Tariffs Making Global Auto Market Uncertain

COMMENTARY International Economies

Tariffs Making Global Auto Market Uncertain

Jan 23rd, 2019 2 min read
COMMENTARY BY
Tori K. Whiting

Jay Van Andel Trade Economist

Whiting provides the conservative true north on free trade through her research and writing.
Workers prepare for a demonstration featuring the new 2020 Ford Explorer at the North American International Auto Show (NAIAS) at the Cobo Center on January 15, 2019 in Detroit. Scott Olson / Staff/Getty Images

Key Takeaways

The Trump administration's high tariffs and trade barriers have significantly hurt America's automotive industry.

The new USMCA, the trade agreement between the United States, Mexico, and Canada, may increase regulations even more.

The money saved by the Trump administration's tax cuts was in the case of Ford less than half of what the company payed due to the new tariffs.

Car manufacturers at the annual North American International Auto Show in Detroit are undoubtedly looking forward to warmer temperatures at the next one, which will be held in June 2020. Unfortunately, it will take more than a scheduling change to heat up business, which has been taking a hit lately from the White House’s trade policy.

Automakers worldwide, and their suppliers, are best positioned to succeed when barriers to business are low. The Trump administration has made lowering corporate tax rates and eliminating burdensome regulations cornerstones of its agenda. These moves give businesses the ability to plan for the future, while allowing them to focus their resources in growing their business rather than complying with excessive government intervention.

The same cannot be said for the administration’s work in the area of trade policy.

The impacts of high tariffs and non-tariff barriers are similar to those of high taxes and regulations. They distort markets and supply chains, and force businesses to make tough capital expenditure decisions.

For example, President Trump last year imposed tariffs on steel and aluminum imports from nearly all countries. Following those tariffs, the domestic price of steel spiked and automakers in America are paying the price, even if they primarily source their steel in the U.S.

In September, Reuters reported that the steel and aluminum tariffs had cost Ford Motor Company as much as $1 billion in profits. Honda, which supports more than 31,000 American jobs, is facing ‘“hundreds of millions of dollars’ in additional costs” due to the tariffs. GM also revised its earnings forecast down roughly $1 billion due to the increased price of steel and currency fluctuation in South America.

In case higher commodity prices were not enough to increase uncertainty for automakers, the last two years have also included potential changes to America’s trading relationship with Canada and Mexico. The new United States-Mexico-Canada Agreement (USMCA) contains provisions that increase the rules of origin requirements for automakers, as well as add new minimum wage and steel and aluminum content rules. The fate of the USMCA still remains uncertain this year.

Perhaps the most troubling case of uncertainty today, however, is the trade war with China. In 2018, the U.S. imposed tariffs on $50 billion worth of goods from China. Included in the list of items were scores of automotive products. In retaliation, China increased its tariffs, including those on automobiles from 15 percent to 40 percent. The trade war has continued to escalate, totaling over $250 billion in trade between the two countries. As with the steel and aluminum tariffs, automakers in America are paying the price.

There is one final trade cloud on the horizon for automakers in America. The Trump administration is also considering additional tariffs on automobiles and parts of up to 25 percent. A recent study found that these tariffs could increase the price of an imported car by $6,400, and the price of domestically produced vehicles with imported components would also go up. President Trump must make a decision on these additional tariffs by late May.

New trade barriers are threatening to cause more harm than the benefits of tax and regulatory reform. Bloomberg reported that “Ford saved about $208.4 million in taxes in the first quarter [of 2018] … the steel and aluminum tariffs will cost the automaker about $509 million.”

The automakers showcasing in Detroit this week are weathering trade impacts on nearly all fronts, and the true impact of the billions of dollars in additional tariffs is difficult to measure in the short term. What automakers do know is that their costs are increasing each day and their ability to know what the future will bring is becoming more and more uncertain.

This piece originally appeared in The Detroit News