By any measure, 25 percent auto tariffs will cost Americans dearly

By any measure, 25 percent auto tariffs will cost Americans dearly
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In the interest of protecting national security and strengthening the U.S. economy, the Commerce Department is considering imposing an additional tariff on U.S. imports of automobiles and automotive parts.

According to the Center for Automotive Research’s (CAR's) latest trade briefing, applying a 25-percent tariff on all automobile and parts imports would result in 2 million fewer U.S. vehicle sales, 715,000 fewer U.S. jobs and nearly $60 billion in lower U.S. economic output.

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The policy would increase the price of the average vehicle sold in the United States an average of $4,400 (including both domestic and imported products). Prices of U.S.-built vehicles would rise an average of $2,270 due to the share of imported parts content in vehicles built in this country.

 

These immediate economic outcomes run counter to the goal of promoting U.S. automotive manufacturing. The final economic impact of additional automotive and parts tariffs would likely be even worse since CAR’s estimates do not include the effects of any likely retaliatory tariffs from U.S. trading partners.

The 25-percent tariff on pickup trucks will not have the same result when applied to cars. The current tariff on imported cars and parts is 2.5 percent, and the tariff on imported pickup trucks and cargo vehicles is 25 percent.

To some, the high truck tariff may seem to be a very compelling trade policy to drive more vehicle production into the United States — but the case is not generalizable.

Yes, the non-North American Free Trade Agreement (NAFTA) import share of vehicles classified as trucks and cargo vehicles was virtually zero in 2017, but over half of all vehicles classified as cars were imports.

Automakers build nearly all trucks and cargo vehicles sold in the United States in the U.S., Canada and Mexico, and full-size pickup trucks are an almost uniquely North American vehicle that automakers do not produce elsewhere.

On the other hand, automakers produce nearly identical cars and car-based products in many factories around the world. These car-based vehicles share the same architecture and the same global supply chain.

Unraveling and re-sourcing the supply chain to increase the U.S. content of car-based vehicles is a costly endeavor and not one the automakers and suppliers are likely to undertake for a short-term trade policy change.

Building new automotive capacity is extremely costly and not warranted by demand conditions in the current U.S. market. It is important to remember that overcapacity in the U.S. market was a factor that led to the automotive crisis during the 2007-2009 recession.

A new automotive assembly plant costs over $1.5 billion, and it takes about three years from the time an investment decision is made to when the first new vehicle rolls off the line. Once built, an auto plant’s productive life is measured in decades.

Automakers are understandably cautious when making large and long-lasting bets on future U.S. automotive demand. Caution is also warranted since automakers and suppliers have been able to fulfill peak U.S. light-vehicle demand with the existing production footprint.

Most forecasts call for the market to plateau below the 2016 peak U.S. sales level — barring any economic or geopolitical shocks.

The vast majority of automakers and suppliers in the United States are currently running above 80-percent capacity utilization — the threshold the Commerce Department considered “healthy” when conducting similar investigations into national security threats posed by steel and aluminum imports.

Finally, the “available” U.S. vehicle capacity is not all that available. Some plants are off-line retooling for new models, and nearly half of the current underutilized assembly capacity is dedicated to producing sedans, a vehicle style that is no longer as popular as it once was. 

The proposed U.S. import tariffs will hurt the United States economy more they will harm our trading partners. Automotive manufacturing is highly integrated in the NAFTA region. As Canada’s former Minister of International Trade François-Philippe Champagne recently remarked, “We don’t just sell to each other — this is kind of a unique relationship in the world…we make things together.”

More than half of all U.S. automobile imports (52 percent), and nearly half of all U.S. automotive parts imports (48 percent) come from Canada and Mexico. Canada and Mexico also comprise 54 percent of U.S. automobile exports and 71 percent of parts exports.

A vehicle made in Canada or Mexico is much more likely to have a U.S.-built engine, transmission or other parts and components content than a vehicle imported from a non-NAFTA country.

While the United States is the largest automotive trading partner for Canada and Mexico, both countries have pursued free-trade agreements that allow their automakers to reach roughly half of the global new-vehicle market tariff-free.

In contrast, U.S. free-trade agreements only enable U.S.-based automakers to reach 9 percent of the global market for new cars and trucks without tariffs. Mexico has already increased its non-NAFTA exports from one-in-five vehicles to one-in-three vehicles in just the past four years.

Canada and Mexico are also parties to the signed, but not yet ratified, Comprehensive and Progressive Agreement for Trans-Pacific Partnership. The United States’ closest trading partners — and allies — are benefiting from expanded global trade.

The U.S. automobile and parts industries will not be competitive in the global marketplace if they are hobbled by higher steel, aluminum, parts and component prices due to the United States’ protectionist trade policies.

Kristin Dziczek is vice president of the non-profit Center for Automotive Research, an organization based in Ann Arbor, Mich. that conducts research, forecasts trends, develops new methodologies, and advises on public policy.