Industry Voices | Automotive Trade Is a Two-Way Street

In the 18^th century, mercantilists implemented policies restricting imports and protecting domestic industries at the expense of their trading partners. Later, economists developed theories demonstrating advantages of increasing trade and lowering duties. Developed economies successfully implemented those principles after the Second World War. Result: Economic growth and trade blossomed.

Trade expansion provided U.S. consumers with lower prices and increased choices for decades. Unfortunately, the U.S. may now be entering a neo-mercantilist era under President-elect Trump. Trade disruptions are certain if Trump’s recent duty proclamations become policy. Duties of 25% on all imports would be inflationary, hurt economic growth and disrupt important global alliances.

U.S. Light-Vehicle Export Disruption

There have been articles written recently about the potential impact of increased import tariffs on U.S. light-vehicle sales and the parts supply chain. The disruption could be substantial, especially if the duties are applied to imports within the USMCA free trade zone.

Very few pieces have discussed the potential impact on U.S. vehicle exports. U.S. vehicle exports are important to overall production levels, and part of a two-way trade ecosystem. Given the current state of vehicle sales in Europe, coupled with a wave of global protectionist sentiment, U.S. tariffs of 25% would result in countermeasures from major trading partners.

Last year, the U.S. exported 1 million vehicles to countries other than Canada and Mexico, or $42.9 billion (Figure 1). The United States’ top six trading partners consumed half of that, equal to what Canada and Mexico purchase. In total, significant American jobs would be at risk if Europe and other major trading partners apply an equivalent amount. Seven states export 70% of U.S. vehicles sold across the globe (Figure 2) and plants in those states would face the largest potential labor disruption.

Applying 25% duties on Canadian and Mexican vehicle imports would be a disaster and violate the existing USMCA trade agreement. Again, a violation of this magnitude would meet with countermeasures and put additional American jobs at risk – at OEMs and suppliers.

Import Disruption and Faux Protectionism

Would duties of 25% on all vehicle imports boost American employment? Short answer: No, just the opposite. U.S. vehicle prices would go up, and consumers would endure the increase. Importantly, consumers would also face higher prices on domestic vehicles as U.S. plants would take advantage of the increased protection and raise their prices beyond what they could achieve in a low-tariff environment.

Assuming overall light-vehicle prices increase 20% next year, then U.S. sales volume produced in the United States would decline by 1.5 million units, equivalent to five assembly plants. This would come at a time when manufacturers are increasing U.S. assembly capacity into an overcapacity environment. Ironically, the near-term supply chain disruptions would not be dramatic as you cannot change them overnight. Parts would just become more expensive, adding cost pressure.

Regional trade agreements enhance trade among all members, with each country exporting products where they have a competitive advantage. The USMCA agreement has done just that. Renegotiating the agreement is the right of all participating countries. Destroying it is not the sole purview of the U.S. Disrupting that agreement over non-trade issues is irresponsible. Negotiating on social media limits policy flexibility.

Applying higher tariffs to Chinese vehicle imports is a different story. With 50 million units of capacity, far more than required to supply their domestic sales of 25 million, China has implemented an industrial policy intended to destroy western companies.

High tariffs are intended to counter unfair trade practices, dumping, or in cases of a national security threat. If the Trump Admin. wants to counter the national security threat that China poses, then put tariffs on Chinese vehicles. Putting tariffs on products imported from our major trading partners could have significant unintended consequences, increase cost and stifle American innovation.