Tariffs Questionable Remedy for U.S. Trade Deficits

It is not clear what exactly the Trump Admin. hopes to accomplish by threatening tariffs on imported cars and trucks. It is not even clear if the threat is meant to be more than a negotiating ploy to win concessions on other goods and services, both imports and exports.

What is clear is that the administration has launched a trade war with Canada, Mexico and the European Union by imposing tariffs on imported steel and aluminum and separately, with China, by targeting more than 1,000 products ranging from industrial machinery to aircraft engines. China, as expected, responded by targeting hundreds of U.S. export items including soybeans, whiskey and cars.

Japan and South Korea have been more restrained in their response to President Donald Trump’s (below, left) steel and aluminum tariffs, indicating, for the moment, their preference to resolve the dispute through the World Trade Organization.

What also is clear is that all major automakers, either independently or through industry groups such as the Japan Automobile Manufacturers Assn.; ACEA, the European automobile manufacturers’ association; and the U.S. Original Equipment Suppliers Assn., have challenged the premise of the U.S. Commerce Dept.’s Section 232 investigation into automotive imports being a national security threat.

That said, the U.S. is right to be concerned about the size of the trade deficit in automobiles and parts, which in 2017 grew to a record $194.8 billion, including $77.1 billion in trade with Mexico, also a historic high. Total automotive trade – combined imports and exports – grew to a record $504.5 billion during the year, according to U.S. government statistics.

The question is: What do the numbers mean, and who will be hurt most?

Mexico, for instance, accounted for nearly 40% of last year's automotive trade deficit. Yet, slightly more than half of Mexican vehicle exports to the U.S. were produced by subsidiaries of General Motors, Ford and Fiat Chrysler, which means an estimated 1.4 million cars and trucks exported were “American,” according to Asociacion Mexicana de la Industria Automotriz (Mexican Automotive Industry Assn.). More than three-fourths of those were fullsize SUVs and trucks.

Mexico, now the world's seventh-largest auto-producing country, exported 2.3 million vehicles to the U.S. in 2017, according to the association’s database. It was followed by Canada, Japan, South Korea and Germany, respectively at 1.9 million, 1.8 million, 900,000 and 500,000 units.

The imbalance in automotive trade between the U.S. and Japan, South Korea and Germany stood at $33.6 billion, $21.9 billion and $21.2 billion, respectively, U.S. government statistics show.

In the case of Canada, because of its historically close cross-border ties with the U.S., the imbalance was only $1.2 billion, with Canada posting a $16.7 billion surplus in vehicles and a $15.5 billion deficit in parts.

A 25% tariff on cars and trucks certainly would force global automakers to raise prices on their imported cars and, over time, invest in new capacity in the U.S. That might or might not be good for traditional U.S. automakers and their suppliers, considering the consequences of the transpacific migration of Japanese and Korean OEMs and their supply base beginning in the 1980s and later the transatlantic migration, mostly of German OEMs, from the 1990s beginning with BMW in South Carolina.

But it will take time, and will be costly because facility investments generally take place when full-model changes or new-model launches occur.

A simple calculation: Add 25% to the sticker price of a Mexican-built Chevrolet Silverado 2500 or Ram 2500 truck, the two top export models to the U.S., and the price rises to an estimated $50,000, from approximately $40,000 at present, after rebates and incentives. Add 25% to a Ford Fusion, produced by Ford México in Hermosillo in northwestern Mexico, and the price goes from $22,000 to $27,500.

The Georgetown, KY-built Toyota Camry, in the Fusion class, lists for $21,000 after incentives. Other competing models – the Honda Accord, Nissan Altima, Hyundai Sonata and Kia Optima, all built in the U.S. – are similarly priced.