Escalating tit-for-tat trade war tariffs applying pricing pressure to global aftermarket suppliers

Aug. 2, 2018
Reflecting on a worldwide network of intertwined supply chains and sales channels, aftermarket executives are assessing both the direct impacts and collateral damage of President Donald Trump’s tariff-induced trade war salvos being directed at friends and foes alike.

Reflecting on a worldwide network of intertwined supply chains and sales channels, aftermarket executives are assessing both the direct impacts and collateral damage of President Donald Trump’s tariff-induced trade war salvos being directed at friends and foes alike.

Under America’s Section 232 national security codes a U.S. Department of Commerce investigation has also been implemented, delving into how the entire international automotive industry relates to the country’s domestic economic interests.

“We must put American workers first,” says Trump in justifying the tariffs, emphasizing a long-held belief that other nations are taking unfair advantage of us– as in the U.S. Yet he appears to be steadfastly disregarding the nature of the nation’s reliance on global trade avenues.

A barrage of personal insults accompanied by tariffs of 25 percent on steel and 10 percent on aluminum imposed against our G-7 Summit allies – Canada, France, the United Kingdom, Germany, Japan and Italy – along with the 28 countries comprising the European Union, plus Mexico, have resulted in tit-for-tat talk of retaliatory tariffs from the aggrieved governments.

China, too, is engaged in an exchange of financial fusillades with the United States.

“There are too many variables right now to accurately assess the ramifications, but they do range from minimal to punitive and destructive,” according to Aaron Lowe, senior vice president of regulatory and government affairs at the Auto Care Association. “The Administration does not appear to be interested in slowing down its confrontational approach to our allies. It is unclear at this point whether this strategy will benefit U.S. companies or result in a trade war that could have negative implications for the global economy. There will be companies that will be directly impacted by the tariffs that the President has imposed on China and may impose as a direct result of the Section 232 automotive and auto parts investigation.”

Results of the far-reaching Dept. of Commerce probe are not due until February 2019.

“We are also concerned about the impact of any retaliatory tariffs that might be imposed by our allies or China,” says Lowe. “Further, it is hard to think of any automotive parts that will not ultimately be impacted by higher steel and aluminum prices as the global market reacts to the 232 tariffs. We are struggling to understand the national security implications of the auto and auto parts trade with some of our strongest allies,” he elaborates. “Until we have more details as to what products will be covered it is very difficult to know the repercussions from this action. However, looking at the possibility of higher car and parts prices, there is little positive that can be found in this action and there is the potential for significant negative economic impacts both on our members and their customers – the motoring public.”

Mark Nantais, president of the Canadian Vehicle Manufacturers’ Association, said, “Considering the high integration of the auto industry across Canada, Mexico and the United States, the imposition of these tariffs will undermine our global competitiveness and have disruptive consequences for the thousands of jobs the supply chain supports in all three countries. It is disappointing to see close allies and partners imposing tariffs on each other, as that can only increase prices within our highly integrated economies. It is our hope that the North American governments will quickly find a positive trade resolution that does not penalize our shared customers.”

An escalating trade war could inflict collateral damage that may not be readily apparent on the homefront. A National Public Radio profile of a Pennsylvania mill worker who admires Trump’s shoot-from-the-lip style and approves of tariffs revealed some static as he realized that the imported steel slabs his employer converts into sheet-coils sold to producers of vehicles and pipes are now 25 percent more expensive, and the company’s business plan may no longer be sustainable. “Wait a minute,” exclaimed the Trump-favoring worker: “Timeout!”

Noting that “Trump’s proposed auto tariffs would throw U.S. automakers and workers under the bus,” the Washington, D.C.-based Peterson Institute for International Economics (PIIE) predicts that if the Administration were to ultimately follow through with a 25 percent tariff on all automotive imports – including parts along with completed cars, SUVs, vans and trucks – domestic production would fall 1.5 percent and cause 195,000 American workers to lose their jobs, shedding 1.9 percent of the industry’s labor force.

“It’s easy to get caught up in the recent whirlwind of trade policy developments in Washington and lose sight of the bigger economic picture and what it all really means for our country,” says J.D. Harrison, executive director for strategic communications at the U.S. Chamber of Commerce. “One day it’s new tariffs on a given product or country, the next it’s retaliatory tariffs from one of our trading partners, and the next it might be a promising breakthrough or a crippling step backwards on NAFTA negotiations.”

Citing the chamber’s own compilations of available analyses, Harrision reports that upwards of 624,000 American jobs could be at risk under an expanded automotive tariffs scenario: “The move would hobble our nation’s car manufacturers and auto parts businesses – many of which are small businesses – cutting their expected production by 4 percent and wiping out 5 percent of their labor force.”

Trade machinations

“One of the biggest confusions in the automotive industry is that the components for the OEM service parts being supplied to the U.S. car companies – i.e. the ‘Big Three’ – are locally produced when they are in fact sourced from all over the world,” according to the Automotive Body Parts Association (ABPA). “They then combine them with other components claiming they are ‘U.S. produced’ but actually they are just ‘U.S. assembled.’ The proposed tariffs will result in higher prices for the OEM service parts – not just their aftermarket equivalents. With higher replacement parts costs comes higher insurance costs.”

ABPA additionally estimates that some 65,000 jobs could potentially be lost among its 150 member companies and their associated parts distributors.

“Ultimately, we believe these proposed tariffs would not improve the automotive industry, would cause the loss of thousands of American jobs, not improve U.S. homeland security and will hurt American consumers,” the organization contends. “We would ask that the administration not move forward with these tariffs and work with our international trading partners in other ways to protect our economy and country.”

Complimenting an array anti-tariff outreach efforts from the Motor Equipment Manufacturers Association (MEMA), the Car Care Association has hosted membership call-in Teleforum sessions with trade experts and pursued other actions in attempts to blunt Trump’s policies, although the President has thus far been acting on his own and rejecting proffered suggestions.

“We are lobbying the issue on Capitol Hill – where there is very little Congressional support for the Administration’s trade machinations,” says Lowe.

“We are working with members who want to engage with their Congressional representatives, encouraging them to tell their stories, submit comments – the association has also submitted comments – and we are testifying at Senate and House hearings,” he reports. “We have to keep making the case that consumers will be harmed, businesses will lose any benefits reaped from the recently enacted tax reform, and the overall economy will suffer.”

Addressing the importance of industry participants formulating trade war battle plans, Lowe advises that “at a minimum they should be assessing the possible impacts on their supply chain if they are not directly affected. If they are directly affected, they should already be working on a Plan B to minimize the impact on their costs.”

Steep Price Hikes

Entering into the heat of the summer vacation season, purveyors of specialized vehicles and auxiliary aftermarket services were ruminating over tariff-related ramifications and the prospect of negative economic headwinds.

“It’s not clear at this time what the long term effects will be from the tariffs,” says Mike VanDenBoom, president of Michigan-based Signature Truck Systems, a converter of OEM chassis into the “bobtail” delivery trucks, larger-capacity tankers, cylinder transports and vehicle-mounted cranes utilized by the propane industry.

“As of right now, we are seeing varying increases for aluminum and steel in the amounts of 3 percent to 10 percent.” Although most of the company’s metals are sourced domestically, vendor pricing is on the rise “because they have the opportunity” due to the higher cost of imported materials; some of the mobile tanks-to-be-mounted originate from Canada, others are purchased from American suppliers.

The core drivetrain/chassis units supplied by vehicle OEMs could also become more expensive, a scenario yet to occur, says VanDenBoom, “but that could change.” The possibility arises that Signature may have to raise its bobtail and service truck prices by $1,000 to $2,000 per vehicle. “It’s probably more of a cost-and-headache of doing business, and we’re keeping an eye on it.”

The U.S. recreational vehicle segment annually uses more than a million metal propane cylinders for on-the-road cooking and hot water needs. Including self-contained RVs, towable camping trailers and “toy haulers” for cars and ATVs, more than 90 percent of the domestic industry’s vehicle exports go to Canada, accounting for nearly 10 percent of all American-made shipments. Mexico is also a top RV recipient with 2 percent of the export market.

“These new tariffs will negatively affect the RV industry and its many supplier companies that use steel and aluminum, even those who source their steel and aluminum from domestic producers,” says Jay Landers, vice president of government affairs at the Recreational Vehicle Industry Association (RVIA) “Our members are building a record number of RVs, and the uncertainty around the implementation of these new tariffs will impact their ability to continue at that rate.”

“Even though the American-made RV industry overwhelmingly uses domestic aluminum in the manufacturing of RVs and their component parts, since the announcement of the aluminum investigation our members have reported an increase in the price of domestic aluminum anywhere from 10 percent to 40 percent,” adds Mike Ochs, RVIA’s director of federal government affairs. “The increase in domestic aluminum prices threatens the booming RV industry by increasing prices to consumers, as has historically been the result of increased tariffs and duties.”

Also coming with warmer weather are increased opportunities for enjoying custom-car cruising amid the $41.2-billion specialty automotive industry, which has also seen steep price hikes. According to Specialty Equipment Market Association (SEMA), its members “are now having to make tough decisions about passing those costs along to the consumer.”

The membership employs more than a million people producing, distributing and selling a wide range of merchandise, from custom wheels to turbochargers, lighting equipment, exhaust systems, suspensions, truck caps, mobile electronics and other appearance and performance enhancements: “The supply chain for these parts is global, integrated and complex. Beyond domestic sales, SEMA member companies have a robust export market.”

“The United States has helped create a global free trade system that includes mechanisms for addressing unfair trade practices,” says SEMA President & CEO Christopher J. Kersting. “SEMA cautions the President and lawmakers to work with our trading partners and employ U.S. law judiciously. The current tariffs are a tax on American companies and consumers that are causing unnecessary harm.”

He goes on to point out that “SEMA welcomes efforts by the U.S. government to protect American companies and their customers from unfair trading practices. We urge the President and Congress to pursue trade infringements in a fashion that does not inflict unintended economic harm.”

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