On to Autos
June 25, 2018
Having saved the steel and aluminum industries through tariffs, President Trump has now moved on to a new victim—the domestic automobile industry. This is likely to play out very differently for a number of reasons.
First, the industry has not asked for help and does not appear to need it. 2015 and 2016 were record-setting years in auto sales. 17.2 million vehicles were sold in 2017. That was a decline from the 2016 record, but it still ranks in the top five all-time best years for the auto industry. And, as the president said in his State of the Union address, “many car companies are now building and expanding plants in the United States.”
Second, while I have long argued that a case can be made for steel being essential to our national security, the case for passenger cars does not pass the laugh test, and everybody knows it. The Pentagon may have a fleet of limos for its senior officials, but the people who actually do the work of defending us don’t depend on regular autos to do it. I know the analysts at the Department of Commerce are creative—I used to be their boss—but even they will have a hard time coming to the conclusion the president so clearly wants. How do we know what he wants? Because he tweeted his conclusion last Friday—a 20 percent tariff on European autos—without waiting for the investigation to conclude, thereby once again undercutting his own position by making clear tariffs have nothing to do with an actual finding that our security is threatened. This is a classic case of “ready, fire, aim,” which is the reverse of the way good government is supposed to work.
Third, the auto industry is a much bigger part of our economy than steel and aluminum. It is responsible for 3 percent of U.S. gross domestic product (GDP). Additionally, the 2016 American Automotive Policy Council’s U.S. economic contribution report states that “automakers, their suppliers, their dealerships, and the local businesses that support them are responsible for more than 7.25 million US jobs.” Conversely, the steel industry employs 140,000 people, and the entire primary metals industry accounts for $235.7 billion out of the $19.39 trillion GDP, which is roughly 1 percent. That means the impact on our economy and on jobs of the president’s action will be much greater than it has been in steel, and concomitantly, the foreign impact will be larger as well.
Fourth, unlike steel and aluminum, autos are an end product purchased directly by consumers. While the 30 percent increase in steel prices so far this year will no doubt affect consumer prices, it will be indirect, occur over time, and be relatively small. The 2017 average car price was slightly more than $36,000. A 20 percent tariff will increase that another $7,200 for imports. Consumers will definitely notice. Moreover, while the president may rail at Mercedes, the vast majority of imported cars are sold to regular people, many of whom simply like them better. I am currently driving a Ford Mustang (not because I anticipated the tariffs), but I confess to owning foreign cars in the past because they provided what I was looking for at the time, not because they were cheaper. And that is why the politics of autos is different from steel. People don’t usually buy steel directly for personal use. They do buy cars, and if they choose a Hyundai over a Chevrolet, their decision is not solely price based. Large visible price increases on popular cars will not be well received.
Fifth, and perhaps most important, the auto industry is the poster child for global integration. Supply chains are complex and often encompass several countries. The major companies produce in multiple locations, often to best serve local markets. BMW makes sport-utility vehicles in South Carolina and is currently the United States’ biggest exporter of cars. Daimler manufactures in Alabama. Toyota is in Kentucky, with suppliers in other states, including West Virginia. General Motors is in Mexico and China. Volvo is currently a Chinese company that just opened a plant in South Carolina. Two of our most popular pickups, the Chevy Silverado and some versions of Fiat Chrysler’s Ram, come from Mexico. (The latter has indicated it will shift production back to the United States, but that won’t happen until 2020.) A 20 or 25 percent price increase on those will hit a lot of Trump voters in rural areas hard. Ironically, one country where we have a trade surplus in autos is China, largely because of BMW exports from South Carolina. That will likely change when the Chinese retaliate.
These examples show that auto production is literally all over the map. The simplistic assumption that tariffs will prompt everybody to manufacture in the United States ignores the enormous cost in time and money of shifting supply chains and the inevitably more expensive and less efficient result of doing so.
I must admit it’s a clever tactic when taken in conjunction with what the administration is trying to do in the North American Free Trade Agreement (NAFTA). There we have been insisting on rules-of-origin changes intended to bring production back onshore, while companies have warned that rules too strict or a compliance burden too expensive will simply force them to move offshore and become importers because the normal 2.5 percent tariff is less than the increased costs they would suffer. Of course, if you increase the tariff to 20 or 25 percent you take away that option. The consequence either way is a less competitive auto industry, more expensive cars, and unhappy consumers, auto and auto parts manufacturers, and auto dealers. That will play out in the November elections and could well be the tipping point I discussed last week that causes Congress to stand up and fight back, if we have not already reached that point via the China tariffs or increasingly likely NAFTA withdrawal.
William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2018 by the Center for Strategic and International Studies. All rights reserved.