How Will the Trump Tariffs Impact the Auto Industry?

By: Bridget Clerkin April 13, 2018
The auto industry will be impacted by the Trump administration's new tariffs, from building parts to selling vehicles to the Chinese market.
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As a candidate, Donald Trump campaigned heavily on trade reforms, and just over a year into his run as President, he’s making good on those promises.

Last month, Trump ordered stiff and sweeping tariffs on a number of products shipped into the country, most notably steel and aluminum. The economic policy essentially acts as a tax on products sent in from overseas, with the new plan setting that price at 25% for steel imports and 10% for aluminum.

In signing the order, Trump said the move was one of national security, citing a recent Commerce Department report that determined too much cheap metal has flooded the market and threatens to ruin the American industrial base.

The U.S. is the world’s leading steel importer, shipping in 27 million metric tons of the stuff in 2017. And imported aluminum—at nearly 7 million metric tons last year—represents about 90% of America’s consumption of the metal. Imposing the tax will thin out foreign competition, allowing domestic production of such products to flourish, some economists argue.

Still, many are worried that the tariffs will impose their own harm to the U.S. economy, with the levy’s additional costs likely passed on to domestic purchasers of the goods and eventually consumers. Relying in no small way on the easy availability of the metals, car manufacturers are particularly susceptible to any creeping costs.

The trade taxes have also strained the relationship between the U.S. and China—a prominent importer of American-made cars—with threats of retaliatory tariffs on behalf of the Asian giant also poised to hurt vehicle production at home. The new policy has only officially been on the books since late March, and the full extent of its effects have yet to be felt, but it’s already been subject to speculation—and skepticism—by many in the auto industry and beyond.

Steeling Themselves

Indeed, the Commerce Department report referenced by Trump found that American steel and aluminum producers have taken heavy hits over the years, with the steel industry shedding 35% of its jobs since 2000 and employment in the aluminum sector falling by 58% between 2013 and 2016 alone.

Still, many prominent voices in the automotive world argue similar unfortunate trends could be passed on to their industry in the wake of the tariffs, including Matt Blunt, president of the American Automotive Policy Council, an advocacy group for the "Big Three" U.S. manufacturers: Ford, General Motors, and Fiat-Chrysler.

Matt Blunt, president of the American Automotive Policy Council.

“We are concerned with the unintended consequences the proposals would have, particularly that it will lead to higher prices for steel and aluminum here in the United States, compared to the price paid by our global competitors,” Blunt said in a statement released shortly after the tariffs were approved. “This would place the U.S. automotive industry, which supports more than 7 million American jobs, at a competitive disadvantage.”

Also at risk of an economic backlash is the U.S. auto parts industry, which creates the individual components of a vehicle and employs some 880,000 people. Many of the industry’s final products rely on specific types of steel and aluminum imported from overseas, and many members of the workforce are doubly threatened by the relatively small size of their specialized operations, said Ann Wilson, senior executive of the U.S. Motor and Equipment Manufacturers Association, which represents the industry.

“The smaller suppliers are the ones at risk because they can’t pivot and they can’t move their businesses,”she recently told Reuters. “They may not be able to absorb this kind of cost. It’s not as simple as saying we’ll just make that specialty steel here.” Still, increasingly hostile attitudes toward the tariffs overseas could pose an even bigger problem.

The Empire Strikes Back

A BMW plant in Spartanburg, South Carolina, sends more than 100,000 vehicles yearly for export to China. The future of that business could be in doubt with new Chinese tariffs in place.

With China bearing the brunt of the hefty new tariffs—nearly 1,300 Chinese goods, worth about $50 billion annually, will face an import tax of 25%—the U.S.’s largest global economic competitor has responded in kind, raising a 25% tariff on 106 American products, also worth nearly $50 billion per year.

The retaliatory tactic touches on a number of U.S. goods but could be particularly damning for the auto industry, which sends $11 billion worth of automobiles to the country annually.

China imports nearly 270,000 vehicles from the U.S. yearly, including 70,000 from Ford, 30,000 from General Motors, and an estimated 15,000 from Tesla. A number of foreign-badged vehicles are also sent to the Asian nation from America, including more than 100,000 BMWs manufactured at the company’s massive South Carolina plant.

Still, the American-made autos make up just a fraction of the 1.2 million vehicles imported by China each year, giving the country plenty of room to withstand any dampening of shipments of cars from the U.S.

But it isn’t all bad news for the industry.

In at least one beneficial twist, the policy could halt some domestic carmakers’ ideas to take their production abroad in search of cheaper manufacturing costs, including a plan by Ford to build its new Focus in China, which the company said would save it $500 million. And if its president, Xi Jinping, is to be believed, the Asian nation may already be backpedaling on the tariff tit-for-tat.

Olive Branches?

At the annual Boao Forum for Asia, a yearly conference touting financial policies in the region which was held earlier this month, President Xi Jinping surprised many attendees when he announced plans to lower import charges on foreign cars.

The move, which Xi said would be made before the end of the year, drew nearly instantaneous support from President Trump, who tweeted that he was “very thankful” of Xi’s “kind words on tariffs and automobile barriers” and announced that the two would “make great progress together!”

Still, even as the news made its way West, a twin plan was announced that could derail any future cooperation derived from the tariff announcement.

Beijing filed a case against the U.S. with the World Trade Organization, requesting 60 days of dispute consultations with America regarding the steel and aluminum levies. China argued that the U.S. failed to prove cheap imports of the metals were hurting domestic producers or responsible for threatening national security, and the country could seek monetary compensation through the measure. It remains to be seen how that dispute will unfold and how it could further impact the problems facing the auto industry, but one thing seems certain: the tangle over tariffs could take months—or years—to smooth over.

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