Tariffs, NAFTA hang over auto industry

June 19, 2018
According to industry associations, U.S. tariffs – which are designed to address trade imbalances and increase onshore manufacturing – could potentially raise consumer prices and lead to domestic job cuts.

Trade associations representing auto manufacturers, suppliers, and aftermarket businesses testified before Congress in May to oppose new tariffs on steel, aluminum, and goods imported from China. According to the associations, the tariffs – which are designed to address trade imbalances and increase onshore manufacturing – could potentially raise consumer prices and lead to domestic job cuts.

At the same time, ongoing negotiations with Mexico and Canada could lead to significant changes to the NAFTA free trade agreement, which would directly impact the automotive parts supply chain.

“We are seeing an administration that is committed to revamping our trade and the way we operate on trade as a country,” says Ann Wilson, senior vice president of government affairs for the Motor & Equipment Manufacturers Association (MEMA), which opposes the tariffs. “This is going to impact our members who have a global footprint, or who have customers with a global footprint, as well as those who manufacture domestically but depend on suppliers with a global footprint.”

The Trump administration has already imposed one set of tariffs: the Section 232 tariffs on steel and aluminum imports. A number of countries have been given exemptions. In the case of the European Union, Canada and Mexico, those exemptions are temporary and pending further trade negotiations. Other countries, like South Korea, have negotiated permanent exemptions while agreeing to quotas on exports.

The proposed Section 301 tariffs, on the other hand, target a still-growing list of products imported from China. Those tariffs were spurred, in part, by a combination of the growing trade deficit with China, theft of intellectual property in China as a result of technology transfer requirements, and China’s dumping of steel in the global market.

“I very much appreciate the Trump Administration[‘s] … efforts to push back against unfair Chinese trade practices by placing tariffs on products that receive substantial benefit from illegal technology transfers or the Chinese government’s manipulation of commerce,” said U.S. Senator Lindsey Graham (R-South Carolina). “It is not too much to ask for China to stop stealing intellectual property and open up their markets that are closed due to heavy-handed Chinese government barriers to foreign business enterprises.”

U.S. automakers and parts suppliers oppose both sets of tariffs, because they will negatively affect their complex international supply chains.

Response in other industries has been mixed. Raw material suppliers like those in the U.S. steel and aluminum, textile, and fishing industries support the tariffs, while heavy finished goods importers like retailers, oil and gas companies, manufacturers, etc. have opposed them.

In March, 45 trade associations sent a letter to the White House arguing against the Chinese tariffs. The Auto Care Association, one of the signatories, warned in the letter that the tariffs would trigger a “chain reaction of negative consequences for the U.S. economy, provoking retaliation; stifling U.S. agriculture, goods, and services exports; and raising costs for businesses and consumers.” 

“There’s not a lot of disagreement about the problem,” Wilson says. “We do have a disagreement about the tools used to address the problem. Tariffs will limit our ability to be competitive.”

Since the steel and aluminum tariffs went into effect, the Commerce Department has received more than 8,200 exemption requests from companies that rely on imported foreign metals.  Every single item made with foreign metal requires an individual filing (even for the same item in different widths and lengths).

The exemption process is extremely lengthy, as domestic steel and aluminum producers have 30 days to file an objection to any public application, and the government has 60 days to make a final ruling. In the meantime, companies may find themselves short of parts or raw materials.

Even with an exemption, supply won’t be guaranteed indefinitely. “It’s important to remember that the exemptions from the tariff will include quotas on how much steel and aluminum can be brought in,” Wilson says. “It’s not a matter of reaching the quota and then paying the tariff; that won’t be allowed. That’s why we’re seeing companies applying for product exclusions with the Department of Commerce.”

“These proposed tariffs on steel and aluminum imports couldn’t come at a worse time,” said Cody Lusk, president and CEO of the American International Automobile Dealers Association (AIADA). “Auto sales have flattened in recent months, and manufacturers are not prepared to absorb a sharp increase in the cost to build cars and trucks in America. The burden of these tariffs, as always, will be passed on to the American consumer. Car shoppers looking for a deal will instead find that they are paying a new tax to transport themselves and their families.”

As many tariff opponents have pointed out, many of the items on the list can’t be easily obtained or manufactured domestically, if at all. "Our members report that a number of products included on the tariff list cannot be sourced in the U.S. as there are no U.S.‐based factories producing some of these products,” says Aaron Lowe, Auto Care Association senior vice president of government and regulator affairs, who testified at recent hearings on the Section 301 tariffs. “At the same time, minimal alternative sources exist, as China is the primary supplier to the world. Therefore, we do not see any benefits to the U.S. economy or U.S.‐based manufacturers when imposing tariffs on these products, as sourcing would just shift to low‐cost countries and would not alleviate the overall U.S. trade imbalance."

The administration has also proposed a 20 percent tariff on imported cars in an effort to encourage domestic production by foreign automakers. The tariff was brought up during a meeting with automakers on emissions standards. The administration is currently in talks with California regulators about harmonizing the state’s more stringent environmental rules with the Trump administration’s roll back of Obama-era emissions standards.

The president threatened a tariff increase if the EU retaliated against U.S. duties on steel and aluminum, but such tariffs may violate World Trade Organization rules. 

NAFTA Reaches Deadline

The ongoing NAFTA renegotiations have also made the international trade picture more challenging for automakers and suppliers. The administration had hoped to wrap up talks by May 17 so that Congress could vote on any proposed changes, but the deadline came and went without a deal.

U.S. demands for higher North American and U.S. content in vehicles were an ongoing sticking point for Mexico and Canada. Under U.S. demands as of this writing, regional content could rise from 62.5 percent to 75 percent. The U.S. also wanted to require wages at auto plants to be $16 an hour or higher.

According to the Center for Automotive Research, those high content requirements would exclude anywhere from 25 to 87 percent of vehicles currently sold in the U.S. from NAFTA tariff preferences, raising prices by hundreds or thousands of dollars per vehicle. 

Higher vehicle content percentages may lead some manufacturers to simply pay the tariffs and source parts from lower cost Asian countries to offset the costs. Ironically, that would actually displace more American jobs.

In addition to the direct impact on the automotive sector, a NAFTA collapse would have effects on the overall economy that could also depress auto sales. According to a report by A.T. Kearney and the Food Marketing Institute, retailers could lose up to $15.8 billion, resulting in job losses in that sector of as many as 130,000. Higher prices (the result of new tariffs on imported goods) would result in a $39 billion drop in retail sales.

The degree of uncertainty around tariffs, exemptions, and exactly what NAFTA will look like moving forward is already proving disruptive in a number of industries that rely on imported metals. EU officials are supportive of the Trump administration’s admonishment of China’s trade practices, but vexed by the continued threat of tariffs. 

At MEMA, Wilson says that members would like to see a more coordinated international effort to address the real trade issues that exist with China. “We want to make sure we have adequate resources to enforce existing laws, and that members can adequately protect IP before it leaves the country,” Wilson says. “We want to work with trading partners around the world to make sure we exert the right influence on China to stop these practices. It isn’t just happening to the U.S. suppliers, but all suppliers.”


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