacturers Honda and Mazda as examples.

Honda makes the vast majority (about 75 per cent) of the cars that it sells in the US at its American plant, so those will not be impacted by tariffs. The other extreme is its smaller rival Mazda, which has almost 80 per cent of its cars sold in the US made in Japan. So if the US levies a 25 per cent duty on cars imported from Japan, Mr Hofer foresees that Mazda will be badly hit as "it will wipe out all of Mazda's operating earnings".

"So both Europeans and Japanese are highly motivated to do everything possible to avoid this 25 per cent tariff on their vehicles. We are expecting to see a trade deal in the first quarter that will solve this problem."

It was reported in November 2018 that the US Commerce Department had submitted draft recommendations to the White House on its investigation into whether or not to impose tariffs of up to 25 per cent on imported cars and parts on national security grounds.

The White House has pledged not to move forward with imposing tariffs on the EU or Japan as long as it is making constructive progress in trade talks.