Tariffs to Make America Safe Again? Hogwash!

National security of the U.S. is important. Our military stays on high alert, and law enforcement vigilant, when protecting the country. However, increasing tariffs on Mercedes E-Class Cabriolets should not be part of the government’s security toolbox.

The Trump Admin. is threatening to impose a 20% duty on imported European vehicles. Presumably, to make America safe again. Trouble is, no real analysis has been put forward to support this very weak argument. Seems they are still studying the issue from some remote location in a Montana bunker.

The country deserves some better policy rationale on this one. Displaying data to support a policy argument is important. Ross Perot did it on television effectively during his 1992 presidential campaign – showing charts and graphs to support his position. Steven Rattner, American financier, explains economic data on MSNBC’s “Morning Joe” better than anybody on television today – with data charts.

The analysis in this article takes a page out of their book – with some data. Sales of U.S. imported light vehicles from 2004 to present are shown below. In 2004, when the economy was growing at 3.8% and full employment reigned, imported vehicles captured 20% of the light-vehicle market.

In 2018, imported light-vehicle sales will capture about 23% of the market. This is up three points from 2004 levels, but nothing that would suggest a national security threat. In fact, the percentage is relatively low given the level of vehicle tariffs over the last few decades.

Consequently, foreign share gains have come from local production. Foreign manufacturers have already executed a strategy that primarily builds vehicles in the regions where they sell them.

European manufacturers have adopted this investment strategy, although not as extensively as Asian brands. European brands will make up about 28% of import sales this year, or about 1.07 million units.

This level is roughly equal to the amount they build in the U.S. Over 95% of these European imports are luxury brands, where the top four vehicles sell fewer than 60,000 annually. Hardly a national security danger.

Well, what happens if tariffs are imposed on European brands? Overall, there would be marketing and pricing distortions in the luxury segment.

In the most likely case, the tariff increase would drive price increases across all luxury brands, with the Asian and Detroit Three brands taking advantage of a competitor’s tariff penalty to gain more margin. The effect on U.S. production likely would mean 120,000 additional units and 2,500 more jobs, based on estimates from WP Browne Consulting.

Honestly, while luxury consumers in Fairfax, VA, and the Hamptons can certainly absorb the lease-price increase (manufacturers would also absorb some of the change in margin) there would be deterioration in imported volume and some minimal improvement in U.S. production.

In another scenario, if there were European price increases without any competitive move, then BMW intenders would move predominantly to imported Lexus and Infiniti products, and not to Lincoln or Cadillac.

Thus, the best-case U.S. production increase is about 45,000 units, or 1,000 jobs through 2020, based on our estimates. Both of these scenarios, while good for employment, are highly disruptive.

More importantly, the level of foreign automotive investment in the U.S. works against the national-security argument.

Let’s bring in some data to demonstrate the point. Looking peak-to-peak, U.S. auto production has not deteriorated despite significant market changes since 2000. U.S. output has leveled at about 12 million units through 2020, the same as 2000.

Additionally, the number of automotive plants in the U.S. will grow to 69 by 2020, based on the current AutoForecast Solutions/Wards Intelligence forecast. The level of U.S. assembly capacity has grown by six plants since 2000.

A significant portion of the plant additions are due to Asian foreign direct investment.

However, there also has been a sizable increase in European production, which has grown in the U.S. to 1 million units and eight plants, a performance level that would at least question the rationale for tariffs. (Remember, these production plans were put in place prior to the current tariff saber-rattling). What is the government thinking?

There are always unintended consequences when tariffs are imposed. The infamous “Chicken Tax,” a 25% duty levied on imported trucks in 1964, resulted in cost distortions by having manufacturers, including the Detroit Three, modify products to circumvent the law.

These production distortions ultimately increased U.S. (and Mexico) labor content among imported knock-down kits.

Today, there are very few imported light trucks that have the 25% duty applied. Mission accomplished.

A permanent 20% duty on European imported vehicles ultimately would result in more local production, but at a slow pace. Imported Asian luxury brands, approximately 400,000 units, have a strong presence in the market, providing European shoppers with competitive alternatives.

Government officials may understand this and are really testing the waters for tariffs on all imports, including those from Mexico and Canada. That scenario would produce catastrophic results for the automotive industry.

The justification for increased tariffs is dubious. The U.S. faces significant national-security issues moving forward. Tariffs on European luxury brands won’t solve any of them.

Warren Browne is adjunct professor of International Trade and Economics at Lawrence Technological University. He is a former GM executive.