Citing national security concerns, the Trump administration has expanded the use of tariffs for both steel and aluminum, as well as against a large swath of goods imported from China. The administration also has foreign-made automobiles and auto parts in its sights, having initiated a new Section 232 investigation into whether such imports impair national security.
“There is evidence suggesting that, for decades, imports from abroad have eroded our domestic auto industry,” said Secretary of Commerce Wilbur Ross. “The Department of Commerce will conduct a thorough, fair, and transparent investigation into whether such imports are weakening our internal economy and may impair the national security.”
The Section 232 statute the recent steel and aluminum tariffs (and proposed auto tariffs) were issued under was originally developed to cover trade that had a direct impact on national security, but the Trump administration has broadened their definition of what types of activities should fall under the security umbrella.
This is a brand of nationalist economics that you may remember from your high school history classes as “mercantilism,” and generally favors protectionist policies, according to Raj Bhala, senior advisor at Dentons U.S. LLP, speaking in a recent webinar on the Trump administration’s trade policies, hosted by the AutoCare Association. “It’s very controversial, and many economists are deeply skeptical that a trade deficit threatens national security,” Bhala says. “Instead, they say trade linkages strengthen national security.”
The current tariffs do have an exclusion process available so that countries or specific products can be excluded from the tariffs. “There is a deliberation period of 90 days or more to grant the exclusion to the company or product, but that process is not working well right now,” says Vanessa Sciarra, vice president of legal affairs for trade and investment at the National Foreign Trade Council. “Anyone who has had to deal with it is relatively frustrated.”
Steel and aluminum prices are already on the rise because of the tariffs, which is what happened when former president George W. Bush imposed similar tariffs. “When you have a tariff, you expect to see the domestic price rise up to the level of the tariff,” Sciarra says. “So you would expect to see a 25 percent increase in steel prices and 10 percent for aluminum. We’re seeing numbers higher than that, particularly for aluminum.”
The country-specific quotas on metals, likewise, distort the market because manufacturers begin ordering more material than they need in order to avoid bumping up against the quote later.
While steel and aluminum producers have supported the tariffs, manufacturers have uniformly line dup against them. One big sticking point for industry is that the steel and aluminum tariffs primarily focus on raw products (like sheet metal or rolled metal). Finished goods made of foreign steel are generally not covered by the tariffs, so U.S. manufacturers of those same products are paying a higher price for raw materials, putting them at a disadvantage compared to foreign competitors.
While the steel, aluminum and proposed automotive tariffs have drawn opposition, the Section 301 tariffs that are specially aimed at China in response to alleged IP theft and other unfair practices have been quietly supported by other countries. However, China has now levied a series of retaliatory tariffs against U.S. goods, and there are fears the conflict could escalate into a full-blown trade war. At the end of June, President Trump directed the U.S. Trade Representative to prepare a 10 percent tariff on an additional $200 billion worth of Chinese imports.
Targeting Foreign Autos, Parts
The administration’s new Section 232 investigation into automobiles is also predicated on national security concerns. “Secretary Ross has argued that imports of automobiles and auto parts have eroded the domestic industry,” says Bhala. Ross cited a number of statistics, including the that the number of imported passenger vehicles has increased from 32 to 48 percent in the past 20 years, and that employment in the motor vehicle production in the U.S. has declined by 22 percent since 1990.
According to Bhala, the administration’s position also expands how the National Security Industrial Base Regulation (NSIBR) is being used to restrict trade. They are using a new criterion that considers production by majority U.S.-owned firms as separate from that of majority foreign-owned firms. “What the administration is suggesting is that it is not enough to be made in the USA, but it also has got to be made in the USA by American firms,” Bhala says.
Bhala notes that despite the figures the administration has cited, automotive output in the U.S. has grown by triple-digit percentages since 2009, and that the decline in employment “has been probably caused not by imports, but by … automation,” he says.
NAFTA Still in Peril
The NAFTA renegotiation effort has continued against the backdrop of tariff’s, and it’s unlikely that the U.S., Canada and Mexico will reconcile their differences in time for the U.S. Congress to take any action related to whatever agreement ultimately emerges.
Canada has balked at a U.S. proposal that the treat be renewed every five years, citing potential instability that could undermine long-term agreements among trading partner companies in the three countries. Mexico also has a presidential election coming up on July 1 that will likely result in a more left-leaning administration that could fundamentally shift many of that country’s negotiating positions.
According to Cody Wood, an associate at Dentons, there are a number of possibilities if no agreement is reached. In one scenario, President Trump could pull the U.S. out of eh agreement altogether. Congress could block that measure. “If there’s no court challenge to hold things up, we would most likely see most of NAFTA stay intact,” Wood says. “There are about 40 laws that would have to be undone to take NAFTA off the books.”
It’s also possible that higher tariffs would kick in on a variety of goods. However, the U.S. has an active free trade agreement with Canada that would still hold.
Analysts believe that the uncertainty around the remaining free trade agreements, and the fact that he U.S. already pulled out of the Trans-Pacific Partnership (TPP) could lead companies that might otherwise invest in new facilities in the U.S. to look elsewhere, namely Canada and Mexico.
“They are more open to free trade agreements with other countries, so it could make more sense to have something made in Mexico to capture the quota- or duty-free market around the world,” Wood says.
“If you’re an Indian motorcycle company like Mahindra, where would you put your new plant?” Bhala says. “It makes more sense to put it in Canada or Mexico, because you get duty-free access to NAFTA for as long as there is a NAFTA, and to the EU and Japan, and you get access to the TPP members. Already, companies are starting to look to our neighbors and treat the entire U.S. as flyover country.”
Whatever the fallout, it appears Congress is not willing to do anything to block the administration’s trade policies. This spring, Republican Senators Patrick Toomey of Pennsylvania and Bob Corker of Tennessee had put forth a bill that would give Congress more say in trade decisions, but it was blocked in the Senate in June.
Subscribe to Aftermarket Business World and receive articles like this every month….absolutely free. Click here.
