Just the Facts: Trump’s proposed 25% tariff on auto imports

Leaving aside the fact that foreign automobiles are not a threat to national security, the administration’s new tariff threat will actually hurt U.S. auto manufacturers and customers.

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On Wednesday May 23, 2018, President Donald Trump instructed U.S. Secretary of Commerce Wilbur Ross to initiate an investigation under Section 232 of the Trade Expansion Act of 1962 to determine “whether imports of automobiles, including SUVs, vans and light trucks, and automotive parts into the United States threaten to impair the national security as defined in Section 232.” The investigation is similar to the one behind the March 2018 proposed measure to impose a 25% tariff on steel imports and a 10% tariff on aluminum imports on major U.S. trading partners, from which Canada and Mexico have been excluded as NAFTA partners.  But as of April 30 the administration had decided to hold off on imposing most of the announced tariffs on imported steel and aluminum until at least June 1.

Data from the U.S. Department of Commerce (ITA) shows that U.S. passenger vehicle imports from the NAFTA bloc grew from $58 billion in 2010 to $90 billion in 2017, with imports from Canada growing from $36 billion to $43 billion and imports from Mexico growing from $23 million to $47 million. Between January and March 2018, passenger vehicle imports from Mexico stood at $11.7 billion, up from $11.3 billion during the same period in 2017.

An April 2018 report from the Center for Automotive Research shows that in 2017, total U.S. light vehicle sales reached 17.3 million units whereby total U.S. production was 11 million units, with 2.4 million of these units being exported to foreign markets. As the report states, “there is more demand for light vehicles in the United States than U.S. producers can supply.” Approximately 55% of U.S. production in 2017 was undertaken by U.S. firms (FCA, Ford, GM and Tesla) while the remaining share was accounted for by international firms with U.S.-based plants (primarily BMW, Daimler, Honda, Hyundai, Kia, Renault-Nissan, Subaru, Toyota, and Volkswagen). To meet its 2017 demand, the U.S. imported 8.7 million light vehicles, with Japan, Canada, and Mexico each contributing 11 percent of the market. Three of the four U.S. based automakers (GM, FCA, and Ford) account for more than 35% of light vehicle imports—vehicles they manufacture in plants located outside of the U.S.

The proposed auto import tariff also comes at a time when the U.S. and its NAFTA partners have stalled in negotiations ahead of the upcoming July 1 Mexican presidential election. Among the items under discussion within the NAFTA negotiations is the modification of the automotive Rules of Origin and Regional Value Content, specifically a proposal to add a requirement that at least “30 percent of vehicle’s content be produced in a country where labor earns more than the median North American wage for automotive manufacturing.”  These proposed measures would arguably limit some of the “erosion” that Secretary Ross has described as occurring in the domestic auto industry by increasing domestic production and protecting “one of America’s core industries that has long been a source of technological innovation”.

Employment data from the Bureau of Labor Statistics on the Motor Vehicle Manufacturing industry that dates back to 1990 shows that current employment levels in the sector stand at around the same level as they did back in 1990, with 1 million persons employed in the industry in 1990 and just under a million employed by the end of 2017. As a percentage of the total civilian labor force, the labor size in the motor vehicle manufacturing industry has declined considerably: in 1990, persons employed in the motor vehicle manufacturing industry represented 0.84% of the total civilian labor force while in 2017 the fraction stood at 0.59 percent.

Whether or not a U.S. Department of Commerce investigation will find that auto imports pose a threat to national security remains to be seen—though a number of experts have found the claims “laughable.” However, as opposed to steel and aluminum, two materials used in military equipment, consumer products like cars are less directly related to matters of defense.  At the same time, automakers have continuously expressed concerns over the renegotiation of NAFTA, let alone a potential 25% auto tariff. Ultimately, from a U.S.-centric perspective, additional costs on the auto industry will undoubtedly raise prices for consumers and limit U.S. auto exports by making them more expensive to produce because of costlier inputs.

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