Investors have been edgy about President Trump’s trade dispute with China. But there’s another trade threat that’s going to flare soon: The possibility of new tariffs on nearly $200 billion worth of automotive imports, which would kill jobs and send car prices soaring if Trump imposes them.
Last year, Trump directed the Commerce Department to investigate whether automotive imports pose a threat to national security, with a report due no later than Feb. 17 of this year. If the report finds cause for concern—as everybody expects—it would give Trump the authority to impose tariffs within 90 days. And he has already proposed a 25% tariff on imported autos.
The premise is ridiculous: Nobody in the national-security business thinks imported cars are a threat. But the threat of tariffs is leverage Trump feels he needs to strike better deals on trade with Europe, Japan and China. Trump, for instance, wants those nations to lower their own tariffs on imports from America and make it easier for U.S. firms to enter those markets.
If Trump did impose the tariffs, it would immediately hit the economy. “A 25% tariff could lead to a decline in sales volume larger than what a recession would produce,” says Jonathan Smoke, chief economist at Cox Automotive, owner of Kelley Blue Book and other services. “It could be autos that create the next recession.”
Even if Trump is bluffing, the threat of tariffs could punish shares of General Motors, Ford and other automakers until the fight subsides. At this year’s Detroit auto show, Bob Carter, head of Toyota North America, told Yahoo Finance a 25% tariff on imported autos and auto parts would add $1,800 to the cost of a Camry sedan—even though Toyota builds the Camry in the United States with many American components. “Consumers are the ones who pay those taxes,” Carter said. “Tariffs on automotive parts would suppress this industry.”
Affecting decision-making
Tariffs are already distorting automotive decision-making. Last year, Ford canceled plans to import the Focus Active compact from China to the United States because of the new tariffs Trump has already imposed on Chinese imports, which include cars and car parts. Trump wants companies to build such products in the United States, but Ford can’t make a profit on a low-margin economy car if it builds it here. So it won’t offer the compact in the U.S. market at all. “We had a great plan to have a Focus Active here in the U.S.,” Ford executive vice president Jim Farley told Yahoo Finance in Detroit. “Customers aren’t going to pay for a tariff in the U.S.”
Trump’s auto tariff probably wouldn’t apply to imports from Mexico and Canada, as long as Congress ratifies the new trade deal the three countries inked last year to update the old NAFTA agreement. That would leave around $103 billion worth of new-car imports from the rest of the world, and about $77 billion worth of parts, according to 2017 figures. The Center for Automotive Research says a 25% tax on auto imports from all countries except Canada and Mexico would raise the average cost of a car by $2,450. There would be more production in the United States, as Trump wants, but total auto sales would fall by about 1.2 million units per year, because of higher prices. On net, that would kill 197,000 jobs. And if the tariffs did apply to imports from Canada and Mexico, the economic damage would more than double.
Some auto executives think Trump is more likely to bluff on tariffs than to actually impose them, using the threat as leverage to get concessions from Europe, Japan and China. Trump and his top trade negotiator, U.S. Trade Representative Robert Lighthizer, could ask for the European Union, for instance, to lower its tariff on U.S. imports, since Europe charges a 10% tariff on imported cars but the U.S. tariff is only 2.5%. They could demand better access to the Japanese market, which is essentially closed to American cars. And the threat of auto tariffs would add to the pressure on China, which is already fighting a second battle with Trump over reforms he wants.
There’s also the chance that Tariff Man, as Trump famously calls himself, could go through with the auto tariffs, if only because he believes—against the advice of nearly all mainstream economists—that tariffs foster more home-grown employment. Some trade experts thought Trump would repeal the steel and aluminum tariffs he imposed last year, or at least exempt Canada and Mexico, once he got a renegotiated NAFTA. But he hasn’t, even though higher costs are costing automakers billions.
Trump’s latest tariff gambit comes as forecasters expect auto sales to taper off in 2019, after several years of record sales. GM just announced it’s closing five plants, and other automakers may cut back as well if sales slow as expected. Tariffs would force automakers to hit the brakes harder. Buckle up.
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Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman