Tariffs Wreak Havoc with The Auto Industry

25 June 2018 Dashboard Insights Blog
Authors: Jeffrey A. Soble

Trade issues have been concerning the automotive industry for some time.  Whether it be NAFTA renegotiations (or NAFTA scrapping), Section 232 Tariffs, Exceptions to Section 232 Tariffs, ever since the current administration was elected, the Dashboard has been predicting that trade issues could upend the automotive industry.  That day appears to have come as the latest round of tariffs on China include those aimed at autos and parts.  China’s retaliation was swift.  And, it specifically targeted (among other things) light vehicles from the U.S.

Somewhat ironically, and perhaps betraying the current administration’s lack of understanding of the Automotive industry, the retaliatory Chinese tariffs will most directly impact BMW.  While the Bavarian Motor Works is routinely thought of by its German roots, it is the largest U.S. exporter of light vehicles thanks to its large Spartanburg, South Carolina plant.  Thus, while the administration targets “foreign” auto supply and manufacturers, the people of Spartanburg may feel the hurt before anyone else.

And what about companies thought of as “American”, such as General Motors?  Well, GM makes the Buick Envision crossover in China.  That vehicle is about to be about $8,000 more expensive.  This almost certainly makes the Envision no longer competitive in its segment.

Of course, China is only the beginning.  Comparatively speaking, China is a small importer of vehicles to the United States – less than 1% of all vehicle imports.  Last week, German Chancellor Angela Merkel sent a shot across the bow: “We should think about the strategic significance of the auto industry for the European Union so we can prepare an exchange with the U.S.,” she said.  Increased tariffs on European Union auto makers would almost certainly result in across the board price increases of vehicles of all kinds in the United States.  Add to that the uncertainty in the ongoing NAFTA negotiations and anyone thinking of buying a vehicle in the United States may want to do that now instead of later when the price is almost certain to spike.

The global auto industry is one of the greatest success stories of the use of global supply chains.  Nationalities of companies traditionally thought of as “American”, “German”, “Japanese” etc. have long ago become obsolete as “foreign” companies build plants in the United States (or Canada, or Mexico) and bring with them a small village of associated suppliers.  Plants like Kia Motor Manufacturing Georgia and Hyundai Motor Manufacturing Alabama and Toyota Motor Manufacturing Texas are just the start in a long line of such examples.  These “foreign” companies now make more vehicles in the United States than the “domestic” companies.

As recently as 2014, the United States exported over 2 million vehicles worth over $57 billion. Sure, plenty of vehicles and their parts are imported into the country.  Some of those parts, thanks to NAFTA, may very well cross the border multiple times as they are incorporated into components, systems and vehicles.  The plain fact is that at this point, the global automotive industry has figured out how to build vehicles all over the world, regardless of the badge on the vehicle.  A trade war over autos or any of the primary raw materials used in autos (e.g. steel) will continue to have essentially one major impact: the price of your car, your truck, your replacement parts, your service and everything else is going up.  One report had prices going up on average $5,000-$7,000 and reducing auto sales by 4 million vehicles.  Such a drastic reduction in North American sales (about 20%) would also have to result in plant slowdowns and layoffs.  Even Wall Street has appeared against this course of action, having sent auto stocks down when the issue makes the news.  All of this may explain why it is difficult to find anyone within the automotive industry who supports the tariffs or who wants to materially renegotiate NAFTA.

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