Trump tariffs threaten to hobble Slovakia’s thriving car industry

A small landlocked country in the heart of Europe appears to be uniquely exposed to President-elect Donald Trump’s “America First” economic agenda.

Nicknamed the “Detroit of Europe” due to its thriving automotive industry, Slovakia produces more cars per capita than any other country in the world.

Trump’s pledge to impose a blanket 10% or 20% tariff on all goods coming into the U.S. threatens to tarnish the central European country’s reputation as a global leader in car production.

The incoming U.S. president on Monday vowed to impose new tariffs on China, Canada and Mexico in one of his first acts in office. The measures include an additional 10% tariff on all Chinese products coming into the U.S. and a 25% tariff on all goods coming from Canada and Mexico.

The fact that Europe was not mentioned in Trump’s first tariff announcement will be regarded as welcome news for European Union policymakers, although the 27-nation bloc is likely worried that it’s just a matter of time before Trump turns his attention to the region’s auto sector.

That’s a big problem for Slovakia. The country of just 5.5 million people relies heavily on U.S. trade, with autos accounting for a sizable chunk of its U.S. exports and the sector indirectly employing over 250,000 people.

“Slovakia has turned into a Detroit of Europe,” Vladimir Vaňo, chief economist at Globsec, a think tank based in Slovakia’s capital of Bratislava, told CNBC via telephone.

“In 1990, after the fall of the Iron Curtain, Slovakia produced exactly zero cars. But it was very strong in what we in our local language like to call special manufacturing, which is just a nice way to say arms production, armored vehicles, tanks and what have you,” Vaňo said.

Germany’s Volkswagen was the first automaker to identify Slovakia’s potential for engineering and manufacturing, Vaňo said, starting with the assembly of gearing boxes before rapidly scaling up to the manufacture of full vehicles.

Alongside Volkswagen’s plant in Bratislava, Stellantis-owned Peugeot, Hyundai Motor‘s Kia and Tata‘s Jaguar Land Rover have all since established manufacturing hubs in the country.

Sweden’s Volvo in 2022 announced plans to become the fifth car company to operate in the country, with a climate-neutral factory poised to open in eastern Slovakia in 2026. Volvo said the 1.2-billion-euro ($1.26 billion) plant will only build electric cars.

Asked the extent to which Slovakia should be concerned about the prospect of Trump tariffs, Globsec’s Vaňo said: “It’s worrisome. But it’s a kind of wait-and-see, lame-duck approach.”

He added that while there appears to be “very little” Slovakia can do in the short term, the country’s automakers have proven to be relatively good at dealing with challenges in the past.

A spokesperson for Slovakia’s government was not immediately available to comment when contacted by CNBC.

Alongside Slovakia, Germany’s crisis-stricken auto industry is likely to be highly vulnerable to Trump tariffs.

Europe’s biggest economy is by far the region’s largest exporter of passenger cars to the U.S., accounting for 23 billion euros worth of exports last year, according to data compiled by statistics agency Eurostat and ING Research. That represents 15% of Germany’s total exports to the U.S.

Rico Luman, senior sector economist for transport and logistics at Dutch bank ING, said the prospect of U.S. tariffs on European autos is likely to make a bad situation in Germany even worse.

“It is the heart of the manufacturing industry, right?” Luman told CNBC via video call. “So, the automotive industry is linked eventually to the steel industry and the chemical industry, so it is the full supply chain that’s involved here.”

Slovakia, meanwhile, is Europe’s joint-third-largest exporter of passenger cars to the U.S., alongside Sweden, with 4 billion euros worth of exports to the U.S. in 2023.

Notably, however, Slovakia’s passenger car exports account for nearly three-quarters (74%) of its overall export package to the U.S., leaving the country acutely exposed to the looming threat of Trump tariffs.

“Slovakia has obviously done very well with auto production so far but now it is facing some challenges,” Arushi Kotecha, automotive analyst at the Economist Intelligence Unit, told CNBC via video call.

One of those issues stems from China.

The EIU’s Kotecha said European lawmakers were trying to hold their ground by not allowing Chinese automakers such as BYD to penetrate the regional market too much, both in terms of sales and investment.

“At least with the Chinese, there is certainty because those tariffs have happened, China has retaliated … so the China part of it is done — but, of course, there is some uncertainty that comes in with the Trump election,” Kotecha said.

“The trouble with Trump is that he makes a lot of threats, but he doesn’t always follow through — or the degree to which he does follow through varies,” she added.

A spokesperson for the European Commission, the EU’s executive arm, referred CNBC to European Commission President Ursula von der Leyen’s statement congratulating Trump on his election victory when asked to comment about the prospect of U.S. tariffs.

“The European Union and the United States are more than just allies,” von der Leyen said in a Nov. 6 statement.

“Let us work together on a transatlantic partnership that continues to deliver for our citizens. Millions of jobs and billions in trade and investment on each side of the Atlantic depend on the dynamism and stability of our economic relationship,” she added.