Auto Industry Waits (And Waits) To See Whether Trump Will Slap New Tariffs On Cars

May 15, 2019
Originally published on May 15, 2019 1:48 pm

The Trump administration's trade war with China continues to roil markets and draw headlines. But that's not the only trade tension in town.

For about a year, the White House has been weighing the possibility of imposing tariffs or quotas on cars and car parts imported from close allies in Europe and Japan.

The auto industry is united in opposition to the tariffs. But carmakers and auto suppliers may have to keep waiting to find out whether their pleas have been heard.

While the administration faces a Saturday deadline on the question of tariffs, the White House is widely expected to opt for an extension rather than make an announcement one way or another.

The hypothetical auto tariffs would be enacted in the name of of national security, under the same "Section 232" authority that Trump used to impose tariffs on steel and aluminum.

Those tariffs have provided a boost to American steel and aluminum producers, while raising costs for the many American manufacturers who use the metals in their products.

Auto tariffs would be different, because the industry is so globally intertwined. Instead of helping some American companies and hurting others, Section 232 tariffs would raise costs for automakers and suppliers across the board. Hundreds of thousands of jobs would be lost, according to industry analyses, and that's without even factoring in retaliatory tariffs.

"The entire industry is very much opposed to it," says Ann Wilson, the senior vice president of government affairs for the Motor and Equipment Manufacturers Association.

Of course, the possibility of such tariffs may be used by the White House as a negotiation tactic — leverage to push for more favorable trade deals — without ever actually putting the tariffs in place. David Schwietert, interim CEO of the Auto Alliance, says if that's the strategy, the goals may be laudable. But the tactic has costs, he says.

"This is having a chilling effect," he says. "Just the near-term threat of even implementing such tariffs, let alone what would happen economically should they be imposed."

The prolonged uncertainty inhibits investment and makes it hard for automakers to plan for the future, he says. "The sooner it's resolved, the better — not only for manufacturers but also for the economy."

An issue of national security?

So, how do car imports imperil national defense? Experts are skeptical, to say the least, that there's any persuasive argument to be made. But no one knows exactly what the administration's argument would be.

In February, the Commerce Department submitted a report on the topic, but it has never been made public. Even Sen. Chuck Grassley, the Republican chairman of the Senate Finance Committee, hasn't seen it — despite making multiple requests to the administration.

But it may not matter how robust the logic is. The president's authority under Section 232 is broad, and historically, the courts and Congress have been reluctant to challenge determinations of national security.

Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics, says the World Trade Organization has also been reluctant to challenge any trade policies claimed for reasons of national security.

As a result, "from President Trump's standpoint the use of this section has been very attractive," he says.

Before this administration, the law was rarely invoked. The president's use of the section has raised some eyebrows in Congress, and a pending legal challenge argues that the law gives the president too much leeway.

Hufbauer notes that Section 232 is a Cold War-era statute.

"During wartime, Congress gives lots of power to the president," he says. "At this time, when things are completely different and when we're talking about ... trade with allies, it's very odd."

When "buying American" isn't an option

Trump has repeatedly defended his trade policies by saying tariffs can be avoided by supporting U.S. manufacturers. But while auto tariffs would target imports, American companies would inevitably take a hit.

"There is no such thing as a U.S. vehicle," says Wilson of the Motor and Equipment Manufacturers Association. "All vehicles that you purchase in the United States ... depend on a vibrant global marketplace."

Cars are made up of thousands of parts, sourced from around the world. In some cases, parts pass back and forth across borders repeatedly.

Consider the seat in a new American-made vehicle. Inside that seat is an electronic sensor — one made by a foreign manufacturer, Wilson says.

The sensors will be imported into the U.S. and programmed. "Then after they're programmed they are oftentimes sent abroad someplace else, to be put into a larger component," Wilson says. "Then they're brought back into the United States so that they could actually become part of that seat."

All that happens before the seat ever makes it to an auto plant. Multiply this by the multitude of parts inside a car, and even the most American vehicle has been touched by part manufacturers around the world.

As a result, tariffs would raise costs for U.S. manufacturers as well as foreign rivals. And ultimately, the costs could be passed to consumers.

The precise impact depends on how exactly any tariffs would imposed, and which countries might get exemptions. An analysis by the Center for Automotive Research found very narrow tariffs would increase car prices only a few hundred dollars, while a broad tariff would make cars thousands of dollars more expensive: Imported car prices could go up $3,700, and cars made in the U.S. would go up $1,900.

Automakers have already been hurt by existing tariffs, including the steel and aluminum tariffs under Section 232 and the array of tariffs on Chinese goods.

But industry leaders say the specter of auto-specific tariffs is far more concerning.

"The potential [of] upwards of 25% tariffs on vehicles would make the steel and aluminum tariffs look really small," says Schwietert, of the Auto Alliance.

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